<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 2000
REGISTRATION NO. 333-37750
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
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WORLD ACCESS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 3669 58-2398004
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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945 E. PACES FERRY ROAD
SUITE 2200
ATLANTA, GEORGIA 30326
(404) 231-2025
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
BRYAN D. YOKLEY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
WORLD ACCESS, INC.
945 E. PACES FERRY ROAD
SUITE 2200
ATLANTA, GEORGIA 30326
(404) 231-2025
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES OF COMMUNICATIONS TO:
LEONARD A. SILVERSTEIN, ESQ.
LONG ALDRIDGE & NORMAN LLP
5300 ONE PEACHTREE CENTER
303 PEACHTREE STREET
ATLANTA, GEORGIA 30308-3201
(404) 527-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger between STI Merger Co., a wholly-owned subsidiary of
World Access, and STAR Telecommunications, Inc. and/or upon consummation of the
merger between WorldxChange Communications, Inc. f/k/a CTI Merger Co., a
wholly-owned subsidiary of World Access, and Communication TeleSystems
International d/b/a WorldxChange Communications described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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[World Access Logo] [STAR Logo]
SPECIAL MEETING OF STOCKHOLDERS
MERGERS PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of World Access, Inc. and STAR Telecommunications,
Inc. have agreed on a merger that will combine the businesses of World Access
and STAR. The STAR merger agreement also provides for the sale of PT-1
Communications, Inc., STAR's subsidiary, to a third party.
As a result of the STAR merger, World Access will issue a total of
approximately 22.7 million shares of World Access common stock assuming World
Access chooses to pay all of the consideration in stock. Each outstanding share
of STAR common stock will be converted into the right to receive, at the
election of World Access:
- 0.386595 shares of World Access common stock, subject to adjustment as
described in the accompanying joint proxy statement/prospectus; or
- a combination of shares of World Access common stock and cash.
The board of directors of World Access has also agreed on a merger that
will combine the businesses of World Access and Communication TeleSystems
International, which does business as WorldxChange Communications. As a result
of the WorldxChange merger, World Access will issue a total of approximately
29.8 million shares of World Access common stock. Each outstanding share of
WorldxChange common stock, including shares of preferred stock deemed to be
automatically converted into shares of common stock immediately before
completion of the WorldxChange merger, will be converted into the right to
receive 0.6583 shares of World Access common stock.
The World Access common stock is traded on the Nasdaq National Market under
the symbol "WAXS." The closing price for the World Access common stock on
October 5, 2000 was $5.25 per share. FOR A DISCUSSION OF RISK FACTORS YOU SHOULD
CONSIDER IN EVALUATING THE MERGERS, SEE "RISK FACTORS" BEGINNING ON PAGE 24.
STAR cannot complete the STAR merger without the approval of its
stockholders, and World Access cannot complete the STAR merger or the
WorldxChange merger without the approval of its stockholders. STAR and World
Access have scheduled special meetings to vote on these transactions and other
important proposals. A joint proxy statement/prospectus accompanies this letter
and provides detailed information about the special meetings, the STAR merger
and the WorldxChange merger. In addition, you may obtain information about our
companies from documents that we have filed with the Securities and Exchange
Commission. We urge you to read the joint proxy statement/prospectus document
carefully.
The dates, times and places of the special meetings are as follows:
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For World Access stockholders: For STAR stockholders:
, 2000 , 2000
11:00 a.m., local time 11:00 a.m., local time
945 E. Paces Ferry Road 223 East De La Guerra
Atlanta, Georgia 30326 Santa Barbara, California 93101
</TABLE>
The World Access board of directors recommends that you vote to approve the
STAR merger and the WorldxChange merger. The STAR board of directors recommends
that you vote to approve the STAR merger. Whether or not you plan to attend the
special meeting in person, please complete, sign and date the accompanying proxy
card and return it in the enclosed prepaid envelope. Your prompt cooperation
will be greatly appreciated.
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/s/ John D. Phillips /s/ Mary A. Casey
John D. Phillips Mary A. Casey
Chairman and Chief Executive Officer President and Secretary
World Access, Inc. STAR Telecommunications, Inc.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT/ PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Joint proxy statement/prospectus dated , 2000 and first mailed
to stockholders on or about , 2000.
<PAGE> 3
WHERE YOU CAN FIND MORE INFORMATION ABOUT WORLD ACCESS AND STAR
Federal securities laws require World Access and STAR to file information
with the Securities and Exchange Commission concerning our business and
operations. Accordingly, World Access and STAR file annual, quarterly and
special reports, proxy statements and other information with the SEC. You can
read and copy this information at the following SEC locations:
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Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Northwest Atrium Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
</TABLE>
You can get additional information about the operation of the SEC's public
reference facilities by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a web site (http://www.sec.gov) that contains World Access' and STAR's
filings and the reports, proxy and information statements and other information
regarding World Access and STAR. You can also inspect information about World
Access and STAR at the offices of the Nasdaq National Market, 1735 K Street,
N.W., Washington, D.C. 20006.
This prospectus is a part of a registration statement that World Access
filed with the SEC and omits certain information contained in the registration
statement as permitted by the SEC. Additional information about World Access and
its common stock is contained in the registration statement on Form S-4 of which
this joint proxy statement/prospectus forms a part, including the exhibits and
schedules. You can obtain a copy of the registration statement from the SEC at
the address or Internet site listed above.
INCORPORATION OF DOCUMENTS FILED WITH THE SEC BY REFERENCE
The SEC allows World Access and STAR to "incorporate by reference" the
information each company files with the SEC, which means that World Access and
STAR can disclose information to you by referring to those documents. The
information incorporated by reference is considered part of this prospectus, and
later information that World Access and STAR file with the SEC from the date of
this joint proxy statement/prospectus until the date of:
- the World Access special meeting, with respect to the World Access
stockholders;
- the STAR special meeting, with respect to the STAR stockholders; and
- the completing of the WorldxChange merger, with respect to the
WorldxChange shareholders, will automatically update and supersede this
information.
World Access and STAR incorporate by reference documents listed below and
any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act prior to the date of the completion of the mergers:
World Access SEC Filings (Commission File No. 0-29782):
- Current Report on Form 8-K filed on June 26, 2000 (event date: June
14, 2000);
- Current Report on Form 8-K filed on June 26, 2000 (event date: June
7, 2000);
- Current Report on Form 8-K filed on April 18, 2000 (event date:
April 10, 2000);
- Current Report on Form 8-K filed on March 1, 2000 (event
date: February 11, 2000);
- Current Report on Form 8-K filed on March 1, 2000 (event
date: February 11, 2000);
- Current Report on Form 8-K filed on February 28, 2000 (event
date: February 11, 2000), as amended by Forms 8-K/A filed on April
26, 2000 and August 4, 2000;
- Current Report on Form 8-K filed on December 22, 1999 (event
date: December 7, 1999), as amended by Forms 8-K/A filed on
February 22, 2000, August 4, 2000 and September 11, 2000;
- Current Report on Form 8-K filed on February 9, 2000 (event
date: February 2, 2000);
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- Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
as amended by Form 10-Q/A filed on September 11, 2000 and October
6, 2000;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2000,
as amended by Form 10-Q/A filed on August 4, 2000, September 11,
2000 and October 6, 2000; and
- Annual Report on Form 10-K for the fiscal year ended December 31,
1999, as amended by Form 10-K/A filed on August 4, 2000, September
11, 2000, and October 6, 2000
STAR SEC filings (Commission File No. 000-22581):
- Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
as amended by Form 10-Q/A filed on October 10, 2000;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2000,
as amended by Form 10-Q/A filed on October 10, 2000; and
- Annual Report on Form 10-K for fiscal year ended December 31, 1999,
as amended by Form 10-K/A filed on September 11, 2000.
WORLD ACCESS AND STAR ANNUAL REPORTS TO STOCKHOLDERS
Copies of the World Access and STAR Annual Reports on Form 10-K for the
fiscal year ended December 31, 1999, as amended, are included with this joint
proxy statement/prospectus.
Additional copies of documents incorporated by reference and listed above
may be obtained without charge by writing to the appropriate company. To obtain
copies from World Access, write to: Investor Relations, World Access, Inc., 945
E. Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326, or by telephone request
to (404) 231-2025. To obtain copies from STAR, write to: Investor Relations,
STAR Telecommunications, Inc., 223 East De La Guerra Street, Santa Barbara,
California 93101, or by telephone request to (805) 899-1962. IN ORDER TO OBTAIN
THE DOCUMENTS IN TIME FOR THE WORLD ACCESS SPECIAL MEETING, YOU MUST REQUEST THE
DOCUMENTS BY , 2000, WHICH IS FIVE BUSINESS DAYS PRIOR TO THE DATE
OF THE WORLD ACCESS SPECIAL MEETING. IN ORDER TO OBTAIN THE DOCUMENTS IN TIME
FOR THE STAR SPECIAL MEETING, YOU MUST REQUEST THE DOCUMENTS BY ,
2000, WHICH IS FIVE BUSINESS DAYS PRIOR TO THE DATE OF THE STAR SPECIAL MEETING.
<PAGE> 5
WORLD ACCESS, INC.
945 E. PACES FERRY ROAD, SUITE 2200
ATLANTA, GEORGIA 30326
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
To the Stockholders of World Access, Inc.:
We have agreed to merge with STAR Telecommunications, Inc. and also with
Communication TeleSystems International, which does business as WorldxChange
Communications. World Access will be the surviving company in both mergers. We
have scheduled a special meeting in lieu of an annual meeting of the
stockholders of World Access, Inc. at the principal executive offices of World
Access located at 945 E. Paces Ferry Road, Atlanta, Georgia 30326 on
, 2000 at 11:00 a.m., local time, for the purposes described below.
The purposes of the special meeting are as follows:
Proposal 1. To consider and vote upon a proposal to approve the adoption
of an Agreement and Plan of Merger among World Access, STI Merger Co., a
subsidiary of World Access, and STAR and the transactions contemplated by the
STAR merger agreement. The STAR merger agreement provides for STAR becoming a
subsidiary of World Access. Under the STAR merger agreement, each outstanding
share of STAR common stock will be converted into the right to receive, at the
election of World Access:
- 0.386595 shares of World Access common stock, subject to adjustment as
described in the enclosed joint proxy statement/prospectus; or
- a combination of shares of World Access common stock and cash.
Proposal 2. To consider and vote upon a proposal to approve the adoption
of an Agreement and Plan of Merger among World Access, WorldxChange
Communications, Inc., a subsidiary of World Access, and WorldxChange and the
transactions contemplated by the WorldxChange merger agreement. The WorldxChange
merger agreement provides for WorldxChange becoming a subsidiary of World
Access. Under the WorldxChange merger agreement, each outstanding share of
WorldxChange common stock, including shares of preferred stock will be converted
into the right to receive 0.6583 shares of World Access common stock.
Proposal 3. To consider and vote upon a proposal to approve an amendment
to Article IV of our amended certificate of incorporation to increase the number
of shares of common stock that we are authorized to issue from 150,000,000
shares to 290,000,000 shares.
Proposal 4. To consider and vote upon a proposal to approve an amendment
to Article IX of our amended certificate of incorporation to increase the
maximum number of authorized directors from 12 to 15.
Proposal 5. To consider and vote upon a proposal to approve an amendment
to Article IX of our amended certificate of incorporation to end the division of
our board of directors into three classes so that all directors will serve terms
of one year and until their successors are duly elected and qualified or until
their earlier resignation or removal.
Proposal 6. To consider and vote upon a proposal to approve an amendment
to our Directors' Warrant Incentive Plan to increase the number of warrants
issuable under the plan from 600,000 warrants to 1,200,000 warrants.
Proposal 7. To consider and vote upon a proposal to approve an amendment
to our Directors' Warrant Incentive Plan to modify the performance criteria of
World Access common stock under the plan.
<PAGE> 6
Proposal 8. To elect as directors the nominees named in this joint proxy
statement/prospectus to serve:
- if Proposal 5 is approved, for a term of one year and until their
successors are duly elected and qualified or until their earlier
resignation or removal; or
- if Proposal 5 is not approved, for a term of three years and until their
successors are elected and qualified or until their earlier resignation
or removal.
At the special meeting, we will also transact any other business as may
properly come before the special meeting or any adjournments or postponements of
the special meeting.
Copies of the STAR merger agreement and the WorldxChange merger agreement
are attached as Annex A and Annex B, respectively, to the accompanying joint
proxy statement/prospectus.
Only holders of record of World Access common stock, World Access 4.25%
cumulative senior perpetual convertible preferred stock, Series A, World Access
convertible preferred stock, Series C, World Access convertible preferred stock,
Series D, and World Access convertible preferred stock, Series E, on
, 2000 are entitled to notice of and to vote at the special meeting and any
adjournments or postponements of the special meeting.
All stockholders are cordially invited to attend the special meeting.
However, to ensure your representation at the special meeting, you are urged to
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. You may revoke your proxy at any time before the
vote. If you attend the special meeting in person, you may vote your shares
personally on all matters even if you have previously returned a proxy card. If
your shares are held in "street name" by your broker or other nominee, only that
holder can vote your shares. You should follow the directions provided by your
broker or nominee regarding how to instruct them to vote your shares.
BY ORDER OF THE BOARD OF DIRECTORS
/S/ W. TOD CHMAR
W. Tod Chmar
Executive Vice President and Secretary
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[STAR LOGO]
STAR TELECOMMUNICATIONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
To the Stockholders of STAR Telecommunications, Inc.:
We have agreed to merge STAR with a subsidiary of World Access, Inc. We
also have agreed with World Access to sell the assets of PT-1 Communications,
Inc., our subsidiary, to a third party. The STAR merger and the sale of the
assets of PT-1 require your approval. We have scheduled a separate special
meeting for you to consider and vote upon the PT-1 asset sale. If the STAR
merger agreement is approved by our stockholders and the STAR merger is
completed, World Access can choose to have each outstanding share of STAR common
stock converted into the right to receive:
- 0.386595 shares of World Access common stock, subject to adjustment as
described in the enclosed joint proxy statement/prospectus; or
- a combination of shares of World Access common stock and cash.
World Access does not have to complete the STAR merger if:
- STAR does not sell the assets of PT-1 prior to the completion of the STAR
merger;
- STAR does not receive net cash proceeds of at least $120.0 million from
the sale of the assets of PT-1 to Counsel Communications LLC; or
- STAR does not receive net cash proceeds of at least $150.0 million from
the sale of PT-1 to another purchaser.
We will hold a special meeting of stockholders on , ,
2000 at , local time, at , to approve the Agreement and Plan
of Merger, dated as of February 11, 2000, as amended June 7, 2000, among World
Access, STI Merger Co. and STAR, which will result in STAR becoming a
wholly-owned subsidiary of World Access.
At the special meeting, we will also transact any other business that is
properly brought before the special meeting, or any adjournment or postponement
of the special meeting.
The enclosed joint proxy statement/prospectus describes the amended STAR
merger agreement in detail. The STAR merger agreement and the amendment to the
STAR merger agreement are attached as Annex A to the joint proxy
statement/prospectus.
Only holders of record of STAR common stock on the close of business on
, 2000 are entitled to notice of and to vote at the special meeting. A
list of stockholders entitled to vote at the meeting will be available for
inspection at the meeting and for ten days prior to the meeting during regular
business hours at STAR's corporate headquarters in Santa Barbara, California.
You may have appraisal rights under Delaware law in connection with the
STAR merger. The enclosed joint proxy statement/prospectus discusses your
possible appraisal rights.
<PAGE> 8
We urge you to vote on the matters in the enclosed joint proxy
statement/prospectus and to sign, date and promptly return the enclosed proxy in
the envelope provided. It is important for you to be represented at the meeting.
You can revoke your proxy at any time before the vote. If you execute and return
your proxy, you can still vote in person if you are present at the meeting. If
your shares are held in "street name" by your broker or other nominee, only that
holder can vote your shares. You should follow the directions provided by your
broker or nominee regarding how to instruct them to vote your shares.
By Order of the Board of Directors
/s/ Mary A. Casey
Mary A. Casey
President and Secretary
, 2000
Santa Barbara, California
Requests for additional copies of proxy materials should be addressed to
Mary A. Casey, Secretary, at STAR's offices located at 223 East De La Guerra
Street, Santa Barbara, California 93101.
<PAGE> 9
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE STAR MERGER................. 1
QUESTIONS AND ANSWERS ABOUT THE WORLDXCHANGE MERGER......... 3
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS............. 5
THE COMPANIES............................................... 5
SUMMARY OF THE STAR MERGER.................................. 7
SUMMARY OF THE WORLDXCHANGE MERGER.......................... 11
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION..... 14
COMPARATIVE PER SHARE DATA.................................. 22
RISK FACTORS................................................ 24
Risk factors relating to the mergers...................... 24
Risk factors concerning the combined company's business
operations............................................. 27
Risk factors concerning the companies' financial
condition.............................................. 29
Risk factors concerning the companies' industry........... 32
Risk factors concerning the combined company's common
stock.................................................. 35
FORWARD-LOOKING STATEMENTS.................................. 36
THE WORLD ACCESS SPECIAL MEETING............................ 36
THE STAR SPECIAL MEETING.................................... 39
PROPOSAL 1 -- THE MERGER BETWEEN WORLD ACCESS AND STAR...... 40
Background of the STAR merger............................. 40
World Access' reasons for the STAR merger................. 44
The World Access board of directors' recommendation that
stockholders approve the STAR merger................... 46
STAR's reasons for the STAR merger........................ 46
The STAR board of directors' recommendation that
stockholders approve the STAR merger................... 48
Opinion of World Access' financial advisor regarding the
STAR merger............................................ 48
Summary of financial analyses performed by Donaldson,
Lufkin & Jenrette...................................... 50
Engagement letter...................................... 53
Other relationships.................................... 54
Opinion of STAR's financial advisor regarding the STAR
merger................................................. 54
Consideration that STAR stockholders will receive in the
STAR merger............................................ 62
Completion of the STAR merger............................. 64
Material federal income tax consequences of the STAR
merger................................................. 64
The STAR merger........................................ 65
Tax considerations for World Access stockholders....... 66
Tax considerations for STAR stockholders............... 66
Tax considerations for the corporate parties........... 69
Exchange of STAR stock certificates for World Access stock
certificates........................................... 70
Restrictions on sales of shares by affiliates of World
Access and STAR........................................ 70
Accounting treatment of the STAR merger................... 70
Regulatory filings and approvals required to complete the
STAR merger............................................ 70
Rights of dissenting STAR stockholders.................... 71
Interests of directors, officers and stockholders in the
STAR merger............................................ 73
Description of the STAR merger agreement.................. 74
Description of the STAR merger consideration........... 75
Representations and warranties contained in the STAR
merger agreement...................................... 75
STAR's conduct of business before completion of the
STAR merger........................................... 75
No other negotiations involving potential acquirors of
STAR.................................................. 76
Description of the management services between World
Access and STAR....................................... 77
Board of directors of World Access..................... 77
Conditions to completion of the STAR merger............ 77
Termination of the STAR merger agreement............... 78
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Payment of termination fee if the STAR merger agreement
is terminated......................................... 79
Extension, waiver and amendment of the STAR merger
agreement............................................. 79
STAR voting agreements and credit agreements........... 79
Edgecomb voting agreement.............................. 79
Tawfik voting agreement................................ 80
STAR credit agreements................................. 81
Information regarding STAR................................ 81
STAR litigation........................................... 81
Comparison of rights of holders of World Access common
stock and STAR common stock............................ 82
Comparison of authorized and outstanding capital
stock................................................. 82
Comparison of classes of common stock.................. 82
Comparison of requirements for special meeting of
stockholders.......................................... 83
Comparison of requirements for action by written
consent in lieu of a stockholders' meeting............ 83
Comparison of record date for determining
stockholders.......................................... 83
Comparison of procedures to nominate directors......... 83
Comparison of number of directors...................... 84
Comparison of classified board of directors............ 84
Comparison of procedures for the removal of
directors............................................. 84
Comparison of board of directors vacancies............. 84
Comparison of notice requirements of special meetings
of the board of directors............................. 84
Comparison of procedures for an amendment of
certificate of incorporation and bylaws............... 84
STAR selected consolidated financial data................. 86
PROPOSAL 2 -- THE MERGER BETWEEN WORLD ACCESS AND
WORLDXCHANGE.............................................. 88
Background of the WorldxChange merger..................... 88
World Access' reasons for the WorldxChange merger......... 90
The World Access board of directors' recommendation that
stockholders approve the WorldxChange merger........... 91
WorldxChange's reasons for the WorldxChange merger........ 91
Opinion of World Access' financial advisor regarding the
WorldxChange merger.................................... 92
Summary of financial analyses performed by Donaldson,
Lufkin & Jenrette...................................... 94
Engagement letter...................................... 97
Other relationships.................................... 98
Consideration that WorldxChange shareholders will receive
in the WorldxChange merger............................. 98
Completion of the WorldxChange merger..................... 98
Material federal income tax consequences of the
WorldxChange merger.................................... 98
The WorldxChange merger................................ 99
Tax considerations for WorldxChange shareholders....... 100
Tax considerations for the corporate parties........... 102
Exchange of WorldxChange stock certificates for World
Access stock certificates.............................. 104
Restrictions on sales of shares by affiliates of World
Access and WorldxChange................................ 104
Accounting treatment of the WorldxChange merger........... 104
Regulatory filings and approvals required to complete the
WorldxChange merger.................................... 105
Rights of dissenting WorldxChange shareholders............ 106
Interests of WorldxChange's directors, officers and
shareholders in the WorldxChange merger................ 108
Principal shareholders of WorldxChange.................... 110
Description of the WorldxChange merger agreement.......... 111
Description of the WorldxChange merger consideration... 111
Representations and warranties contained in the
WorldxChange merger agreement......................... 111
WorldxChange's conduct of business before completion of
the WorldxChange merger............................... 112
No other negotiations involving WorldxChange........... 112
Treatment of WorldxChange stock options and warrants... 112
Board of directors and officers of World Access........ 112
Conditions to completion of the WorldxChange merger.... 113
Termination of the WorldxChange merger agreement....... 113
Extension, waiver and amendment of the WorldxChange
merger agreement...................................... 114
Post-closing indemnification; escrowed shares.......... 114
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WorldxChange services, voting and participation
agreements............................................. 115
World Access voting agreement.......................... 115
WorldxChange voting agreements......................... 116
Executive management services agreement with
WorldxChange.......................................... 116
Foothill Capital Corporation participation agreement... 117
Information regarding WorldxChange........................ 118
Services............................................... 118
The WorldxChange network............................... 119
Termination arrangements............................... 122
Sales and marketing.................................... 122
Worldwide operations................................... 124
Employees.............................................. 125
Properties............................................. 125
Legal proceedings...................................... 125
WorldxChange management's discussion and analysis of
financial condition and results of operations.......... 127
Overview............................................... 127
Results of operations.................................. 129
Liquidity and capital resources........................ 133
Market risk............................................ 137
Foreign currency exposure.............................. 137
Euro conversion........................................ 137
Seasonality............................................ 138
Recent accounting pronouncements....................... 138
WorldxChange selected consolidated financial data......... 139
Comparison of the rights of holders of World Access common
stock and WorldxChange common stock.................... 141
Comparison of authorized and outstanding capital
stock................................................. 141
Comparison of classes of common stock.................. 141
Comparison of requirements for special meeting of
shareholders.......................................... 141
Comparisons of requirements for action by written
consent in lieu of shareholders' meeting.............. 142
Comparison of record date for determining
shareholders.......................................... 142
Comparison of procedures to nominate directors......... 142
Comparison of number of directors...................... 143
Comparison of classified board of directors............ 143
Comparison of procedures for the removal of
directors............................................. 144
Comparison of board of directors vacancies............. 144
Comparison of notice requirements of special meetings
of the board of directors............................. 144
Comparison of procedures for an amendment of
certificate of incorporation and bylaws............... 145
Comparison of notice requirements of stockholder's
meetings.............................................. 145
Comparison of stockholder approval of business
combinations.......................................... 146
Comparison of inspection of shareholder list........... 146
Comparison of dividends and repurchases of shares...... 147
Comparison of dissolution rights....................... 147
COMPARATIVE PER SHARE MARKET PRICE DATA FOR WORLD ACCESS,
STAR AND WORLDXCHANGE..................................... 148
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 150
MANAGEMENT OF THE COMBINED COMPANY.......................... 201
Executive officers........................................ 201
Board of directors........................................ 201
DESCRIPTION OF WORLD ACCESS' BUSINESS AND STRATEGY.......... 201
World Access' proposed acquisition of TelDaFax AG......... 204
World Access' third quarter special charges and financial
projections............................................ 204
PROPOSAL 3 -- AMENDMENT OF THE WORLD ACCESS AMENDED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
SHARES OF COMMON STOCK THAT WORLD ACCESS IS ENTITLED TO
ISSUE FROM 150,000,000 SHARES TO 290,000,000 SHARES....... 205
</TABLE>
iii
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROPOSAL 4 -- AMENDMENT OF THE WORLD ACCESS AMENDED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED DIRECTORS FROM 12 TO 15........................ 207
PROPOSAL 5 -- AMENDMENT OF THE WORLD ACCESS AMENDED
CERTIFICATE OF INCORPORATION TO END THE CLASSIFICATION OF
THE WORLD ACCESS BOARD OF DIRECTORS SO THAT ALL DIRECTORS
WILL SERVE TERMS OF ONE YEAR AND UNTIL THEIR SUCCESSORS
ARE DULY ELECTED AND QUALIFIED............................ 208
PROPOSAL 6 -- AMENDMENT TO THE WORLD ACCESS DIRECTORS'
WARRANT INCENTIVE PLAN TO INCREASE THE NUMBER OF WARRANTS
ISSUABLE UNDER THE PLAN FROM 600,000 WARRANTS TO 1,200,000
WARRANTS.................................................. 209
Description of proposed amendment......................... 209
Brief summary of the warrant plan......................... 209
Vote required............................................. 211
PROPOSAL 7 -- AMENDMENT TO THE WORLD ACCESS DIRECTORS'
WARRANT INCENTIVE PLAN TO CHANGE THE PERFORMANCE CRITERIA
UNDER THE PLAN............................................ 211
Vote required............................................. 212
PROPOSAL 8 -- ELECTION OF WORLD ACCESS DIRECTORS............ 212
Information regarding nominees and directors.............. 213
World Access nominees for director........................ 213
World Access directors continuing in office until the 2002
annual meeting......................................... 213
World Access directors continuing in office until the 2001
annual meeting......................................... 214
World Access directors not divided into classes........... 214
Meetings and committees of the World Access board......... 215
World Access director compensation........................ 215
DESCRIPTION OF WORLD ACCESS' CAPITAL STOCK.................. 216
World Access common stock................................. 216
World Access preferred stock.............................. 217
PRINCIPAL STOCKHOLDERS OF WORLD ACCESS...................... 221
EXECUTIVE OFFICERS OF WORLD ACCESS.......................... 226
Information regarding executive officers of World
Access................................................. 226
World Access' Executive compensation...................... 226
WORLD ACCESS' SUMMARY COMPENSATION TABLE.................... 226
WORLD ACCESS OPTION GRANTS IN LAST FISCAL YEAR.............. 227
WORLD ACCESS' AGGREGATED OPTION AND WARRANT EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES........ 228
World Access' executive employment agreements............. 228
World Access' compensation committee report............... 231
World Access' compensation committee interlocks and
insider participation in compensation decisions........ 233
WORLD ACCESS STOCK PRICE PERFORMANCE GRAPH.................. 234
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..... 234
RELATIONSHIPS AND RELATED TRANSACTIONS WITH WORLD ACCESS'
DIRECTORS, OFFICERS AND STOCKHOLDERS...................... 235
ACCOUNTANTS................................................. 235
EXPERTS..................................................... 236
WORLD ACCESS STOCKHOLDER PROPOSALS.......................... 236
STAR STOCKHOLDER PROPOSALS.................................. 237
OTHER MATTERS THAT MAY COME BEFORE THE WORLD ACCESS SPECIAL
MEETING................................................... 237
OTHER MATTERS THAT MAY COME BEFORE THE STAR SPECIAL
MEETING................................................... 237
LEGAL MATTERS............................................... 237
</TABLE>
<TABLE>
<S> <C> <C>
ANNEX A THE STAR MERGER AGREEMENT
ANNEX B THE WORLDXCHANGE MERGER AGREEMENT
</TABLE>
iv
<PAGE> 13
<TABLE>
<S> <C> <C>
ANNEX C OPINION OF WORLD ACCESS FINANCIAL ADVISOR REGARDING THE STAR
MERGER
ANNEX D OPINION OF WORLD ACCESS FINANCIAL ADVISOR REGARDING THE
WORLDXCHANGE MERGER
ANNEX E OPINION OF STAR FINANCIAL ADVISOR REGARDING THE STAR MERGER
ANNEX F DELAWARE GENERAL CORPORATION LAW SECTION 262
ANNEX G CALIFORNIA GENERAL CORPORATION LAW SECTIONS 1300 THROUGH
1312
</TABLE>
v
<PAGE> 14
QUESTIONS AND ANSWERS ABOUT THE STAR MERGER
Q: WHAT IS THE STAR MERGER?
A: The boards of directors of World Access and STAR have voted to combine the
businesses of World Access and STAR, exclusive of STAR's PT-1 business
unit. To combine the companies, STAR will become a subsidiary of World
Access.
Q: WHY IS PT-1 NOT A PART OF THE STAR MERGER?
A: World Access did not believe that the U.S. prepaid calling card and dial
around businesses of PT-1 fit the long-term strategy for the combined
company, which is focused on market opportunities arising from the
consolidation of the European telecommunications market. In addition, World
Access did not feel it could complete the STAR merger with the current debt
position of STAR.
As a result of World Access' concerns, the completion of the STAR merger is
conditioned on the sale of PT-1 by STAR for net cash proceeds in excess of
(a) $120.0 million, if PT-1 is sold to Counsel Communications LLC under an
Asset Purchase Agreement dated June 6, 2000, or (b) $150.0 million if PT-1
is sold to another party. World Access and STAR intend to use the cash
generated from the sale of PT-1 to reduce the debt of the combined company.
Q: WILL STAR STOCKHOLDERS VOTE ON THE PT-1 ASSET SALE?
A: STAR has mailed a separate proxy statement for the PT-1 asset sale to all
its stockholders. A meeting has been scheduled on , 2000 for
the STAR stockholders to approve this sale.
Q: WHAT IS THE WORLDXCHANGE MERGER?
A: World Access has also agreed to a merger with WorldxChange. Each merger
does not depend on the completion of the other merger. Consequently, there
are three possible combinations that you should consider:
- World Access and STAR;
- World Access and WorldxChange; and
- World Access, STAR and WorldxChange.
Unless stated otherwise, information provided in this joint proxy
statement/prospectus assumes completion of the STAR merger and the
WorldxChange merger.
Q: WHAT WILL STAR STOCKHOLDERS RECEIVE IN THE STAR MERGER?
A: World Access has the option to pay STAR stockholders by using all stock, or
part stock and part cash. Specifically, STAR stockholders will be entitled
to receive for each share of STAR common stock owned either:
- 0.386595 shares of World Access common stock, or
- substantially the equivalent value of 0.386595 shares of World Access
common stock as of the date of the STAR merger, with up to 40% of this
value, based on the average closing price of World Access shares for 10
trading days before the closing date, paid in cash and the remainder in
World Access common stock.
The amount paid by World Access is subject to upward adjustment if STAR
sells PT-1 prior to the completion of the STAR merger for net cash proceeds
in excess of $150.0 million. World Access and STAR expect PT-1 to be sold
to Counsel and accordingly, view any upward adjustment as unlikely.
1
<PAGE> 15
Although World Access believes it has adequate cash reserves to support
current working capital requirements and business plans for at least the
next 12 months, as a result of the projected cash requirements of the
combined company, World Access currently intends to pay 100% of the STAR
consideration using its common stock. Under this assumption, for every 100
shares of STAR common stock owned, STAR stockholders will receive 38 shares
of World Access common stock and a cash payment equal to the market value
of the 0.6595 fractional share of World Access common stock as of the date
of the STAR merger. The total value of this consideration will depend on
the value of World Access common stock at that time, and is illustrated in
the following table:
<TABLE>
<CAPTION>
SHARES OF SHARES OF VALUE OF VALUE
ASSUMED VALUE OF WORLD ACCESS STAR WORLD ACCESS WORLD ACCESS CASH TOTAL PER
COMMON STOCK OWNED RECEIVED STOCK RECEIVED VALUE STAR SHARE
----------------------------- --------- ------------ ------------ -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 4.00 100 38 $152.00 $2.64 $154.64 $1.55
5.00 100 38 190.00 3.30 193.30 1.93
6.00 100 38 228.00 3.96 231.96 2.32
7.00 100 38 266.00 4.62 270.62 2.71
8.00 100 38 304.00 5.28 309.28 3.09
9.00 100 38 342.00 5.94 347.94 3.48
</TABLE>
If World Access elects to pay the STAR consideration using part stock and
part cash, the STAR stockholders will receive substantially the same total
value and value per STAR share as noted above.
Q: WHAT HAPPENS IF STAR DOES NOT SELL PT-1 PRIOR TO THE COMPLETION OF THE STAR
MERGER?
A: If STAR does not sell PT-1 prior to the completion of the STAR merger, then
World Access does not have to complete the STAR merger.
Q: WHAT HAPPENS IF STAR SELLS PT-1 FOR LESS THAN NET CASH PROCEEDS OF AT LEAST
$150.0 MILLION?
A: If STAR sells PT-1 to a buyer other than Counsel and does not receive net
cash proceeds of at least $150.0 million from that sale, then World Access
does not have to complete the STAR merger. However, the STAR merger
agreement provides that the condition to World Access' obligations under
the STAR merger agreement relating to the sale of PT-1 will be deemed
satisfied if STAR sells the assets of PT-1 to Counsel for net cash proceeds
of at least $120.0 million under the PT-1 asset sale agreement.
Q: WHAT DO I NEED TO DO NOW?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares will be represented at your meeting. If you do
not include instructions on how to vote your properly signed proxy, your
shares will be voted for approval of the proposals on which you are able to
vote.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: If you want to change your vote, send the secretary of your company a
later-dated, signed proxy card before your special meeting or attend the
meeting in person. You may also revoke your proxy by sending written notice
to the secretary of your company before the meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how
to vote by following the information provided to you by your broker.
Q: SHOULD I SEND IN MY STAR STOCK CERTIFICATES NOW?
A: No. The completion of the STAR merger is not assured and is subject to
conditions described in this document, including stockholder approval. If
the STAR merger is completed, World Access will send STAR stockholders
written instructions for exchanging their STAR stock certificates.
Q: WHEN DO YOU EXPECT THE STAR MERGER TO BE COMPLETED?
A: World Access and STAR are working toward completing the STAR merger as
quickly as possible. However, the completion of the STAR merger is subject
to conditions described in this document, including stockholder approval.
World Access and STAR hope to complete the STAR merger in the fourth
calendar quarter of 2000.
2
<PAGE> 16
QUESTIONS AND ANSWERS ABOUT THE WORLDXCHANGE MERGER
Q: WHAT IS THE WORLDXCHANGE MERGER?
A: The boards of directors of World Access and WorldxChange have voted to
combine the businesses of World Access and WorldxChange. To combine the
companies, WorldxChange will become a subsidiary of World Access.
Q: WHAT IS THE STAR MERGER?
A: This joint proxy statement/prospectus contains information regarding an
additional merger, the STAR merger. The completion of each merger does not
depend on the completion of the other merger. Consequently, there are three
possible combinations that you should consider:
- World Access and WorldxChange;
- World Access and STAR; and
- World Access, STAR, and WorldxChange.
Q: WHAT WILL WORLDXCHANGE SHAREHOLDERS RECEIVE IN THE WORLDXCHANGE MERGER?
A: When the WorldxChange merger is completed, WorldxChange shareholders will
receive 0.6583 shares of World Access common stock in exchange for each
share of WorldxChange common stock, including each share of WorldxChange
common stock into which shares of WorldxChange preferred stock are deemed
converted immediately prior to the completion of the WorldxChange merger.
For every 100 shares of WorldxChange common stock owned, WorldxChange
stockholders will receive 65 shares of World Access common stock and a cash
payment equal to the market value of the 0.83 fractional share of World
Access common stock as of the date of the merger. The total value of this
consideration will depend on the value of World Access common stock at that
time and is summarized in the following table:
<TABLE>
<CAPTION>
SHARES OF SHARES OF VALUE OF VALUE
VALUE OF WORLD ACCESS WXC WORLD ACCESS WORLD ACCESS CASH TOTAL PER
COMMON STOCK OWNED RECEIVED STOCK RECEIVED VALUE WXC SHARE
--------------------- --------- ------------ ------------ -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 4.00 100 65 $260.00 $3.32 $263.32 $2.64
5.00 100 65 325.00 4.15 329.15 3.29
6.00 100 65 390.00 4.98 394.98 3.95
7.00 100 65 455.00 5.81 460.81 4.61
8.00 100 65 520.00 6.64 526.64 5.27
9.00 100 65 585.00 7.47 592.47 5.92
</TABLE>
Q: WHAT DO I NEED TO DO NOW?
A: If you are a World Access stockholder, you should mail your signed proxy
card in the enclosed return envelope as soon as possible so that your
shares may be represented at the World Access meeting. If you do not
include instructions on how to vote your properly signed proxy, your shares
will be voted for approval of the proposals with regard to which you are
entitled to vote.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: If you are a World Access stockholder and you want to change your vote,
send the secretary of World Access a later-dated, signed proxy card before
the meeting or attend the meeting in person. You may also revoke your proxy
by sending written notice to the secretary of World Access before the
meeting.
Q: SHOULD I SEND IN MY WORLDXCHANGE STOCK CERTIFICATES NOW?
A: No. The completion of the WorldxChange merger is not assured and is subject
to conditions described in this document, including stockholder approval.
If the WorldxChange merger is completed, World Access will send
WorldxChange shareholders written instructions for exchanging their
WorldxChange stock certificates for World Access stock certificates.
3
<PAGE> 17
Q: WHEN DO YOU EXPECT THE WORLDXCHANGE MERGER TO BE COMPLETED?
A: World Access and WorldxChange are working toward completing the
WorldxChange merger as quickly as possible. However, the completion of the
WorldxChange merger is subject to conditions described in this document,
including stockholder approval. World Access and WorldxChange hope to
complete the WorldxChange merger in the fourth calendar quarter of 2000.
4
<PAGE> 18
SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this document. To
understand the proposed mergers fully and for a more complete description of the
terms of the mergers, you should read carefully this entire document and the
documents to which we have referred you.
THE COMPANIES
World Access, Inc.
945 E. Paces Ferry Road
Suite 2200
Atlanta, Georgia 30326
(404) 231-2025 World Access transports international long
distance voice, data and Internet traffic
primarily for long distance carriers and
local phone companies operating in the
United States and Europe. These services
are provided through a combination of its
own network facilities and agreements with
other carriers to terminate traffic in
regions of the world where World Access
does not have its own network. Through the
acquisition of FaciliCom International in
December 1999 and NETnet International in
February 2000, World Access has expanded
its service offerings to include the sale
of bundled voice, data and Internet
services directly to small and medium sized
businesses located throughout Western
Europe.
STAR Telecommunications, Inc.
223 East De La Guerra Street
Santa Barbara, California 93101
(805) 899-1962 STAR provides telecommunications services
on a world-wide basis to the public, long
distance carriers, corporations and
Internet service providers. STAR also
provides international and national long
distance calling services, international
private telephone lines, prepaid calling
cards, long distance services accessible
through a dialed prefix and international
toll free services. Following the
completion of the PT-1 asset sale, STAR
will no longer provide long distance
service to individual consumers and
businesses through prepaid calling cards,
long distance services accessible through a
dialed prefix and presubscribed domestic
and international long distance services.
WorldxChange Communications
9999 Willow Creek Road
San Diego, California 92131
(858) 530-8116 WorldxChange is a global telecommunications
company that specializes in providing
high-quality, low-cost services to
customers in the United States, Australia,
Belgium, Canada, France, Germany,
Guatemala, The Netherlands, New Zealand and
the United Kingdom. WorldxChange operates
43 switches which route traffic and are
connected with a network of owned and
leased undersea and land-based fiber optic
cables, providing customers with affordable
communications services worldwide.
WORLD ACCESS' PURCHASE OF TELDAFAX SHARES AND FINANCIAL PROJECTIONS
The World Access board of directors has approved an agreement under which
World Access has agreed to acquire shares of TelDaFax AG stock in five separate
transactions. TelDaFax provides telecommunications services to business and
residential customers in Germany. On September 21, 2000, World Access completed
the first of these transactions with its purchase of all of the TelDaFax shares
owned by the Apax Funds, which represents approximately 33% of the outstanding
shares of TelDaFax. In this transaction, World Access purchased 11,178,176
shares of TelDaFax in exchange for 11,457,631 shares
5
<PAGE> 19
of World Access common stock. The TelDaFax transactions are more fully described
on page 203 of this joint proxy statement/prospectus.
World Access' third quarter special charges and financial projections
On September 19, 2000, World Access announced that in the third quarter of
2000 it will be recording a $30.0 to $50.0 million restructuring charge and a
$35.0 million special charge to selling, general and administrative expenses.
The restructuring charge relates to the integration of WorldxChange which will
be consolidated into World Access' financial statements effective August 1,
2000. The special charge relates to a significant increase in reserves for
doubtful accounts, due to World Access' recent decision to discontinue or
significantly curtail services provided to certain customers for credit reasons,
and costs associated with migration of billing systems and re-branding of retail
activities. World Access also announced its financial projections for the
remainder of 2000 and for 2001 based on a recently developed business model.
These special charges and financial projections are more fully described on page
204 of this joint proxy statement/prospectus.
6
<PAGE> 20
SUMMARY OF THE STAR MERGER
THE STAR MERGER
As a result of the STAR merger, STAR will become a subsidiary of World
Access. In the STAR merger World Access expects to issue approximately 22.7
million shares of its common stock to STAR stockholders. Assuming a value of
$6.00 per share of World Access common stock, the total consideration to be paid
by World Access will be approximately $136.0 million. In addition, after
applying the anticipated net cash proceeds of $120.0 million from the sale of
PT-1, World Access expects to assume approximately $75.0 million of net STAR
debt.
World Access has also agreed to a merger with WorldxChange. The percentage
in voting power of the combined company that will be owned by the pre-merger
stockholders will be as follows:
<TABLE>
<CAPTION>
WORLD
ACCESS STAR WORLDXCHANGE
------ ---- ------------
<S> <C> <C> <C>
World Access, STAR and WorldxChange
100% World Access stock................................... 67% 14% 19%
60% World Access stock/40% cash........................... 71 9 20
World Access and STAR only
100% World Access stock................................... 83 17 --
60% World Access stock/40% cash........................... 89 11 --
World Access and WorldxChange only.......................... 78 -- 22
</TABLE>
CONDITIONS TO COMPLETION OF THE STAR MERGER (SEE PAGE 77)
The conditions that must be satisfied or waived before World Access is
obligated to complete the STAR merger include the following:
- no material adverse effect may occur with respect to STAR;
- holders of fewer than 1% of the shares of STAR common stock shall have
exercised dissenters' rights of appraisal under Delaware law; and
- STAR must complete the PT-1 asset sale to Counsel for net cash proceeds
of at least $120.0 million or complete the sale of PT-1 to a party other
than Counsel for net cash proceeds of at least $150.0 million pursuant to
an agreement reasonably satisfactory to World Access.
Any of the closing conditions can be waived by the party that is not
obligated to complete the STAR merger if the condition is not satisfied. If
either World Access or STAR waives any condition, World Access and STAR will
each consider the facts and circumstances at that time and determine whether a
resolicitation of proxies from stockholders is appropriate. The boards of
directors of STAR and World Access will resolicit stockholder approval of the
STAR merger if either company waives a material closing condition that the
boards believe a reasonable investor would consider important when deciding to
approve the STAR merger. The completion of the WorldxChange merger is not a
condition to the completion of the STAR merger.
VOTE REQUIRED FOR APPROVAL (SEE PAGES 37 AND 39)
The holders of a majority of the outstanding shares of World Access common
stock and preferred stock, voting together as a single class, must approve and
adopt the STAR merger agreement and the STAR merger. The shares of World Access
preferred stock are counted as if they have been converted to common stock. In
this joint proxy statement/prospectus, we refer to the World Access common
stock, the Series A preferred stock, the Series C preferred stock, the Series D
preferred stock and the Series E preferred stock as the World Access voting
stock. World Access stockholders are entitled to cast one vote per share of
World Access common stock owned or to be received upon the conversion of shares
of preferred stock owned as of [ ], 2000, the World Access record
date.
7
<PAGE> 21
The holders of a majority of the outstanding shares of STAR common stock
must approve and adopt the STAR merger agreement and the STAR merger. STAR
stockholders can cast one vote per share owned as of [ ], 2000,
the STAR record date.
World Access stockholders holding [ %] of the total voting power of
World Access as of the World Access record date have agreed to vote in favor of
the STAR merger. Directors and officers of World Access collectively
beneficially owned approximately [ %] of the voting power of World Access as
of the World Access record date.
TERMINATION OF THE STAR MERGER AGREEMENT (SEE PAGE 78)
The STAR merger agreement may be terminated under limited circumstances at
any time before the completion of the STAR merger. The circumstances include:
- by World Access or STAR, if the STAR merger is not completed on or before
December 31, 2000;
- by World Access or STAR, if the stockholders of World Access or STAR do
not adopt the STAR merger agreement by the required vote; and
- by World Access if there is a default under STAR's anticipated credit
agreement with World Access.
TERMINATION FEE (SEE PAGE 79)
If the STAR merger agreement is terminated for specific reasons listed in
the STAR merger agreement, STAR must pay World Access a termination fee of $14.0
million. STAR will be required to pay the termination fee if the STAR merger
agreement is not approved by the required vote of the stockholders of STAR and
STAR enters into a definitive agreement with respect to a business combination
with another party within one year of the failed stockholder vote.
STAR VOTING AGREEMENTS (SEE PAGE 79)
STAR stockholders Christopher E. Edgecomb and Samer Tawfik entered into
voting and stock transfer restriction agreements with World Access under which
they have agreed to vote all of their shares of STAR common stock in favor of
the approval and adoption of the STAR merger agreement and approval of the STAR
merger. Mr. Edgecomb and Mr. Tawfik together owned approximately % of the
outstanding shares of STAR's common stock as of the STAR record date.
OPINIONS OF WORLD ACCESS' AND STAR'S FINANCIAL ADVISORS (SEE PAGES 48 AND 54)
In deciding to approve the STAR merger, World Access' board of directors
considered an opinion from its financial advisor, Donaldson, Lufkin & Jenrette
Securities Corporation, regarding the fairness to World Access, from a financial
point of view, of the STAR merger consideration. STAR's board considered the
opinion of its financial advisor, Deutsche Bank Securities, Inc., as to the
fairness, from a financial point of view, of the merger consideration to the
STAR stockholders.
Donaldson, Lufkin & Jenrette delivered its fairness opinion to the World
Access board on February 11, 2000, and the opinion relates to the fairness of
the STAR merger as of that date. Deutsche Bank delivered its fairness opinion to
the STAR board on February 7, 2000, and the opinion relates to the fairness of
the STAR merger as of that date. Some of the assumptions relied upon by
Donaldson, Lufkin & Jenrette and Deutsche Bank in preparing their analyses and
in rendering their opinions have changed since they were asked to deliver their
respective opinions. The following sets forth a summary of such changes:
- Both Donaldson, Lufkin & Jenrette and Deutsche Bank assumed an exchange
ratio of 0.3905 shares of World Access common stock for each share of
STAR common stock based on net cash proceeds from the sale of PT-1 of
$150.0 million as compared to a revised exchange ratio of 0.386595 and
assumed net cash proceeds of $120.0 million.
8
<PAGE> 22
- Assumptions used by Donaldson, Lufkin & Jenrette underlying the
projections for World Access and STAR have been revised to reflect lower
carrier revenues for both World Access and STAR due to a reduction in the
number of carrier customers resulting from a strengthened credit policy
implemented by World Access as well as lower organic growth in retail
revenues for STAR due to a greater focus on World Access' European retail
acquisition strategy, which seeks to increase retail revenues through
acquisitions. Deutsche Bank has not independently analyzed World Access'
most recent projections.
- The market prices of shares of World Access common stock and STAR common
stock have decreased significantly since Donaldson, Lufkin & Jenrette and
Deutsche Bank rendered their respective opinions.
- Deutsche Bank did not include the impact of the WorldxChange merger or
the TelDaFax transactions in its evaluation of the STAR merger.
Neither World Access nor STAR has asked, or intends to ask, Donaldson,
Lufkin & Jenrette and Deutsche Bank, respectively, for a new or updated fairness
opinion. Neither Donaldson, Lufkin & Jenrette nor Deutsche Bank has been asked
to update its analyses, and neither is opining as to the fairness of the STAR
merger as of any date subsequent to the date of its respective opinion.
INTERESTS OF DIRECTORS, OFFICERS AND STOCKHOLDERS IN THE STAR MERGER (SEE PAGE
73)
Some of the directors, officers and stockholders of STAR have interests in
the STAR merger that are different from, or are in addition to, all other
stockholders of STAR.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE STAR MERGER (SEE PAGE 64)
World Access has received an opinion from its legal counsel regarding the
material federal income tax consequences of the STAR merger. STAR stockholders
will not recognize gain or loss for federal income tax purposes, except with
respect to cash received in lieu of fractional shares or cash received after the
exercise of appraisal rights. If World Access elects to pay cash as part of the
STAR merger consideration, STAR stockholders will recognize their gain realized
for federal income tax purposes, but only up to the amount of cash received, and
any recognized gain may be taxed as ordinary income. STAR stockholders are urged
to consult their own tax advisors to determine their particular tax
consequences.
APPRAISAL RIGHTS (SEE PAGE 71)
If you are a STAR stockholder, you may be entitled to appraisal rights
under Delaware law with respect to the STAR merger. If you are a World Access
stockholder, you are not entitled to appraisal rights under Delaware law.
ANTITRUST AND DOMESTIC AND FOREIGN REGULATORY APPROVAL REQUIRED TO COMPLETE THE
STAR MERGER (SEE PAGE 70)
The STAR merger is subject to U.S. and German antitrust laws. The
Department of Justice and the Federal Trade Commission granted an early
termination of the required U.S. waiting period, effective March 16, 2000. On
May 18, 2000, the German Cartel office approved the STAR merger. The STAR merger
is also subject to state and federal telecommunications regulatory approvals.
The Federal Communications Commission has approved the STAR merger.
9
<PAGE> 23
COMPARATIVE MARKET PRICE INFORMATION
Shares of World Access common stock and STAR common stock are listed on the
Nasdaq National Market. On December 20, 1999, the last full trading day prior to
the public announcement of the proposed STAR merger, the World Access common
stock and STAR common stock closed at $20 1/2 per share and $8 7/8 per share,
respectively. We urge you to obtain current market quotations.
For a more complete understanding of the STAR merger, please read the
documents attached to this joint proxy statement/prospectus, including the STAR
merger agreement, which is attached as Annex A, the opinion of Donaldson, Lufkin
& Jenrette Securities Corporation, which is attached as Annex C, and the opinion
of Deutsche Bank Securities, Inc., which is attached as Annex E.
10
<PAGE> 24
SUMMARY OF THE WORLDXCHANGE MERGER
THE WORLDXCHANGE MERGER
In the WorldxChange merger, WorldxChange will become a subsidiary of World
Access. In the WorldxChange merger, World Access will issue a total of
approximately 29.8 million shares of World Access common stock to the
WorldxChange shareholders. Assuming a value of $6.00 per share of World Access
common stock, the total consideration to be paid by World Access will be
approximately $179.0 million. In addition, World Access will assume
approximately $225.0 million of WorldxChange's debt. Please see page 7 for a
description of the percentage in voting power of the combined company that will
be owned by the pre-merger stockholders.
CONDITIONS TO COMPLETION OF THE WORLDXCHANGE MERGER (SEE PAGE 113)
The conditions that must be satisfied or waived before World Access is
obligated to complete the WorldxChange merger include the following:
- fewer than 1% of the shares of WorldxChange common stock shall have
exercised dissenters' rights under California law; and
- all shares of WorldxChange preferred stock must be voted in favor of the
WorldxChange merger and deemed to be converted immediately prior to the
completion of the WorldxChange merger into not more than 8,282,829 shares
of WorldxChange common stock.
All consents and approvals required of World Access to complete the
WorldxChange merger must be obtained before WorldxChange is obligated to
complete the WorldxChange merger.
Any of the closing conditions can be waived by the party that is not
obligated to complete the WorldxChange merger if the condition is not satisfied.
If World Access waives any condition, World Access will consider the facts and
circumstances at that time and determine whether a resolicitation of proxies
from its stockholders is appropriate. The World Access board of directors will
resolicit stockholder approval of the WorldxChange merger if either company
waives a material closing condition that it believes a reasonable investor would
consider important when deciding to approve the WorldxChange merger. The
completion of the STAR merger is not a condition to the completion of the
WorldxChange merger.
VOTE OR CONSENT REQUIRED FOR APPROVAL (SEE PAGE 37)
The holders of a majority of the outstanding shares of World Access common
stock, Series A preferred stock, Series C preferred stock, Series D preferred
stock and Series E preferred stock voting together as a single class, must
approve and adopt the WorldxChange merger agreement. The shares of World Access
preferred stock are counted on an as-converted to common stock basis. World
Access stockholders are entitled to cast one vote per share of World Access
common stock owned or to be received upon the conversion of shares of preferred
stock owned as of [ ], 2000, the World Access record date.
The holders of a majority of the outstanding shares of WorldxChange common
stock and WorldxChange preferred stock, voting or consenting as separate
classes, must approve and adopt the WorldxChange merger agreement. WorldxChange
shareholders are entitled to cast one vote per share of common stock owned as of
[ ], 2000, the WorldxChange record date.
World Access stockholders holding [ %] of the voting power of World
Access as of the World Access record date have agreed to vote in favor of the
WorldxChange merger.
WorldxChange shareholders holding [ %] of the voting power of
WorldxChange as of the WorldxChange record date have agreed to vote in favor of
the WorldxChange merger.
11
<PAGE> 25
TERMINATION OF THE WORLDXCHANGE MERGER AGREEMENT (SEE PAGE 113)
The WorldxChange merger agreement may be terminated under limited
circumstances at any time before the completion of the WorldxChange merger.
WORLD ACCESS AND WORLDXCHANGE VOTING AGREEMENTS (SEE PAGES 115 AND 116)
World Access stockholders Armstrong International Telecommunications, Inc.,
WorldCom Network Services, Inc., The 1818 Fund III, L.P., John D. Phillips, W.
Tod Chmar and Resurgens Partners, LLC have agreed to vote all shares of World
Access capital stock owned by them in favor of the approval of the WorldxChange
merger. In addition, these stockholders have agreed not to transfer or sell
their shares of World Access common stock before to the completion of the
WorldxChange merger.
The World Access stockholders who entered into the voting and stock
transfer restriction agreements collectively held approximately [ %] of the
voting power of World Access as of the World Access record date.
WorldxChange shareholders Atocha, L.P., Roger B. Abbott and Rosalind
Abbott, whose shares are jointly owned, Gold & Appel Transfer S.A. and Edward S.
Soren have agreed to vote all shares of WorldxChange capital stock beneficially
owned by them in favor of the WorldxChange merger. These WorldxChange
shareholders also have agreed to restrictions on the pre-closing transfer of
their shares of WorldxChange common stock and post-closing transfer of shares of
World Access common stock to be received by them in the WorldxChange merger.
The WorldxChange shareholders who entered into the voting and stock
transfer restriction agreements collectively held approximately [ %] of the
voting power of WorldxChange capital stock as of the WorldxChange record date.
OPINION OF WORLD ACCESS' FINANCIAL ADVISORS (SEE PAGE 92)
In deciding to approve the WorldxChange merger, World Access' board of
directors considered an opinion from its financial advisor, Donaldson, Lufkin &
Jenrette Securities Corporation, as to the fairness to World Access, from a
financial point of view, of the consideration to be paid by World Access
pursuant to the WorldxChange merger agreement.
Donaldson, Lufkin & Jenrette's fairness opinion was delivered to the World
Access board on February 11, 2000 and relates to the fairness of the
WorldxChange merger as of that date. Some of the assumptions relied upon by
Donaldson, Lufkin & Jenrette in preparing the analyses described above and in
rendering its opinion have changed since Donaldson, Lufkin & Jenrette was asked
to deliver its opinion. The assumptions underlying the projections for World
Access and WorldxChange have been revised to reflect lower carrier revenues for
both World Access and WorldxChange due to a reduction in the number of carrier
customers resulting from a strengthened credit policy implemented by World
Access as well as lower organic growth in retail revenues for WorldxChange due
to a greater focus on World Access' European retail acquisition strategy, which
seeks to increase retail revenues through acquisitions. In addition, the market
price of shares of World Access common stock has decreased significantly since
Donaldson, Lufkin & Jenrette rendered its opinion. World Access has not asked,
and does not intend to ask, Donaldson, Lufkin & Jenrette for a new or updated
fairness opinion, and Donaldson, Lufkin & Jenrette has not been asked to update
its analyses and is not opining as to the fairness of the WorldxChange merger as
of any date subsequent to the date of its opinion.
INTERESTS OF DIRECTORS, OFFICERS AND SHAREHOLDERS IN THE WORLDXCHANGE MERGER
(SEE PAGE 108)
Some World Access and WorldxChange directors, officers and shareholders
have interests in the WorldxChange merger that are different from, or are in
addition to, all other stockholders of World Access and shareholders of
WorldxChange.
12
<PAGE> 26
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE WORLDXCHANGE MERGER (SEE PAGE
98)
Each of World Access and WorldxChange has received an opinion from its
legal counsel regarding the material federal income tax consequences of the
WorldxChange merger. WorldxChange shareholders will not recognize gain or loss
for federal income tax purposes, except with respect to cash received in lieu of
fractional shares or cash received after the exercise of dissenters' rights.
Holders of WorldxChange preferred stock may have additional tax consequences
upon payment of the accrued and unpaid dividends on the stock as part of the
WorldxChange merger. WorldxChange shareholders are urged to consult their own
tax advisors to determine their particular tax consequences.
APPRAISAL OR DISSENTERS' RIGHTS (SEE PAGE 106)
If you are a WorldxChange shareholder, you may be entitled to dissenters'
rights under California law with respect to the WorldxChange merger. If you are
a World Access stockholder, you are not entitled to appraisal rights under
Delaware law.
ANTITRUST AND DOMESTIC AND FOREIGN REGULATORY APPROVALS REQUIRED TO COMPLETE THE
WORLDXCHANGE MERGER (SEE PAGE 105)
The WorldxChange merger is subject to U.S. and German antitrust laws. The
Department of Justice and the Federal Trade Commission granted an early
termination of the required U.S. waiting period, effective April 6, 2000. On May
24, 2000,the German Cartel office approved the WorldxChange merger. The
WorldxChange merger is also subject to state and federal telecommunications
regulatory approvals. The Federal Communications Commission has approved the
WorldxChange merger.
COMPARATIVE MARKET PRICE INFORMATION
Shares of World Access common stock are listed on the Nasdaq National
Market. On February 11, 2000, the last full trading day prior to the public
announcement of the proposed WorldxChange merger, the World Access common stock
closed at $22 7/8 per share. We urge you to obtain current market quotations.
The WorldxChange common stock is not publicly traded.
Please read the documents attached to this joint proxy
statement/prospectus, including the WorldxChange merger agreement, which is
attached as Annex B and the opinion of Donaldson, Lufkin & Jenrette Securities
Corporation, which is attached as Annex D.
13
<PAGE> 27
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
WORLD ACCESS SELECTED HISTORICAL FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1999 set forth below has been derived from and should be read
in conjunction with the audited consolidated financial statements of World
Access. The financial information for the six month periods ended June 30, 1999
and 2000 have been derived from unaudited consolidated financial statements of
World Access, which, in the opinion of World Access' management, include all the
significant normal and recurring adjustments necessary for fair presentation of
the financial position and results of operations for such unaudited periods.
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- -------- -------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CONTINUING OPERATIONS
DATA(1):
Carrier service revenue............. $ -- $ -- $ -- $ 10,787 $ 501,081 $198,014 $ 561,600
Cost of services (exclusive of
depreciation and amortization).... -- -- -- 10,137 448,305 182,804 490,330
Depreciation and amortization....... 30 71 115 416 13,541 4,597 36,512
Restructuring charge (credit)....... -- -- -- -- 37,800 -- (3,995)
Operating income (loss)............. (880) (1,011) (1,550) (4,383) (26,998) 1,939 (12,585)
Loss from continuing operations..... (1,292) (588) (460) (5,437) (27,098) (1,728) (29,577)
Loss from continuing operations per
share............................. $ (0.14) $ (0.05) $ (0.03) $ (0.25) $ (0.78) $ (0.06) $ (0.53)
Weighted average shares
outstanding....................... 9,083 13,044 17,242 22,073 37,423 36,232 57,658
BALANCE SHEET DATA:
Cash and equivalents................ $ 1,887 $22,480 $118,065 $ 55,176 $ 147,432 $ 98,996 $ 329,279
Short-term investments.............. -- -- -- -- -- -- 160,211
Working capital..................... 17,884 52,149 206,769 350,816 289,844 180,061 410,422
Total assets........................ 23,604 52,512 207,294 544,649 1,629,804 693,146 2,176,810
Long-term debt...................... 3,750 -- 115,264 137,523 408,338 140,728 417,946
Total liabilities................... 9,270 138 115,539 184,066 732,505 267,354 883,079
Stockholders' equity................ 14,334 52,374 91,755 360,583 897,299 425,792 1,293,731
OTHER FINANCIAL DATA:
EBITDA from continuing operations
before restructuring(2)........... $ (850) $ (940) $ (1,435) $ (3,967) $ 24,343 $ 6,536 $ 19,932
Capital expenditures................ 280 1,176 3,591 12,216 7,198 4,163 12,951
Cash flows from (used by) operating
activities........................ (6,445) 1,995 (1,602) (13,038) 18,515 4,288 (83,053)
Cash flows (used by) investing
activities........................ (2,432) (1,792) (18,240) (66,527) (32,186) (4,102) 176,567
Cash flows from financing
activities........................ 10,010 20,391 115,427 16,676 105,927 43,634 88,333
</TABLE>
---------------
(1) Includes the results of operations for the following businesses from their
respective dates of acquisition: Cherry U.S. and Cherry U.K. -- December
1998; Comm/Net -- May 1999; FaciliCom -- December 1999; and
NETnet -- February 2000.
(2) EBITDA from continuing operations as used in this proxy statement/prospectus
is earnings (loss) before net interest expense (income), income taxes,
foreign exchange gains or losses, depreciation and amortization and is
presented because World Access believes that such information is commonly
used in the telecommunications industry as one measure of a company's
operating performance and historical ability to service debt. EBITDA from
continuing operations is not determined in accordance
14
<PAGE> 28
with generally accepted accounting principles, is not indicative of cash
provided by operating activities, should not be used as a measure of
operating income and cash flows from operations as determined under
generally accepted accounting principles and should not be considered in
isolation, or as an alternative to, or to be more meaningful than, measures
of performance determined in accordance with generally accepted accounting
principles. EBITDA, as calculated by World Access, may not be comparable to
similarly titled measures reported by other companies and could be
misleading unless all companies and analysts calculated EBITDA in the same
manner. The following table reconciles World Access' loss from continuing
operations to EBITDA from continuing operations and EBITDA from continuing
operations before restructuring charges and credits:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ----- ------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Loss from continuing operations... $(1,292) $(588) $ (460) $(5,437) $(27,098) $(1,728) $(29,577)
Net interest expense (income)..... 412 (85) (838) 4,355 9,606 3,443 19,318
Income taxes benefit.............. -- (338) (252) (3,301) (10,126) 224 (2,115)
Foreign exchange (gain) loss...... -- -- -- -- 620 -- (211)
Depreciation and amortization..... 30 71 115 416 13,541 4,597 36,512
------- ----- ------- ------- -------- ------- --------
EBITDA from continuing
operations...................... (850) (940) (1,435) (3,967) (13,457) 6,536 23,927
Restructuring charge (credit)..... -- -- -- -- 37,800 -- (3,995)
------- ----- ------- ------- -------- ------- --------
EBITDA from continuing operations
before restructuring............ $ (850) $(940) $(1,435) $(3,967) $ 24,343 $ 6,536 $ 19,932
======= ===== ======= ======= ======== ======= ========
</TABLE>
STAR SELECTED HISTORICAL FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1999 set forth below has been derived from and should be read
in conjunction with the audited consolidated financial statements of STAR. The
financial information for the six month periods ended June 30, 1999 and 2000
have been derived from unaudited consolidated financial statements of STAR,
which, in the opinion of STAR's management, include all the significant normal
and recurring adjustments necessary for fair presentation of the financial
position and results of operations for the unaudited periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- -------- -------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $66,964 $283,450 $434,086 $619,220 $1,061,774 $500,478 $497,400
Operating expenses:
Cost of services (exclusive of
depreciation and
amortization).................. 50,300 244,153 374,504 523,621 925,206 441,503 433,657
Selling, general and
administrative................. 13,356 41,804 48,906 66,140 160,067 77,053 61,555
Depreciation and amortization.... 952 2,343 5,650 15,054 44,236 19,640 26,539
Loss on impairment of goodwill... -- -- -- 2,604 -- -- --
Merger expense................... -- -- 286 1,026 1,878 1,872 --
------- -------- -------- -------- ---------- -------- --------
Total operating expenses......... 64,608 288,300 429,346 608,445 1,131,387 540,068 521,751
------- -------- -------- -------- ---------- -------- --------
Income (loss) from operations.... 2,356 (4,850) 4,740 10,775 (69,613) (39,590) (24,351)
Other income (expenses):
Interest income.................. 65 138 464 4,469 2,192 1,675 265
Interest expense................. (214) (1,270) (2,617) (3,386) (9,895) (3,532) (7,742)
Legal settlements and expense.... -- (100) (1,653) -- -- -- --
Other............................ (97) 186 208 (304) 1,373 (1,923) 7,554
------- -------- -------- -------- ---------- -------- --------
</TABLE>
15
<PAGE> 29
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- -------- -------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before provision
for income taxes............... 2,110 (5,896) 1,142 11,554 (75,943) (43,370) (24,274)
Provision (benefit) for income
taxes............................ 66 577 2,905 9,923 (12,096) (7,886) (5,706)
------- -------- -------- -------- ---------- -------- --------
Net income (loss).................. $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847) $(35,484) $(18,568)
======= ======== ======== ======== ========== ======== ========
Pro forma net income (loss)
(unaudited)(1)................... $ 478 $ (7,416) $ (1,958)
======= ======== ========
Income (loss) per common share(2)
Basic and Diluted................ $ 0.10 $ (0.27) $ (0.06) $ 0.04 $ (1.12) $ (0.64) $ (0.32)
======= ======== ======== ======== ========== ======== ========
Pro forma income (loss) per
common share (unaudited)(2)
Basic and Diluted................ $ 0.02 $ (0.31) $ (0.06)
======= ======== ========
Weighted average number of common
shares outstanding -- basic(2)
Basic............................ 19,916 24,076 31,101 40,833 57,036 55,541 58,609
Diluted.......................... 19,916 24,076 31,101 42,434 57,036 55,541 58,609
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
------- -------- --------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $(1,065) $(10,913) $ 4,692 $ 46,698 $ (197,921) $ (85,773) $ (151,862)
Total assets................. 37,169 76,250 130,382 374,651 807,754 638,674 729,789
Total long-term liabilities,
net of current portion..... 2,980 8,834 14,800 33,048 96,693 38,691 93,037
Accumulated deficit.......... (6,294) (12,077) (13,737) (12,106) (75,953) (19,657) (93,736)
Stockholders' equity......... 6,614 9,986 40,615 195,591 278,054 336,207 258,569
OTHER FINANCIAL DATA:
EBITDA from continuing
operations(3).............. $ 3,308 $ (2,507) $ 10,390 $ 25,829 $ (25,377) $ (19,950) $ (2,562)
Cash flows (used in) provided
by operating activities.... 2,076 (2,847) 11,476 (12,379) 40,138 13,365 11,357
Cash flows (used in) provided
by investing activities.... (1,123) (10,403) (31,157) (100,986) (58,297) (63,331) 8,326
Cash flows (used in) provided
by financing activities.... (839) 14,721 19,174 158,526 (991) 11,860 (28,728)
Capital expenditures(4)...... 2,922 14,810 26,584 147,236 150,588 56,015 5,678
North American wholesale
billed minutes of use(5)... 38,106 479,681 1,034,187 1,657,523 2,129,296 1,102,804 921,885
North American wholesale
revenue per billed minute
of use(6).................. $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084 $ 0.2256 $ 0.1657
</TABLE>
---------------
(1) The pro forma net income or loss per share assumes that STAR and CEO
Telecommunications, Inc., which STAR acquired in a pooling of interests
transaction on November 30, 1997, were C-corporations for all periods
presented.
(2) See Note 2 of Notes to Consolidated Financial Statements set forth in STAR's
annual report on Form 10-K for the fiscal year ended December 31, 1999, as
amended by Form 10-K/A filed on September 11, 2000, and incorporated by
reference herein, for an explanation of the method used to determine the
number of shares used in computing basic and diluted income (loss) per
common share and pro form basic and diluted income (loss) per common share.
16
<PAGE> 30
(3) EBITDA from continuing operations as used in this joint proxy
statement/prospectus is earnings (loss) before net interest expense
(income), income taxes, foreign exchange gains or losses, depreciation and
amortization and is presented because STAR believes that the information is
commonly used in the telecommunications industry as one measure of a
company's operating performance and historical ability to service debt.
EBITDA from continuing operations is not determined in accordance with
generally accepted accounting principles, is not indicative of cash provided
by operating activities, should not be used as a measure of operating income
and cash flows from operations as determined under generally accepted
accounting principles and should not be considered in isolation or as an
alternative to, or to be more meaningful than, measures of performance
determined in accordance with generally accepted accounting principles.
EBITDA, as calculated by STAR, may not be comparable to similarly titled
measures reported by other companies and could be misleading unless all
companies and analysts calculate EBITDA in the same manner.
The following table reconciles STAR's income (loss) from continuing
operations to EBITDA from continuing operations (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------ ------- ------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations.................. $2,044 $(6,473) $(1,763) $ 1,631 $(63,847) $(35,484) $(18,568)
Net interest expense
(income).................... 149 1,132 2,153 (1,083) 7,703 1,857 7,477
Income tax expense
(benefit)................... 66 577 2,905 9,923 (12,096) (7,886) (5,706)
Other......................... 97 (86) 1,445 304 (1,373) 1,923 (7,554)
Depreciation and
amortization................ 952 2,343 5,650 15,054 44,236 19,640 26,539
------ ------- ------- ------- -------- -------- --------
EBITDA from continuing
operations.................. $3,308 $(2,507) $10,390 $25,829 $(25,377) $(19,950) $ 2,188
====== ======= ======= ======= ======== ======== ========
</TABLE>
(4) Includes assets financed with capital leases, notes and vendor financing
arrangements.
(5) Does not include wholesale billed minutes of use from T-One Corporation, a
former subsidiary of STAR, prior to the year ended December 31, 1997.
Includes wholesale billed minutes of use attributable to ALLSTAR Telecom,
formerly know as United Digital Network, Inc., a subsidiary of STAR, for all
years presented.
(6) Represents wholesale gross call usage revenue per billed minute. Amounts
exclude other revenue related items such as finance charges. This data does
not include wholesale billed minutes of use from T-One prior to the year
ended December 31, 1997.
17
<PAGE> 31
WORLDXCHANGE SELECTED HISTORICAL FINANCIAL INFORMATION
The following table summarizes WorldxChange's financial data. The data
presented in this table are derived from the "WorldxChange Selected Consolidated
Financial Data" and the consolidated financial statements and notes which are
included elsewhere in this joint proxy statement/prospectus. You should read
those sections for a further explanation of the financial data summarized here.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $331,660 $398,867 $421,580 $304,324 $423,913
Cost of services (exclusive of depreciation
and amortization)......................... 235,027 287,312 328,334 238,599 337,814
-------- -------- -------- -------- --------
Gross profit................................ 96,633 111,555 93,246 65,725 86,099
Selling, general and administrative......... 113,459 114,897 124,112 88,431 124,014
Depreciation and amortization............... 8,677 12,332 17,705 12,394 35,131
-------- -------- -------- -------- --------
Operating loss.............................. (25,503) (15,674) (48,571) (35,100) (73,046)
Interest expense............................ 8,682 11,947 16,883 12,448 22,694
Other expense, net.......................... 3,366 1,378 648 222 822
Minority interest........................... (473) (1,546) (2,251) (1,782) --
-------- -------- -------- -------- --------
Net loss.................................... $(37,078) $(27,453) $(63,851) $(45,988) $(96,562)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30, JUNE 30,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 1,400 $ 3,400 $ 4,326 $ 20,917 $ 38,030 $ 6,913
Working capital (deficit)......... (15,100) (35,400) (50,428) (37,035) (37,173) (307,333)
Total assets...................... 55,200 62,800 103,745 120,129 235,002 430,412
Short-term debt and capital lease
obligations..................... 13,500 15,700 9,456 20,272 20,381 201,825
Long-term debt, net of current
portion......................... 24,900 24,700 49,204 99,313 129,719 70,829
Minority interest................. -- 300 8,815 7,269 -- --
Total shareholders' deficit....... (8,600) (32,000) (68,880) (89,593) (35,053) (95,948)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)................................... $(16,826) $ (3,342) $(30,866) $(22,706) $(37,915)
Cash provided by (used in) operating
activities................................ (7,206) (31,735) (31,549) (4,506) (37,876)
Cash used in investing activities........... (10,871) (11,990) (27,633) (25,125) (60,908)
Cash provided by financing activities....... 18,783 60,535 76,284 46,864 67,667
Capital expenditures........................ 19,404 22,411 81,024 57,763 32,549
GEOGRAPHIC DATA:
Revenues:
North America............................. $291,633 $321,763 $337,457 $238,013 $246,063
Pacific Rim............................... 24,437 58,382 55,619 42,975 38,178
Europe.................................... 15,590 18,722 28,504 23,336 139,672
-------- -------- -------- -------- --------
Total............................. $331,660 $398,867 $421,580 $304,324 $423,913
======== ======== ======== ======== ========
</TABLE>
18
<PAGE> 32
---------------
(1) EBITDA as used in this joint proxy statement/prospectus is operating loss
plus depreciation and amortization expense and is presented because
WorldxChange believes that the information is commonly used in the
telecommunications industry as one measure of a company's operating
performance and historical ability to service debt. EBITDA from continuing
operations is not determined in accordance with generally accepted
accounting principles, is not indicative of cash provided by operating
activities, should not be used as a measure of operating income and cash
flows from operations as determined under generally accepted accounting
principles and should not be considered in isolation or as an alternative
to, or to be more meaningful than, measures of performance determined in
accordance with generally accepted accounting principles. EBITDA, as
calculated by WorldxChange, may not be comparable to similarly titled
measures reported by other companies and could be misleading unless all
companies and analysts calculate EBITDA in the same manner.
The following table reconciles WorldxChange's net loss to EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss............................ $(37,078) $(27,453) $(63,851) $(45,988) $(96,562)
Net interest expense................ 8,682 11,947 16,883 12,448 22,694
Other expense, net.................. 3,366 1,378 648 222 822
Minority interest................... (473) (1,546) (2,251) (1,782) --
Depreciation and amortization....... 8,677 12,332 17,705 12,394 35,131
-------- -------- -------- -------- --------
EBITDA.............................. $(16,826) $ (3,342) $(30,866) $(22,706) $(37,915)
======== ======== ======== ======== ========
</TABLE>
UNAUDITED SELECTED PRO FORMA FINANCIAL INFORMATION
The unaudited selected pro forma balance sheet of World Access as of June
30, 2000 set forth below gives effect to the STAR merger, including the related
PT-1 asset sale, the WorldxChange merger and the TelDaFax acquisition. The
unaudited selected pro forma statement of operations data of World Access for
the six months ended June 30, 2000 set forth below gives effect to the
transactions reflected above and transactions that World Access has completed in
1999, as if consummated at the beginning of 1999. The selected pro forma
information set forth below is qualified in its entirety by, and should be read
in conjunction with, the Unaudited Pro Forma Condensed Combined Financial
Statements included herein and the historical financial information of World
Access, FaciliCom, Comm/Net, Long Distance International (LDI), STAR,
WorldxChange and TelDaFax, which, in the case of WorldxChange and TelDaFax, are
included in this document and, in the case of World Access, FaciliCom, Comm/Net,
LDI and STAR, are incorporated herein by reference.
The selected pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the financial position or
operating results that would have occurred if the transactions given retroactive
effect in the pro forma information had been consummated as of the dates
indicated, nor is it necessarily indicative of future financial conditions or
operating results. See "Unaudited Pro Forma Condensed Combined Financial
Statements."
19
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- ------------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS DATA:
Service revenue............................................. $2,554,632 $1,189,884
Operating expenses:
Cost of services (exclusive of depreciation and
amortization)............................................. 2,170,883 1,013,297
Selling, general and administrative......................... 496,305 207,313
Depreciation and amortization............................... 208,608 113,446
Merger expense.............................................. 1,867 --
Restructuring and other special charges..................... 44,187 (3,995)
---------- ----------
Total operating expenses.......................... 2,921,850 1,330,061
---------- ----------
Operating loss.................................... (367,218) (140,177)
Interest and other income................................... 19,992 21,568
Interest and other expense.................................. (93,148) (52,703)
Foreign exchange gain (loss)................................ (5,840) 117
---------- ----------
Loss from continuing operations before income
taxes and minority interests.................... (446,214) (171,195)
Provision (benefit) for income taxes........................ (18,250) (12,277)
---------- ----------
Loss from continuing operations before minority
interest.......................................... (427,964) (158,918)
Minority interest........................................... 2,388 851
---------- ----------
Loss from continuing operations................... (425,576) (158,067)
Preferred stock dividends................................... (3,245) (2,763)
---------- ----------
Loss from continuing operations available to
common stockholders............................... $ (428,821) $ (160,830)
========== ==========
Loss per common share from continuing operations(1)....... $ (2.90) $ (1.04)
========== ==========
Weighted average shares outstanding(1).................... 147,824 154,858
========== ==========
</TABLE>
---------------
(1) Loss per share and weighted average shares outstanding are presented on a
diluted basis.
<TABLE>
<CAPTION>
AT JUNE 30,
2000
-----------
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash and equivalents........................................ $ 337,684
Short-term investments...................................... 161,967
Restricted cash............................................. 31,095
Accounts receivable......................................... 507,886
Other current assets........................................ 123,705
Net assets held for sale.................................... 41,465
----------
Total Current Assets.............................. 1,203,802
----------
Property and equipment, net................................. 497,264
Goodwill and other intangibles.............................. 2,270,762
Other assets................................................ 62,892
----------
Total Assets...................................... $4,034,720
==========
</TABLE>
20
<PAGE> 34
<TABLE>
<CAPTION>
AT JUNE 30,
2000
-----------
<S> <C>
Short-term debt............................................. $ 253,507
Accounts payable............................................ 425,732
Other accrued liabilities................................... 502,898
----------
Total Current Liabilities......................... 1,182,137
Long-term debt.............................................. 391,897
Other long-term liabilities................................. 48,974
----------
Total Liabilities................................. 1,623,008
----------
Minority Interests.......................................... 888
Stockholders' Equity
Preferred stock............................................. 6
Common stock................................................ 1,571
Additional paid in capital.................................. 2,584,065
Accumulated other comprehensive loss........................ (12,239)
Accumulated deficit......................................... (162,579)
----------
Total Stockholders' Equity........................ 2,410,824
----------
Total Liabilities and Stockholders' Equity........ $4,034,720
==========
</TABLE>
21
<PAGE> 35
COMPARATIVE PER SHARE DATA
(UNAUDITED)
Set forth below are historical loss per share from continuing operations
and book value per common share data of World Access, STAR and WorldxChange and
the loss per share from continuing operations and book value per common share
data of World Access on a pro forma basis to give effect to the acquisition of
Comm/Net in May 1999, the acquisition of FaciliCom in December 1999, the
acquisition of LDI in February 2000 and the proposed mergers with STAR and
WorldxChange.
In accordance with the STAR merger agreement, World Access, at its option,
may pay up to 40% of the purchase price in the form of cash. Currently, World
Access has no intention of paying any portion of the STAR purchase price with
cash other than an immaterial amount to be paid for fractional shares and any
cash to be paid for Dissenters' Shares. As a result, comparative per share data
giving effect to World Access' option to reduce the number of shares it issues
is not included. However, should World Access decide to pay 40% of the STAR
purchase price in cash, assuming a value of $6.00 per share of World Access
common stock, World Access would be required to pay STAR shareholders
approximately $54.4 million in cash and issue approximately 13.6 million shares
of World Access Common Stock having an approximate value of $81.6 million in
connection with the merger. Since the option to pay a portion of the STAR
purchase price in cash is solely at the option of the World Access and World
Access has no intention of paying any portion of the STAR purchase price with
the cash option, the pro forma balance sheets have been prepared excluding the
cash option.
No common stock dividends were paid by World Access during the periods
presented below.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
<S> <C> <C>
World Access -- Historical:
Loss per share from continuing operations:
Basic.................................................. $(0.78) $(0.53)
Diluted................................................ (0.78) (0.53)
Book value per common share(1)............................ 17.15 20.81
World Access -- Pro Forma(4):
Loss per share from continuing operations(2):
Basic.................................................. $(3.63) $(1.22)
Diluted................................................ (3.63) (1.22)
Book value per common share(3)............................ 17.85
World Access -- Pro Forma(5):
Net loss per share:
Basic.................................................. $(3.33) $(0.75)
Diluted................................................ (3.33) (0.75)
Book value per common share............................... 20.18
World Access -- Pro Forma(6):
Net loss per share:
Basic.................................................. $(4.33) $(1.43)
Diluted................................................ (4.33) (1.43)
Book value per common share............................... 20.02
STAR -- Historical:
Net loss per share:
Basic.................................................. $(1.12) $(0.32)
Diluted................................................ (1.12) (0.32)
Book value per common share(1)............................ 4.75 4.41
</TABLE>
22
<PAGE> 36
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
<S> <C> <C>
STAR -- Equivalent Pro Forma(7):
Net loss per share:
Basic.................................................. $(1.40) $(0.47)
Diluted................................................ (1.40) (0.47)
Book value per common share............................... 6.90
STAR -- Equivalent Pro Forma(8):
Net loss per share:
Basic.................................................. $(1.29) $(0.29)
Diluted................................................ (1.29) (0.29)
Book value per common share............................... 7.80
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1999 JUNE 30, 2000
------------------ -------------
<S> <C> <C>
WorldxChange -- Historical:
Net loss per share:
Basic.................................................. $(1.91) $(1.73)
Diluted................................................ (1.91) (1.73)
Book value per common share(1)............................ (0.95) (2.25)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
<S> <C> <C>
WorldxChange -- Equivalent Pro Forma(7):
Net loss per share
Basic.................................................. $(2.39) $(0.80)
Diluted................................................ (2.39) (0.80)
Book value per common share............................... 11.75
WorldxChange -- Equivalent Pro Forma(9):
Net loss per share:
Basic.................................................. $(2.85) $(0.94)
Diluted................................................ (2.85) (0.94)
Book value per common share............................... 13.18
</TABLE>
---------------
(1) Calculated by dividing historical stockholders' equity by the number of
outstanding common shares. The outstanding common shares do not include
shares issuable upon exercise of stock options, stock warrants, conversion
of outstanding convertible securities, or outstanding shares which have
been placed in escrow in connection with previous acquisitions.
(2) Pro forma loss per share from continuing operations is presented on a basic
and diluted basis computed as pro forma loss from continuing operations
divided by the weighted average number of shares outstanding, assuming
shares issued in each of the transactions were outstanding since the
beginning of each period presented. The outstanding common shares do not
include shares issuable upon exercise of stock options, stock warrants, or
conversion of outstanding convertible securities.
(3) Calculated by dividing pro forma stockholders' equity by the number of
outstanding shares of World Access Common Stock expected to be outstanding
as of the consummation of the Mergers, and does not include shares issuable
upon the exercise of stock options, stock warrants, the conversion of
outstanding convertible securities, or outstanding shares which have been
placed in escrow in connection with previous acquisitions.
(4) Pro forma information assumes World Access acquires both STAR and
WorldxChange.
(5) Pro forma information assumes World Access acquires STAR but not
WorldxChange.
(6) Pro forma information assumes World Access acquires WorldxChange but not
STAR.
(7) Equivalent pro forma information assumes World Access acquires both STAR
and WorldxChange.
(8) Equivalent pro forma information assumes World Access acquires STAR but not
WorldxChange.
(9) Equivalent pro forma information assumes World Access acquires WorldxChange
but not STAR.
23
<PAGE> 37
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS JOINT PROXY STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS IN DECIDING WHETHER TO VOTE FOR OR EXERCISE DISSENTERS'
RIGHTS WITH RESPECT TO THE MERGERS.
RISK FACTORS RELATING TO THE MERGERS
INTEGRATING THE COMPANIES WILL BE A COMPLEX, TIME CONSUMING AND EXPENSIVE
PROCESS THAT MAY DECREASE REVENUES, DAMAGE RELATIONSHIPS WITH KEY CUSTOMERS AND
EMPLOYEES, AND CAUSE THE COMBINED COMPANY'S STOCK PRICE TO DROP.
The combined company may encounter difficulties when it attempts to merge
the operations of World Access, STAR, and WorldxChange. World Access, STAR and
WorldxChange anticipate that the merger process will be complex, time consuming
and expensive. The integration of the STAR and WorldxChange networks into the
World Access network may disrupt the combined company's business, decrease
revenues and damage relationships with key customers. The combined company may
also incur significant merger-related expenses and suffer extended network
downtime during this period. In addition, the integration of the World Access,
STAR and WorldxChange operations and accounting, personnel, administrative,
legal and other functions involves the risk that key employees, who cannot
easily be replaced, may leave even when offered continuing employment. To the
extent that management's attention is diverted by these difficulties from the
day-to-day operation of the combined company's business, the combined company's
revenues may decrease and the combined company may lose key customers and
employees. The occurrence of any of the events described above could cause the
combined company's stock price to drop.
THE COMBINED COMPANY MAY NOT REALIZE THE COST SAVINGS, OPERATING EFFICIENCIES
AND SYNERGIES EXPECTED FROM THE MERGERS.
World Access expects to realize cost savings, operating efficiencies and
synergies in excess of $110.0 million as a result of the mergers. However, the
combined company may not achieve these cost savings, operating efficiencies and
synergies as rapidly as expected or at all. For example, the combined company's
ability to consolidate its purchasing and obtain more favorable prices from
suppliers may be limited by changes in the purchasing power or practices of its
competitors and other market dynamics.
EACH COMPANY HAS SIGNIFICANT LOSSES AND MAY NEVER ACHIEVE PROFITABILITY AS A
COMBINED COMPANY, WHICH MAY CAUSE THE COMBINED COMPANY'S STOCK PRICE TO DROP.
After giving effect to the mergers and the TelDaFax transactions, the
combined company would have had total losses of approximately $ million from
continuing operations for the six months ended June 30, 2000 and $ per
diluted share as compared to the $ loss per diluted share from continuing
operations of World Access for the same period on a stand alone basis. These
losses could cause the combined company's stock price to drop and prohibit the
combined company from achieving profitability. World Access does not anticipate
that the combined company will generate profits in the near future.
STAR AND WORLDXCHANGE STOCKHOLDERS MAY RECEIVE LESS CONSIDERATION THAN THEIR
BOARDS OF DIRECTORS ORIGINALLY ANTICIPATED. FURTHER, THE MERGER AGREEMENTS DO
NOT ALLOW STAR OR WORLDXCHANGE TO TERMINATE THEIR RESPECTIVE MERGER IF THE VALUE
OF THE CONSIDERATION TO BE RECEIVED BY THEIR STOCKHOLDERS FALLS SIGNIFICANTLY.
Neither STAR nor WorldxChange has the right under their respective merger
agreements to decline to close the merger if World Access's stock price falls
below any particular level. This could result in WorldxChange and STAR
stockholders receiving World Access shares worth substantially less than these
shares were worth at the time the merger agreements were entered into or at the
time of the special meetings.
24
<PAGE> 38
The value of the World Access stock on February 11, 2000, which is the
original date the exchange ratios were agreed upon, was $22.875. As of October
5, 2000, World Access' stock price closed at $5.25 per share. This is a decrease
of approximately 77.0% as compared to the stock price on February 11, 2000.
Therefore, the value of the consideration to be received in the mergers has been
greatly reduced. Since each merger contemplates a fixed exchange ratio, no
adjustment will be made to account for the decrease in World Access' stock
price. As an example of World Access' stock price volatility, the following
table sets forth the high and low closing sale prices per share of World Access
common stock on the Nasdaq National Market during the indicated months.
<TABLE>
<CAPTION>
CLOSING SALE PRICES
PER SHARE OF
WORLD ACCESS
COMMON STOCK
-------------------
MONTH HIGH LOW
----- -------- --------
<S> <C> <C>
October 2000 (through October 5)........................... $ 5.690 $ 5.190
September 2000............................................. 9.375 5.344
August 2000................................................ 10.063 8.000
July 2000.................................................. 11.375 8.625
June 2000.................................................. 13.000 10.375
May 2000................................................... 17.000 9.250
April 2000................................................. 20.000 14.125
March 2000................................................. 26.875 19.000
February 2000.............................................. 24.375 17.375
January 2000............................................... 20.688 17.250
December 1999.............................................. 22.000 15.313
November 1999.............................................. 17.125 12.375
</TABLE>
THE COMBINED COMPANY'S HIGH LEVEL OF DEBT MAY LIMIT ITS ABILITY TO OBTAIN
ADDITIONAL FINANCING, REDUCE THE AMOUNT OF CASH FLOW AVAILABLE FOR OPERATIONS,
AND MAKE IT MORE DIFFICULT TO MEET DEBT SERVICE REQUIREMENTS.
Immediately after the completion of the mergers, the combined company will
have a higher degree of financial leverage than prior to the mergers. At June
30, 2000, World Access had a current assets to current liabilities ratio of
1.9-to-1, $417.9 million of long-term debt and a total liabilities to equity
ratio of approximately 68.3%. The pro forma balance sheet of World Access at
June 30, 2000, reflecting the combination of World Access, STAR, WorldxChange
and TelDaFax, had a current assets to current liabilities ratio of ,
long-term debt of $ million and a total liabilities to equity ratio of
%.
The combined company's indebtedness could have serious negative
consequences. For example, it could:
- limit the combined company's ability to obtain additional financing for
working capital, capital expenditures or other purposes or make it
difficult to obtain such financing on favorable terms;
- require the combined company to dedicate a substantial portion of its
cash flow from operations to service payments on its debt, which will
reduce the funds that would otherwise be available for operations and
future business opportunities; and
- make it difficult for the combined company to meet its debt service
requirements or force the combined company to modify its operations if
there is a substantial decrease in operating income and cash flows or an
increase in expenses.
World Access anticipates that the combined company's debt service payments
will be approximately $203.0 million for the second half of 2000 and $155.0
million for 2001, exclusive of any obligation to redeem its outstanding debt
securities. If the combined company is unable to extend the maturities of
certain debt instruments and/or generate sufficient cash flow or otherwise
obtain funds necessary to meet its obligations, or if the combined company does
not comply with the various covenants under its indebtedness, the combined
company will be in default under the terms of that debt. If the combined
25
<PAGE> 39
company defaults, the holders of indebtedness can accelerate the maturity of the
indebtedness that is owed to them, which could cause defaults under the combined
company's other indebtedness.
DECREASED CASH FLOW MAY LIMIT THE COMBINED COMPANY'S ABILITY TO CONTINUE TO MAKE
CAPITAL EXPENDITURES FOR THE ACQUISITION AND DEVELOPMENT OF ITS INTERNATIONAL
TELECOMMUNICATIONS NETWORK, WHICH IS NECESSARY TO BE COMPETITIVE IN THIS
INDUSTRY.
The combined company will need to enhance and expand its network and build
out its telecommunications network infrastructure in order to maintain a
competitive position and to meet the increasing demands for service quality,
capacity and competitive pricing. If the combined company's available cash flow
substantially decreases as a result of lower telecommunications prices or for
other reasons, the combined company may have limited ability to continue to make
capital expenditures for the acquisition and development of its international
telecommunications network. If cash flow from operations is not sufficient to
satisfy the combined company's capital expenditure requirements, the combined
company will need to raise additional capital from equity or debt sources.
Additional debt or equity financing or other sources of capital may not be
available to meet the combined company's requirements.
IF THE MERGERS ARE APPROVED, CURRENT WORLD ACCESS STOCKHOLDERS WILL SUFFER
SUBSTANTIAL DILUTION AND HAVE LESS VOTING POWER IN THE FUTURE DIRECTION OF THE
COMBINED COMPANY DUE TO THE ISSUANCE OF WORLD ACCESS COMMON STOCK TO STAR AND
WORLDXCHANGE STOCKHOLDERS.
The completion of the STAR merger and WorldxChange merger will result in a
substantial dilution of the voting and equity interests of current World Access
stockholders. The current World Access stockholders will have less control over
the future direction of the combined company due to the issuance of World Access
common stock to STAR and WorldxChange stockholders. For more information
regarding percentages of stock ownership after the mergers, see page 7.
IF THE SALE OF PT-1 IS NOT COMPLETED, WORLD ACCESS DOES NOT HAVE TO COMPLETE THE
STAR MERGER. ADDITIONALLY, STAR MAY INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE
FAILED PT-1 ASSET SALE, INCLUDING A TERMINATION FEE OF $5.85 MILLION, AND WILL
NEED TO OBTAIN ADDITIONAL CAPITAL.
If STAR sells the assets of PT-1 to Counsel for net cash proceeds of less
than $120.0 million, or to a purchaser other than Counsel for net cash proceeds
of less than $150.0 million, then World Access does not have to complete the
STAR merger. In the event that the STAR merger is not completed, STAR may face
significant costs associated with the failed STAR merger, including a
termination fee of $14.0 million, and will need to obtain additional capital.
STAR is not certain that it will be able to raise additional capital on
favorable terms or at all.
If the PT-1 asset sale agreement is terminated, STAR may face significant
costs associated with the failed PT-1 asset sale, including a termination fee of
$5.85 million and will need to obtain additional capital. In addition, PT-1 will
be required to pay the termination fee if the PT-1 asset sale agreement is not
approved by the required vote of the stockholders of STAR and STAR sells the
assets of PT-1 to another party within one year of the failed stockholder vote.
IF THE WORLD ACCESS STOCKHOLDERS DO NOT APPROVE AN INCREASE IN WORLD ACCESS'
AUTHORIZED SHARES OF COMMON STOCK, WORLD ACCESS CANNOT COMPLETE BOTH MERGERS.
Currently, World Access does not have a sufficient number of shares of
common stock authorized for issuance to complete both the STAR merger and the
WorldxChange merger. If the World Access stockholders do not approve an increase
in the authorized shares at the World Access special meeting, World Access'
management will determine with which merger World Access will proceed or if an
alternative structure for one of the mergers is feasible. A lack of approval by
the stockholders may result in a significant delay in completing one of the
mergers and may deny the stockholders the benefits that may otherwise have been
achieved from the failed merger.
26
<PAGE> 40
THE IRS MAY CHALLENGE THE TAX-FREE NATURE OF THE MERGERS IN WHICH CASE ANY GAIN
REALIZED BY STAR OR WORLDXCHANGE STOCKHOLDERS UPON RECEIPT OF WORLD ACCESS
COMMON STOCK IN THE MERGERS MAY BE IMMEDIATELY SUBJECT TO TAX.
STAR and World Access intend the STAR merger to be tax-free to STAR
stockholders for federal income tax purposes to the extent that they receive
shares of World Access common stock in the merger. Similarly, WorldxChange and
World Access intend the WorldxChange merger to be tax-free to WorldxChange
shareholders for federal income tax purposes to the extent that they receive
shares of World Access common stock in that merger. If the applicable merger in
which STAR or WorldxChange stockholders receive World Access common stock is not
tax-free, however, the gain realized by the STAR or WorldxChange stockholders
upon receipt of World Access common stock may be immediately subject to tax.
Neither STAR nor World Access has requested a ruling from the Internal Revenue
Service as to the status of the STAR merger as a reorganization under Section
368(a) of the Internal Revenue Code. Similarly, neither WorldxChange nor World
Access has requested a ruling from the Internal Revenue Service as to the status
of the WorldxChange merger as a reorganization under Section 368(a) of the
Internal Revenue Code. Although World Access has received an opinion from its
counsel to the effect that the STAR merger will qualify as a reorganization and
WorldxChange and World Access have received opinions from their respective
counsel to the effect that the WorldxChange merger will qualify as a
reorganization, these opinions are conditioned upon various assumptions and, in
any event, such opinions are not binding on the IRS or the courts. If any of
those assumptions are not accurate or if either the IRS or the courts
successfully challenges the status of either or both of the mergers as
reorganizations, any merger that fails to qualify as a reorganization would be a
taxable event to STAR and/or WorldxChange and to the STAR and/or WorldxChange
stockholders, as the case may be.
ASSUMING THAT THE STAR MERGER QUALIFIES AS A REORGANIZATION, THE FEDERAL INCOME
TAX CONSEQUENCES OF THE STAR MERGER TO STAR STOCKHOLDERS THAT RECEIVE A
COMBINATION OF CASH AND WORLD ACCESS STOCK IN THE MERGER IS SUBJECT TO
UNCERTAINTIES.
If the STAR merger qualifies as a reorganization, the federal income tax
consequences of the merger to a STAR stockholder will vary depending on whether
the stockholder receives cash, stock, or a combination of cash and stock.
Neither World Access nor STAR can assure you, and counsel to World Access has
expressed no opinion, as to whether the gain recognized by STAR stockholders who
receive a combination of cash and World Access common stock in the STAR merger
will be treated as capital gain or ordinary income. The character of the gain as
ordinary income or capital gain will depend on the particular facts and
circumstances of each STAR stockholder. The gain may be treated as ordinary
income, rather than capital, if the STAR stockholder owns, either actually or
constructively, any shares of World Access common stock, other than shares of
World Access common stock that are received in the STAR merger. Each STAR
stockholder who receives a combination of cash and World Access common stock in
the STAR merger should consult a tax advisor as to the character of the gain
recognized in the STAR merger.
RISK FACTORS CONCERNING THE COMBINED COMPANY'S BUSINESS OPERATIONS
THE COMBINED COMPANY MAY NOT BE ABLE TO OBTAIN TRANSMISSION CAPACITY AT
HISTORICAL RATES, WHICH MAY DECREASE THE COMBINED COMPANY'S PROFITABILITY AND
CAUSE A LOSS OF CUSTOMERS.
The combined company's future profitability will be based in part upon its
ability to transmit long distance telephone calls over transmission facilities,
also referred to in the industry as network facilities, leased from others on a
cost-effective basis. Also, a substantial portion of the combined company's
transmission capacity will be obtained on a variable, per minute and short-term
basis, subjecting the combined company to the possibility of unanticipated price
increases and service cancellations. Since the combined company will not
generally have long-term arrangements for the purchase or resale of
international long distance services, and since rates fluctuate significantly
over short periods of time, the combined company's gross margins are subject to
significant fluctuations. Decreased gross margins and
27
<PAGE> 41
competitive pricing pressures for these facilities may decrease the combined
company's profitability and cause a loss of customers.
THE COMBINED COMPANY MAY INCUR SIGNIFICANT EXPENSES, LOSS OF CUSTOMERS, AND
ULTIMATELY BE UNSUCCESSFUL IN EXPANDING ITS DATA TRANSMISSION BUSINESS, IN WHICH
THE COMBINED COMPANY HAS LIMITED EXPERIENCE.
The combined company's experience in providing data transmission services
to date has been limited and, consequently, the combined company may not be
successful in the data transmission business. The combined company's ability to
successfully enter the data transmission business will depend upon, among other
things, its ability to:
- select new equipment and software and integrate these into its network;
- hire and train qualified personnel; and
- enhance its billing, back-office and information systems to accommodate
data transmission services and customer acceptance of its service
offerings.
In providing data transmission services, the combined company will be
dependent upon vendors for assistance in the planning and deployment of its data
product offerings, as well as ongoing training and support. If the combined
company is not successful at entering the data transmission business, it may
suffer a loss of customers and incur significant expenses without any increase
in income to offset such expenses.
TECHNICAL DIFFICULTIES WITH OR FAILURES IN THE COMBINED COMPANY'S
TELECOMMUNICATIONS NETWORK COULD RESULT IN DISSATISFIED CUSTOMERS AND LOST
REVENUE.
In Europe, there are a number of different protocols for data transmission.
The combined company's network will need to be able to handle all of these
protocols, which will pose technical difficulties. Technical difficulties with
or failures in the combined company's telecommunications network could result in
dissatisfied customers and lost revenue. For example, a failure in a portion of
the combined company's network could prevent the combined company from
delivering telephone calls initiated by its customers. Additionally, technical
difficulties with the network could cause the loss of call detail record
information, which is the basis for the combined company's ability to process
and substantiate customer billings. Components of each companies' networks have
failed in the past, which have resulted in lower billing collections. The
combined company can provide no assurance that similar or other failures or
technical difficulties will not occur in the future, which could result in the
loss of customers and revenue.
THE COMBINED COMPANY MAY SUFFER DECREASED REVENUES AND LOSS OF CUSTOMERS IF IT
IS UNABLE TO INCREASE ITS NETWORK CAPACITY TO MEET CUSTOMER DEMANDS.
World Access is currently in the process of expanding its network and will
continue the expansion whether or not the mergers are completed. As it expands
its network and the volume of its network traffic, its cost of revenues will
increasingly consist of fixed costs arising from the ownership and maintenance
of switches and fiber optic cables. These costs may increase, and its operating
margins may decrease. If its traffic volume were to decrease, or fail to
increase to the extent expected or necessary to make efficient use of its
network, its costs as a percentage of revenues would increase significantly,
which could significantly decrease the revenues of its business operations.
In addition, the combined company's business will depend in part on its
ability to obtain transmission facilities on a cost-effective basis. The
combined company may not be able to obtain sufficient transmission facilities or
access to undersea fiber optic cable on economically viable terms. The combined
company's failure to obtain telecommunications facilities that are sufficient to
support its network traffic in a manner that ensures the reliability and quality
of its telecommunications services could increase the combined company's
operational costs, as well as cause a loss of customers due to poor quality or
unreliable service.
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<PAGE> 42
ANY SYSTEM OR NETWORK FAILURE THAT INTERRUPTS THE COMBINED COMPANY'S OPERATIONS
COULD CAUSE THE LOSS OF CUSTOMERS, A REDUCTION IN REVENUES OR A DECREASE IN THE
COMBINED COMPANY'S STOCK PRICE.
The combined company's operations are dependent on its ability to
successfully expand its network and integrate new and emerging technologies and
equipment into its network, which are likely to increase the risk of system
failure and to cause strain upon the networks. The combined company's operations
also depend on its ability to protect its hardware and other equipment from
damage from natural disasters such as fires, floods, hurricanes and earthquakes,
other catastrophic events such as civil unrest, terrorism and war and other
sources of power loss and telecommunications failures. The combined company
cannot be certain that its switches will not become disabled in the event of an
earthquake, power outage or otherwise. A network failure or a significant
decrease in telephone traffic as a result of a natural or man-made disaster
could damage the combined company's relationships with its customers and
decrease its revenues and operating results.
THE COMBINED COMPANY MAY BE UNABLE TO MANAGE EFFECTIVELY WORLD ACCESS' RECENT
RAPID GROWTH AND THE RAPID GROWTH PLANNED FOR THE COMBINED COMPANY, WHICH MAY
REDUCE THE QUALITY OF THE COMBINED COMPANY'S PRODUCTS AND SERVICES AND ITS
ABILITY TO RETAIN KEY PERSONNEL.
World Access' rapid growth from recent acquisitions and the expansion of
its operations has placed significant demands on its resources. In addition,
World Access expects that its expansion into foreign countries will lead to
increased financial and administrative demands, such as:
- increased operational complexity associated with expanded network
facilities;
- administrative burdens associated with managing an increasing number of
foreign subsidiaries and relationships with foreign partners; and
- expanded treasury functions to manage foreign currency risks.
If World Access, and the combined company after the mergers, is unable to
manage its growth effectively, the quality of its products and services and its
ability to retain key personnel could be damaged.
RISK FACTORS CONCERNING THE COMPANIES' FINANCIAL CONDITION
IF WORLD ACCESS LOSES OR SETTLES A STOCKHOLDER LAWSUIT, WORLD ACCESS WILL OWE
DAMAGES THAT MAY CAUSE A REDUCTION IN AVAILABLE CASH, A DECREASE IN EARNINGS,
DROP IN STOCK PRICE AND NEGATIVE PUBLICITY.
Following World Access' announcement in January 1999 regarding earnings
expectations for the quarter and year ended December 31, 1998 and the subsequent
decline in the price of World Access common stock, a number of stockholders
filed class action complaints against World Access. The plaintiffs allege
violations of the federal securities laws and have requested an unspecified
amount of damages in their complaints and have not quantified their claim at the
time this joint proxy statement/prospectus was printed. If World Access loses or
settles these or any future stockholder lawsuits, World Access will owe damages
that may cause a reduction in available cash, a decrease in earnings, drop in
stock price and negative publicity.
IF STAR'S LENDERS DO NOT EXTEND THE DUE DATE FOR CERTAIN DEBT, OR IF THEY SUE TO
COLLECT CERTAIN DEBTS PRIOR TO COMPLETING THE PT-1 ASSET SALE, STAR COULD BECOME
INSOLVENT OR BE FORCED TO FILE FOR BANKRUPTCY.
STAR is subject to certain restrictions under its financing arrangements,
including its financing arrangement with WorldCom Network Services, Inc. If STAR
violates any restrictions under its financing arrangements, STAR's lenders may
accelerate payment of the amounts STAR owes them. If STAR's lenders do not
extend the due date for STAR's debt or if STAR's lenders sue to collect on any
of STAR's debt, it could force STAR to file for bankruptcy or reorganize its
business.
If STAR violates any restrictions under its receivables sale agreement with
RFC, RFC may declare an event of default and no longer purchase receivables from
STAR. If RFC does not continue to purchase
29
<PAGE> 43
STAR's receivables, STAR may be deprived of needed liquidity. RFC can refrain
from purchasing additional receivables from STAR if STAR is in default under any
other financing arrangement.
STAR has entered into promissory notes with WorldCom Network Services in
the amounts of $56.0 and up to $30.0 million, both of which are currently due on
the earlier of termination of the STAR merger agreement, the consummation of the
STAR merger or October 31, 2000. In addition, STAR and certain of its
subsidiaries owe Nortel Networks, Inc. approximately $35 million. STAR intends
to obtain payment terms from Nortel. If STAR is unable to obtain an extension
from WorldCom Network Services and WorldCom Network Services seeks to collect
its debt, or if Nortel seeks to collect the sum STAR and its subsidiaries owes
to it, STAR and certain of its subsidiaries may need to seek the protection of
the federal bankruptcy laws to continue operating its business, unless the sale
of PT-1 is completed before these debts are sought to be collected.
IF WORLDXCHANGE'S LENDERS ACCELERATE PAYMENT OF THE AMOUNTS WORLDXCHANGE OWES
THEM, WORLDXCHANGE COULD BECOME INSOLVENT OR BE FORCED TO FILE FOR BANKRUPTCY.
WorldxChange is subject to certain restrictions under its financing
arrangements, including its financing arrangement with Foothill Capital
Corporation. If WorldxChange violates any restrictions under its financing
arrangements, its lenders may accelerate payment of the amounts it owes them. If
the lenders accelerate payment on any of WorldxChange's debt, it could force
WorldxChange to file for bankruptcy or reorganize its business. Under
WorldxChange's financing arrangements, if WorldxChange commits a breach of the
terms of these arrangements, WorldxChange's lenders can accelerate payment of
their obligations. WorldxChange cannot predict what actions its lenders will
take if it is out of compliance with any restrictions under any of its financing
arrangements.
WORLDXCHANGE WILL NOT HAVE SUFFICIENT CASH FLOW FROM ITS BUSINESS TO PAY ITS
DEBT AND WILL NEED TO RAISE ADDITIONAL CAPITAL TO PAY, OR WILL NEED TO
RESTRUCTURE, ITS DEBT OBLIGATIONS.
The amount of WorldxChange's outstanding debt is large compared to its cash
flow. As of June 30, 2000 WorldxChange had:
- total consolidated debt of approximately $272.7 million; and
- stockholders' deficit of approximately $95.9 million.
Of WorldxChange's total consolidated debt, approximately $162.0 million is
due over the next 12 months. The earliest of the maturity dates for this debt is
October 1, 2000. WorldxChange will not generate enough cash from its operations
to meet these obligations. If the WorldxChange merger is not completed by the
earliest maturity of these obligations, WorldxChange will need to raise
additional capital to pay, or will need to restructure, a substantial portion of
these obligations. WorldxChange may not be able to raise the additional capital
or restructure the debt obligations.
DUE TO STAR'S LARGE AMOUNT OF DEBT PAYMENTS, STAR WILL NOT HAVE SUFFICIENT CASH
FLOW FROM ITS INDEPENDENT BUSINESS OPERATIONS TO PAY ITS DEBT AND STAR MAY NEED
TO RAISE ADDITIONAL CAPITAL TO PAY, OR WILL NEED TO RESTRUCTURE, ITS DEBT
OBLIGATIONS IF THE PT-1 ASSET SALE IS NOT COMPLETED.
The amount of STAR's outstanding debt is large compared to its cash flow
and the net book value of its assets. STAR is required to make significant
payments under its outstanding debt. As of June 30, 2000, STAR had:
- total consolidated debt of approximately $178.1 million, including
$23.9 million outstanding under its receivables sale arrangement with
RFC and $57.7 million under its financing arrangement with WorldCom
Network Services which is due October 31, 2000; and
- stockholders' equity of approximately $258.6 million.
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<PAGE> 44
The following chart shows the interest and principal payments due on all of
STAR's currently outstanding debt for each of the next five fiscal years,
assuming STAR's lenders do not require early payment of the amounts due under
its credit arrangements. Also, because the interest rates under some of its
credit arrangements are based upon variable market rates, the amount of these
interest payments could fluctuate in the future.
<TABLE>
<CAPTION>
SCHEDULED PAYMENTS
--------------------
INTEREST PRINCIPAL
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
For the year ending December 31:
2000...................................................... $10,012 $75,690
2001...................................................... 6,487 107,637
2002...................................................... 1,679 20,675
2003...................................................... 1,428 8,446
2004...................................................... 0 0
</TABLE>
Due to the large amount of these principal and interest payments, STAR will
not generate enough cash from its operations to meet these obligations. If the
PT-1 asset sale is not completed, STAR will need to raise additional capital to
pay its debts, or will need to restructure a substantial amount of these
obligations. STAR may not be able to raise additional capital or restructure its
debt obligations.
WORLD ACCESS RELIES ON WORLDCOM, INC. FOR A SUBSTANTIAL AMOUNT OF ITS GROSS
PROFITS, AND THE TERMINATION OF WORLD ACCESS' CARRIER SERVICE AGREEMENT WITH
WORLDCOM COULD SIGNIFICANTLY DECREASE ITS REVENUES AND GROSS PROFITS.
Under a Carrier Service Agreement, WorldCom is obligated to purchase from
World Access at least $25.0 million a month of carrier services, provided the
services are of acceptable quality and the rates quoted are at least equal to
the rates WorldCom is obtaining from other third party providers. The service
agreement is for a one-year term but automatically renews each month, subject to
a one year termination notice. World Access recorded approximately $116.0
million of revenue and related gross profit of $45.6 million during the first
six months of 2000. This represented approximately 20.7% and 64.0% of World
Access' total revenue and gross profit, respectively. Termination of the service
agreement, or any reduction in the services provided, could significantly
decrease World Access' revenues and profits, particularly in the carrier
services business.
AS THE COMBINED COMPANY EXPANDS ITS FOCUS ON RETAIL CUSTOMERS AND EMERGING
CARRIERS, ITS LEVEL OF UNCOLLECTIBLE DEBT MAY INCREASE.
In the companies' experience, a greater percentage of the revenues
generated by retail customers and from emerging carriers has been uncollectible
as compared to revenues generated by sales to established wholesale carriers and
large international carriers. Therefore, since the percentage of World Access'
revenues after the mergers derived from retail operations and from sales to
emerging carriers will increase as a result of the mergers, its level of
uncollectible debt may increase, which would result in lower revenues and
profits. In addition, the combined company may expend considerable resources to
collect receivables from customers who fail to make timely payments.
THE COMBINED COMPANY COULD BE FORCED TO PAY THE SUSPENDED $17.6 MILLION PORTION
OF A REGULATORY FINE IMPOSED AGAINST WORLDXCHANGE, WHICH COULD HARM THE COMBINED
COMPANY'S FINANCIAL CONDITION AND CAUSE THE WORLD ACCESS STOCK PRICE TO DROP.
In May 1997, the California Public Utilities Commission issued an order
revoking WorldxChange's authority to provide intrastate calling service in
California and imposing other fines and penalties on WorldxChange, including a
$19.6 million fine, based on the California Public Utilities Commission's
finding that WorldxChange violated laws requiring prior consumer authorization
before switching consumers' long distance carriers. WorldxChange has paid $2.0
million of the $19.6 million, with the
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<PAGE> 45
balance suspended so long as WorldxChange is not found to have committed any
future violations of statutes or California Public Utilities Commission
directives. The $17.6 million suspended fine would be binding on the combined
company under the California Public Utilities Commission order. There can be no
assurance that additional allegations of wrongdoing will not be made against the
combined company after the merger. If the combined company were required to pay
the suspended $17.6 million portion of the California Public Utilities
Commission fine, the combined company's financial condition could be harmed and
the World Access stock price could drop.
RISK FACTORS CONCERNING THE COMPANIES' INDUSTRY
THE COMPANIES' RELIANCE ON INTERNATIONAL SALES IS SIGNIFICANT AND COULD RESULT
IN LOST REVENUE AND INCREASED COSTS BECAUSE OF INTERNATIONAL REGULATORY CHANGES,
POLITICAL AND ECONOMIC INSTABILITY AND DIFFICULTY IN COLLECTION EFFORTS.
In the year ended December 31, 1999, non-U.S. sales represented
approximately 4.8% of World Access' total sales, approximately 11.7% of STAR's
total sales and approximately 25.5% of WorldxChange's total sales. After the
mergers, the combined company intends to increase its international sales. The
companies' international sales are subject to inherent risks, including:
- changes in regulatory requirements, tariffs or other barriers;
- difficulties in staffing and managing foreign operations;
- long payment cycles;
- unstable political and economic environments;
- potentially adverse tax consequences of international tax laws; and
- fluctuations in foreign currency values.
THE COMBINED COMPANY'S PLANNED ENTRY INTO THE INTERNET AND DATA BUSINESS IN
EUROPE MAY BE UNSUCCESSFUL DUE TO THE LEVEL OF COMPETITION AND THE COMBINED
COMPANY'S LACK OF EXPERIENCE IN THIS NEW MARKET.
The market for Internet connectivity and related services is extremely
competitive. The combined company's primary competitors will include other
Internet service providers that have a significant national or international
presence, but soon may also include competition from traditional
telecommunications carriers that expand into the market for Internet services.
Many of these carriers have substantially greater resources, capital and
operational experience than the combined company will have. The combined company
will require substantial additional capital to make investments in its Internet
operations, and may not be able to obtain that capital on favorable terms or at
all.
Even if the combined company is able to establish and expand its Internet
business, it will face numerous risks, including:
- competition in the market for Internet services;
- its ability to adapt and react to rapid changes in technology related to
the Internet;
- vulnerability to unauthorized access, computer viruses and other
disruptive problems;
- adverse regulatory developments; and
- difficulties managing the growth of its Internet business, including the
need to enter into agreements with other providers of infrastructure
capacity and equipment and to acquire other Internet service providers
and Internet-related businesses on acceptable terms.
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<PAGE> 46
DELAYS AND INCONSISTENCIES IN IMPLEMENTATION OF THE WORLD TRADE ORGANIZATION
AGREEMENT AND OTHER COMPETITIVE DIRECTIVES MAY SLOW DOWN THE RATE OF THE
COMBINED COMPANY'S EXPANSION IN SOME FOREIGN COUNTRIES
Under the World Trade Organization Agreement, the U.S. and 68 other
countries agreed to open their telecommunications markets to competition and
foreign ownership effective February 5, 1998. These World Trade Organization
member countries, which have increased to 72, represent approximately 90% of
worldwide telecommunications traffic. Although the World Trade Organization
Agreement has been implemented, to some degree, by most of the 72 signatory
countries, some signatory countries have not yet fully implemented their World
Trade Organization commitments. The combined company's ability to expand its
operations internationally will be limited if any signatory country to the World
Trade Organization Agreement fails to implement its obligations on a timely
basis.
The national governments of the European Union member states were required
to pass legislation to liberalize the telecommunications markets within their
countries to implement European Commission directives. Implementation has also
been slow in certain member states as a result of their failure to dedicate the
resources necessary to have a functioning regulatory body in place. The
legislation and/or its implementation have, in certain circumstances, imposed
significant obstacles on the ability of carriers to proceed with the licensing
process. These barriers include requirements that carriers:
- post significant bonds or make significant capital commitments to build
infrastructure;
- complete extensive application documentation; and
- pay substantial license fees.
These factors and slow implementation of legislation in connection with
deregulation of telecommunications services could slow down the combined
company's rate of expansion and increase the cost of such expansion.
GOVERNMENT REGULATORY POLICIES AND INDUSTRY CONSOLIDATION IN EUROPE MAY DECREASE
PROFIT MARGINS AND INCREASE PRICING PRESSURES IN THE COMBINED COMPANY'S INDUSTRY
AND DECREASE DEMAND FOR SERVICES AND PRODUCTS.
The companies expect that government regulatory policies, including the
Telecommunications Act of 1996, are likely to continue to have a major impact on
the pricing of both existing and new public network services and possibly
accelerate the entrance of new competitors and consolidation of the industry. In
addition, industry consolidation, especially in Europe, may decrease profit
margins. These trends may decrease demand for the combined company's services
and products that support these services. Lower prices may affect the cost
effectiveness of the combined company's deployment of public network services.
User uncertainty regarding future policies may also decrease demand for the
combined company's telecommunications products and services.
FOREIGN GOVERNMENTS MAY ATTEMPT TO PREVENT THE COMBINED COMPANY FROM CONDUCTING
ITS BUSINESS AND FROM EXPANDING INTO THEIR RESPECTIVE COUNTRIES.
Governments of many countries exercise substantial influence over various
aspects of the telecommunications market. In some cases, the government owns or
controls companies that are or may become the combined company's competitors or
on which the combined company may depend for required interconnections to local
telephone networks and other services. Accordingly, government actions in the
future could block or impede the combined company's operation of its business.
World Access desires to expand the combined company's foreign operations as
these markets increasingly permit competition. The nature, extent and timing of
the combined company's foreign operations, however, will be determined, in part,
by the actions taken by foreign governments to permit competition and the
response of incumbent carriers to these efforts. The regulatory authorities in
these countries may not provide the combined company with practical
opportunities to compete in the near
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<PAGE> 47
future, or at all, and the combined company may not be able to take advantage of
any such liberalization in a timely manner.
RECENT FEDERAL COMMUNICATIONS COMMISSION ACTIONS MAY DAMAGE THE COMBINED
COMPANY'S OPERATIONS AND DECREASE REVENUES BY INCREASING COMPETITION, WHICH MAY
INCREASE PRICING PRESSURES AND DECREASE DEMAND FOR THE COMBINED COMPANY'S
SERVICES.
Recent Federal Communications Commission rulemaking orders and other
actions have lowered the entry barriers for new carriers and resale
international carriers by streamlining the processing of new applications and by
eliminating the international settlements policy for arrangements with foreign
carriers that lack market power and on other selected routes. In addition, the
Federal Communications Commission's rules implementing the World Trade
Organization Basic Telecommunications Agreement presume that competition will be
advanced by the U.S. entry of carriers and resale carriers from World Trade
Organization member countries, thus further increasing the number of potential
competitors in the U.S. market and the number of carriers which may also offer
end-to-end services. Increased competition may increase pricing pressures,
reduce the combined company's margins and decrease demand for the combined
company's services.
FEDERAL COMMUNICATIONS COMMISSION INTERVENTION REGARDING THE SETTLEMENT RATES
CHARGED BY FOREIGN CARRIERS MAY DISRUPT THE COMBINED COMPANY'S TRANSMISSION
ARRANGEMENTS TO CERTAIN COUNTRIES AND DECREASE THE COMBINED COMPANY'S REVENUES.
The Federal Communications Commission recently has sought to reduce the
foreign routing costs of U.S. international carriers by prescribing maximum or
benchmark settlement rates which foreign carriers may charge U.S. carriers for
routing telecommunications traffic. The Federal Communications Commission's
benchmarks order was recently upheld by the U.S. Court of Appeals for the
District of Columbia circuit. The Federal Communications Commission's action may
reduce the combined company's settlement costs, although the costs of other U.S.
international carriers also may be reduced in a similar fashion. The Federal
Communications Commission has not stated how it will enforce the new settlement
benchmarks if U.S. carriers are unsuccessful in negotiating settlement rates at
or below the prescribed benchmarks. Any future Federal Communications Commission
intervention could disrupt the combined company's transmission arrangements to
certain countries or require the combined company to modify its existing
arrangements, which could decrease the combined company's revenues.
A RECENT FEDERAL COMMUNICATIONS COMMISSION ORDER DIRECTING ALL DOMESTIC
INTERSTATE CARRIERS TO DE-TARIFF THEIR SERVICES MAY DECREASE THE COMBINED
COMPANY'S ABILITY TO COMPETITIVELY PRICE ITS SERVICE OFFERINGS.
The Telecommunications Act of 1996 permits the Federal Communications
Commission to forbear enforcement of tariff provisions, which apply to all
interstate and international carriers, and the U.S. Court of Appeals for the
District of Columbia Circuit recently upheld the Federal Communications
Commission's order directing all domestic interstate carriers to de-tariff their
offerings. The Federal Communications Commission's order only applies to
domestic services. However, the Federal Communications Commission may forbear
its current tariff rules for U.S. international carriers such as the combined
company, or order these carriers to de-tariff their services. Any such Federal
Communications Commission action would likely afford non-dominant international
carriers greater flexibility in pricing service offerings, which would increase
the combined company's competition. The Federal Communications Commission
routinely reviews the contribution rate for various levels of regulatory fees,
including the rate for fees levied to support universal service, which fees may
be increased in the future for various reasons, including the need to support
the universal service programs mandated by the Telecommunications Act of 1996,
the total costs for which are still under review by the Federal Communications
Commission.
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<PAGE> 48
DELAYS AND COSTS INCURRED IN ACHIEVING COMPLIANCE WITH GOVERNMENT REGULATIONS
AND EVOLVING INDUSTRY STANDARDS FOR THE COMBINED COMPANY'S PRODUCTS COULD
DECREASE REVENUES.
If the combined company's products fail to comply with the various existing
and evolving regulations and industry standards or if the combined company
experiences delays and incurs costs in achieving compliance with these
regulations and standards, revenues could materially decrease as a result of the
increased costs. The combined company's products must meet a significant number
of voice and data communications regulations and standards, some of which are
evolving as new technologies are deployed. In the United States, these products
and services must comply with various regulations promulgated by the Federal
Communications Commission, as well as with standards established by Bell
Communications Research. Internationally, the combined company's products and
services must comply with standards established by telecommunications
authorities in various countries, as well as with recommendations of the
International Telecommunications Union. Any failure to comply with these
standards could result in a material reduction of revenue and a loss of
customers for the combined company.
RISK FACTORS CONCERNING THE COMBINED COMPANY'S COMMON STOCK
SIGNIFICANT VARIANCE IN THE COMBINED COMPANY'S QUARTERLY OPERATING RESULTS COULD
CAUSE THE PRICE OF THE COMBINED COMPANY'S COMMON STOCK TO DROP.
In future quarters, the combined company's results of operations may fail
to meet the expectations of market analysts and investors, which may cause the
price of its common stock to drop. World Access' quarterly operating results
have varied significantly in the past, and the combined company's quarterly
operating results are expected to do so in the future. The combined company's
revenues in any given period can vary due to factors such as:
- call volume fluctuations, particularly in regions with relatively high
per-minute rates;
- the addition or loss of major customers, whether through competition or
merger; and
- technical difficulties with or failures of portions of its network that
impact its ability to provide service to or bill customers.
The combined company's cost of services and operating expenses in any given
period can vary due to factors such as:
- fluctuations in rates charged by carriers to terminate traffic;
- the timing of capital expenditures, and other costs associated with
acquiring or obtaining other rights to switching and other transmission
facilities; and
- costs associated with changes in staffing levels of sales, marketing,
technical support and administrative personnel.
In addition, the combined company's operating results can vary due to
factors such as:
- changes in routing due to variations in the quality of vendor
transmission capability;
- the amount of, and the accounting policy for, return traffic under
operating agreements; and
- the level, timing and pace of the combined company's expansion in
international and retail markets.
In response to competitive pressures or new product and service
introductions, the combined company may take certain pricing or marketing
actions that could damage its quarterly operating results. World Access
currently bases its expense levels, in part, on its expectations of future
sales. If future sales levels are below expectations, then the combined company
may be unable to adjust spending sufficiently in a timely manner to compensate
for the unexpected sales shortfall. Historically, World Access has generated a
disproportionate amount of its operating revenues toward the end of each
quarter, making precise prediction of revenues and earnings particularly
difficult and resulting in risk of variance of actual results from those
forecast at any time.
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<PAGE> 49
FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents incorporated by
reference in this joint proxy statement/prospectus contain certain information
regarding our financial projections, plans and strategies that are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in
this joint proxy statement/ prospectus or in the documents incorporated by
reference, the words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar terms and/or expressions are
intended to identify forward-looking statements. These statements reflect the
companies' assessment of a number of risks and uncertainties, and their actual
results could differ materially from the results anticipated in these
forward-looking statements. Important factors that could cause actual results to
differ materially from estimates or projections contained in the forward-looking
statements include, without limitation, actual future financial results
differing materially from financial projections, potential inability to
identify, complete and integrate acquisitions, difficulties in expanding into
new business activities, delays in new service offerings, the potential
termination of certain service agreements or the inability to enter into
additional service agreements and the other issues discussed above in the Risk
Factors section. The companies caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date they were made.
THE WORLD ACCESS SPECIAL MEETING
Date, time and place of the World Access special meeting.
, 2000
11:00 a.m., local time
945 E. Paces Ferry Road, Suite 2200
Atlanta, Georgia 30326.
World Access board of directors' recommendations. The board of directors
of World Access unanimously approved the STAR merger agreement, the WorldxChange
merger agreement and the transactions contemplated by each merger agreement and
unanimously recommends that the stockholders of World Access vote for the
approval and adoption of the STAR merger agreement and the WorldxChange merger
agreement and the transactions contemplated by each merger agreement.
In addition, the board of directors of World Access unanimously approved,
recommended and declared advisable the amendments to the World Access amended
certificate of incorporation, the amendments to the World Access Directors'
Warrant Incentive Plan and a vote for the nominees for director named in this
joint proxy statement/prospectus.
Currently, World Access does not have a sufficient number of shares of
common stock authorized for issuance under its amended certificate of
incorporation to complete both the STAR merger and the WorldxChange merger.
Approval of Proposal 3 by the World Access stockholders to increase the number
of shares of common stock World Access is authorized to issue is required for
World Access to have sufficient authorized shares to complete both mergers.
World Access record date; stockholders entitled to vote. As of the close
of business on , 2000, the World Access record date,
shares of World Access common stock were outstanding, held by approximately
holders of record. World Access stockholders are entitled to cast
one vote per share of World Access common stock owned or to be received upon the
conversion of shares of preferred stock owned as of the World Access record
date.
World Access also has shares of preferred stock issued and outstanding.
Each share of World Access preferred stock is convertible at the option of the
holder into World Access common stock in accordance with a conversion formula
contained in the World Access amended certificate of incorporation. Other than
the Series C preferred stock, the World Access preferred stock is entitled to
vote on the approval and adoption of all of the proposals to be considered at
the special meeting on an as converted basis with the
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<PAGE> 50
World Access common stock voting together as a single class. The Series C
preferred stock may vote with the holders of World Access common stock on all of
the proposals except the election of directors.
The following table sets forth information regarding the World Access
preferred stock:
<TABLE>
<CAPTION>
COMMON STOCK
SERIES SHARES OUTSTANDING HELD UPON CONVERSION
------ ------------------ --------------------
<S> <C> <C>
Series A.......................................... 70,000 6,086,956
Series C.......................................... 350,260 17,186,451
Series D.......................................... 184,000 10,222,222
Series E.......................................... 9,645 443,448
</TABLE>
Only holders of record of World Access voting stock as of the close of
business on the World Access record date are entitled to notice of and to vote
at the World Access special meeting and any adjournments or postponements of the
special meeting.
Quorum; vote required. A majority of the shares of World Access common
stock entitled to vote at the World Access special meeting will constitute a
quorum for the transaction of business at the World Access special meeting. The
following table sets forth the vote required for approval of each of the
proposals to be considered at the World Access special meeting.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
PROPOSAL VOTE REQUIRED
---------------------------------------------------------------------------------------
<S> <C>
Proposals 1, 2, 6 and 7 - majority in voting power of the shares of World Access
voting stock entitled to vote and voting as a single
class.
---------------------------------------------------------------------------------------
Proposal 3 - majority in voting power of the shares of World Access
voting stock entitled to vote and voting as a single
class; and
- majority of the shares of World Access common stock
entitled to vote and voting as a single class.
---------------------------------------------------------------------------------------
Proposals 4 and 5 - 75% in voting power of the shares of World Access voting
stock entitled to vote and voting as a single class.
---------------------------------------------------------------------------------------
Proposal 8 - plurality in voting power of the shares of World Access
voting stock entitled to vote for the election of
directors and voting as a single class.
---------------------------------------------------------------------------------------
</TABLE>
The total outstanding shares of World Access common stock for purposes of
calculating the number of shares constituting a quorum and needed for approval
includes the number of shares of World Access common stock issuable upon
conversion of the Series A preferred stock, the Series C preferred stock, except
with respect to the election of directors, the Series D preferred stock and the
Series E preferred stock.
Shares of World Access voting stock that are voted "for," "against" or
"withheld" at the World Access special meeting will be treated as being present
at such meeting for purposes of establishing a quorum and will also be treated
as votes eligible to be cast by the World Access voting stock present in person
or represented by proxy at the World Access special meeting and entitled to vote
on the subject matter. Abstentions will be counted for purposes of determining
both the presence or absence of a quorum for the transaction of business and the
total number of votes cast with respect to a particular matter. Broker non-votes
will be counted for purposes of determining the presence or absence of a quorum
for the transaction of business but will not be counted for purposes of
determining the number of votes cast with respect to the particular proposal on
which the broker has expressly not voted. Because approval of the proposals
described herein other than the election of nominees for director requires the
affirmative vote of a majority in voting power of outstanding shares of World
Access voting stock, abstentions and broker non-votes will have the same effect
as negative votes with respect to these proposals.
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Security ownership by beneficial owners and management. As of the close of
business on the World Access record date, directors and executive officers of
World Access and their respective affiliates may be deemed to be the beneficial
owners of shares of World Access common stock representing approximately %
of the outstanding voting power of World Access.
Solicitation and revocability of proxies. This joint proxy
statement/prospectus is being furnished to holders of World Access voting stock
in connection with the solicitation of proxies by and on behalf of the board of
directors of World Access for use at the World Access special meeting. All
shares of World Access voting stock that are entitled to vote and are
represented at the World Access special meeting, by properly executed proxies
received prior to or at the meeting and not duly and timely revoked, will be
voted at the meeting in accordance with the instructions indicated on the
proxies. If no instructions are indicated, the proxies will be voted for the
approval and adoption of the proposals described herein.
If any other matters are properly presented for consideration at the World
Access special meeting or any adjournments or postponements of the special
meeting, including, among other things, consideration of a motion to adjourn or
postpone the meeting to another time and/or place, including, without
limitation, for the purpose of soliciting additional proxies, the persons named
in the enclosed form of proxy and voting thereunder will have discretion to vote
on the matters in accordance with their best judgment. Proxies voting against
the proposals presented in this joint proxy statement/prospectus may not be
voted for an adjournment or postponement of the World Access special meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it any time before it is voted. Proxies may be revoked by:
- filing with the Secretary of World Access at or before the taking of the
vote at the World Access special meeting a written notice of revocation
bearing a later date than the proxy;
- duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of World Access before the taking of the
vote at the World Access special meeting; or
- attending the World Access special meeting and voting in person.
Attendance at the World Access special meeting will not in and of itself
constitute a revocation of a proxy.
Any written notice of revocation or subsequent proxy should be sent so as
to be delivered to World Access, Inc., at 945 E. Paces Ferry Road, Suite 2200,
Atlanta, Georgia 30326, Attention: Secretary, or hand delivered to the Secretary
of World Access at or before the taking of the vote at the World Access special
meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this joint proxy statement/prospectus to stockholders of World Access,
will be borne by World Access. In addition to solicitation by use of the mails,
proxies may be solicited by directors, officers and employees of World Access in
person or by telephone, telegram or other means of communication. Such
directors, officers and employees will not be additionally compensated, but may
be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by such custodians, nominees and fiduciaries, and World
Access will reimburse such custodians, nominees and fiduciaries for reasonable
expenses incurred by them.
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THE STAR SPECIAL MEETING
Date, time and place of the STAR special meeting.
, 2000
11:00 a.m., local time
Four Seasons Biltmore Hotel
Montecito, California
STAR board of directors' recommendations. The board of directors of STAR
approved the STAR merger agreement and the transactions considered in the STAR
merger agreement and recommends that the stockholders of STAR vote:
- for the approval and adoption of the STAR merger agreement; and
- for the approval of the transactions considered in the STAR merger
agreement.
STAR record date. The board of directors of STAR has fixed ,
2000 as the date for determination of holders of STAR common stock, who will be
entitled to notice of the STAR special meeting and to vote at the STAR special
meeting.
Stockholders entitled to vote. As of the close of business on the STAR
record date, shares of STAR common stock were outstanding, held by
approximately holders of record. Each share of outstanding STAR
common stock is entitled to one vote.
Only STAR stockholders on the close of business on the STAR record date are
entitled to notice of the STAR special meeting and to vote at the STAR special
meeting, or vote on any adjournment or postponement of the STAR special meeting.
Quorum and vote required. Each STAR stockholder on the STAR record date is
entitled to cast one vote for each share of STAR common stock held by the STAR
stockholder. The holders of a majority of the shares of STAR common stock issued
and outstanding and entitled to vote at the STAR special meeting, who are
present in person or represented by proxy, will constitute a quorum for the
transaction of business at the STAR special meeting. The approval of the STAR
merger agreement and the transactions considered in the STAR merger agreement
require the affirmative vote of a majority of the outstanding shares of STAR
common stock.
Shares of STAR common stock that are voted "for," "against" or "withheld"
at the STAR special meeting are treated as being present at the meeting for
purposes of establishing a quorum and are also treated as votes eligible to be
cast by the holders of STAR common stock present in person or represented by
proxy at the STAR special meeting and entitled to vote on the subject matter.
Abstentions are counted for purposes of determining both the presence of a
quorum for the transaction of business and the total number of votes cast with
respect to a particular matter. Broker non-votes will be counted for purposes of
determining the presence of a quorum for the transaction of business but will
not be counted for purposes of determining the number of votes cast on the
particular proposal that the broker has expressly not voted. Because adoption
and approval of the STAR merger agreement and the transactions considered in the
STAR merger agreement require the affirmative vote of a majority of outstanding
shares of STAR common stock, abstentions and broker non-votes will have the same
effect as negative votes.
Two of STAR's stockholders holding a total of of the outstanding
common stock of STAR as of the STAR record date have agreed to vote in favor of
the STAR merger.
Security ownership by STAR directors, executive officers and their
affiliates. As of the close of business on the STAR record date, directors and
executive officers of STAR and their respective affiliates were deemed to be the
owners of shares of STAR common stock representing approximately % of the
outstanding common stock of STAR.
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Solicitation and revocability of proxies. This joint proxy
statement/prospectus is being provided to holders of STAR common stock in
connection with the solicitation of proxies by the board of directors of STAR
for use at the STAR special meeting. All shares of STAR common stock entitled to
vote and represented at the STAR special meeting by properly executed proxies
received before or at the meeting and not duly and timely revoked, will be voted
at the meeting pursuant to the instructions on the proxies. If the proxies do
not have instructions, the proxies will be voted for the approval and adoption
of the STAR merger agreement and the transactions considered in the STAR merger
agreement.
If any other matters are properly presented for consideration at the STAR
special meeting or any adjournment or postponement of the STAR special meeting,
including the consideration of a motion to adjourn or postpone the STAR special
meeting to another time and/or place, the persons named in the enclosed form of
proxy will have the right to vote on the matters. However, proxies voting
against the proposals presented in this joint proxy statement/prospectus may not
be voted for an adjournment or postponement of the STAR special meeting.
Any proxy given pursuant to this solicitation may be revoked by the
stockholder giving it any time before it is voted. Proxies may be revoked by:
- filing with the Secretary of STAR at or before the taking of the vote at
the STAR special meeting a later dated written notice revoking the proxy;
- executing a later-dated proxy for the same shares and delivering it to
the Secretary of STAR before the vote is taken at the STAR special
meeting; or
- attending the STAR special meeting and voting in person. However
attendance at the STAR special meeting will not in and of itself
constitute a revocation of a proxy.
Any written notice of revocation or subsequent proxy should be sent to STAR
Telecommunications, Inc., 223 East De La Guerra Street, Santa Barbara, CA 93101,
Attention: Secretary, or hand delivered to the Secretary of STAR at or before
the taking of the vote at the STAR special meeting.
All expenses of this solicitation, including the cost of preparing and
mailing this joint proxy statement/prospectus to stockholders of World Access,
will be paid by World Access. In addition to solicitation by mail, proxies may
be solicited by directors, officers and employees of STAR in person or by
telephone, telegram or other means. Directors, officers and employees who aid in
the solicitation will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses for the solicitation. Arrangements will also
be made with custodians, nominees and fiduciaries for forwarding proxy
solicitation materials to beneficial owners of shares held of record by the
custodians, nominees and fiduciaries, and STAR will reimburse the custodians,
nominees and fiduciaries for reasonable expenses for the solicitation.
PROPOSAL 1
THE MERGER BETWEEN WORLD ACCESS AND STAR
This section of the joint proxy statement/prospectus describes the proposed
merger between World Access and STAR. This proposal is for consideration by the
World Access stockholders and the STAR stockholders, voting separately. The
completion of the STAR merger is conditioned on the sale of PT-1 by STAR. Unless
World Access waives this condition, World Access will be merging with STAR minus
its PT-1 operations.
BACKGROUND OF THE STAR MERGER
During the first quarter of 1999, the STAR board of directors and members
of its management began searching for additional capital at a time when STAR's
core business margins were declining as a result of increased competition. In
addition, STAR was incurring significant capital costs in connection with the
expansion of its business into Germany and the development of its retail long
distance operations. During
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this time period, STAR engaged Goldman Sachs Credit Partners LP, Kaufman Bros.,
L.P., Lehman Brothers, Morgan Stanley Dean Witter and Deutsche Bank Securities
Inc. to pursue a possible high yield bond offering and to provide financial
advice on strategic mergers. STAR concluded that it would not raise sufficient
capital from a high yield bond offering.
During this same period, STAR also consulted with Goldman Sachs, Kaufman
Bros., Lehman Brothers, Morgan Stanley and Deutsche Bank about the feasibility
of spinning off its European operations, the possibility of the sale of stock of
one or more of STAR's subsidiaries and raising senior subordinated debt. STAR
determined that it could not pursue these transactions because the
telecommunications market conditions were not favorable and STAR lacked
sufficient capital.
STAR received several acquisition proposals in the last quarter of 1999 for
STAR's German operations. These proposals were not considered attractive by the
STAR board of directors because the sale of STAR's German operations would have
provided additional cash but did not fit with STAR's strategy to diversify and
improve its business mix.
In the late fall of 1999, STAR was approached by World Access, which was
aware of STAR's search for a strategic transaction. STAR was unable to discuss a
transaction with World Access at that time because it was subject to an
exclusive negotiating agreement with a third party. On December 20, 1999, after
the exclusive negotiating agreement had expired, STAR and World Access announced
the execution of a letter of intent under which World Access would acquire all
of STAR's outstanding capital stock in exchange for shares of common stock of
World Access, and possibly cash, valued at approximately $10.50 per share of
STAR common stock. The letter also called for World Access to provide STAR with
a short-term loan when a definitive agreement was signed. During the due
diligence period, World Access concluded that STAR would require substantial
capital to achieve its business objectives, including capital expenditures
necessary to expand its network, employ new technologies and enter foreign
markets. World Access also concluded that STAR's operating losses could not be
stemmed as easily as World Access had first thought and it would require a
significant capital investment to return STAR to profitability. World Access and
STAR both maintained strong networks but both parties determined that there
would be a continuing need for capital to fund expansions into new geographic
areas and in order to enter into new operating agreements.
Representatives of World Access and STAR met to renegotiate the terms of
the STAR merger. STAR's management had taken steps to improve cash flow,
including through the reduction of capital expenditures, but in part due to
capital constraints, had not been able to return STAR to profitability or
positive cash flow. World Access determined that the initial offer it had made
to STAR was too high because of STAR's financial condition and future capital
requirements. STAR considered World Access' revised proposal and determined that
the revised offer was in the best interests of the STAR stockholders because of
STAR's operating results, capital requirements and prospects.
On February 2, 2000, the parties agreed to reprice the STAR merger, and
World Access indicated that STAR was free to shop for better offers from other
bidders. Under the revised terms, World Access agreed to pay between $7.50 and
$8.00 for each outstanding share of STAR common stock. A closing condition was
added to the STAR merger agreement which required STAR to sell PT-1 for net cash
proceeds of at least $150.0 million. World Access required STAR to sell PT-1
because the sale would provide STAR with needed capital in the near term and the
business of PT-1 did not fit into World Access' long-term strategic plans. In
addition, World Access agreed in principle to provide STAR with a short-term
loan, subject to STAR's and World Access' agreement on the definitive terms of
the short-term loan. Based on this agreement, the parties issued a joint press
release announcing the repricing and worked to finalize the STAR merger
agreement.
During the period between December 20, 1999 and February 2, 2000, STAR did
not receive a superior proposal from another potential competing bidder. Prior
to signing a definitive agreement, the STAR board of directors was free to and
did seek out other proposals. The STAR board of directors met on February 7,
2000 and considered the revised proposal at length. Given STAR's rising debt and
cash
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shortage and the lack of superior offers, management was instructed to continue
negotiations with World Access.
On February 8, 2000, the board of directors of World Access met to receive
a report from management regarding the status of the merger discussions with
STAR, including the results of World Access' due diligence investigation of STAR
and the resulting repricing of the transaction. On February 11, 2000, the board
of directors of World Access met again to consider the merger with STAR. At this
meeting, management reviewed, for the board of directors, the strategic reasons
for a business combination with STAR. Management and legal counsel described the
specific terms of the proposed STAR merger agreement. During this meeting,
Donaldson, Lufkin & Jenrette gave its oral opinion as to the fairness of the
consideration to be paid by World Access under the STAR merger agreement. The
board of directors also received summaries of the results of World Access' due
diligence investigation of STAR. The World Access board of directors unanimously
approved the STAR merger agreement and the transactions contemplated by the STAR
merger agreement and unanimously agreed to recommend its adoption to the
stockholders of World Access. On February 11, 2000, Donaldson, Lufkin & Jenrette
forwarded its written opinion regarding the fairness of the consideration to be
paid by World Access under the STAR merger agreement to the members of the board
of directors of World Access.
On or about February 7, 2000 and February 11, 2000, the STAR board of
directors met to consider World Access' renegotiated proposal. The board
received an opinion from Deutsche Bank Securities Inc. that the proposal was
fair from a financial point of view to STAR and STAR's stockholders. The STAR
board of directors also received advice from Delaware legal counsel with respect
to its obligations regarding its duty of care and its duty to exercise informed
business judgment.
At the meeting held on February 11, 2000, the STAR board of directors
concluded that the STAR merger was fair to and in the best interests of STAR and
its stockholders. The STAR board of directors considered STAR's financial
condition, the decline in margins in its core business due to increased
competition and the significant capital required to diversify STAR's business
mix. The STAR board of directors voted to approve the STAR merger agreement and
the transactions contemplated by the STAR merger agreement and voted to
recommend that the stockholders of STAR vote for the approval and adoption of
the STAR merger agreement and the transactions contemplated by the STAR merger
agreement. In approving the STAR merger, the STAR board of directors considered
the potential benefits of the STAR merger, including all material business,
financial, legal and market factors, and the risks associated with the STAR
merger discussed below under the heading "STAR's reasons for the STAR merger."
Beginning on or about May 18, 2000, STAR began discussions with World
Access regarding the PT-1 asset sale agreement with Counsel. STAR sought World
Access' approval of the terms of the PT-1 asset sale agreement, as well as World
Access' consent to STAR's execution of the PT-1 asset sale agreement, as
required by the STAR merger agreement. On May 25, 2000, STAR received World
Access' consent to enter into the PT-1 asset sale agreement although World
Access had not yet determined whether the PT-1 asset sale agreement met the
requirements of the STAR merger agreement. On May 30, 2000, representatives of
both STAR and World Access met in Atlanta, Georgia to discuss the terms of the
PT-1 asset sale agreement in relation to the requirements of the STAR merger
agreement. STAR and World Access determined that an amendment to the STAR merger
agreement was necessary to adjust the amount of net cash proceeds that STAR was
required to obtain from the PT-1 asset sale because STAR was not going to
receive net cash proceeds of at least $150.0 million from the sale of PT-1 to
Counsel.
The STAR merger agreement was also amended to:
- reduce the exchange ratio from 0.3905 to 0.386595;
- provide for a reduction in the amount of financing that World Access
would provide to STAR by the amount of financing provided to STAR by
WorldCom, on a dollar-for-dollar basis, up to an aggregate of $30.0
million;
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- provide that a material adverse effect will not be deemed to have
occurred if the change, circumstance or effect relates to an action taken
by STAR at the specific request of World Access; and
- eliminate the requirement that STAR provide evidence of the termination
of its obligations with respect to the China-U.S. Cable Network.
On June 6, 2000, the STAR board of directors met to consider the proposal
to amend the STAR merger agreement. The STAR board of directors received advice
from Delaware legal counsel with respect to its obligations regarding its duty
of care and its duty to exercise informed business judgment. The STAR board of
directors seriously considered and evaluated the need for an updated fairness
opinion from Deutsche Bank as a result of the amendment to the STAR merger
agreement, the WorldxChange merger, the PT-1 asset sale to Counsel for net cash
proceeds of less than $150.0 million, the decrease in the consideration to be
paid to STAR's stockholders as a result of the decrease in the price of the
World Access common stock and the TelDaFax acquisition by World Access. Deutsche
Bank informed the STAR board of directors that an updated fairness opinion would
require substantial additional cost and extensive diligence resulting in a
significant delay in executing the amendment. As a result of the timing
concerns, the status of the STAR merger and STAR's financial situation, the STAR
board of directors determined that an updated fairness opinion was not, under
the circumstances, in the best interests of the STAR stockholders. The STAR
board of directors concluded that, while the amendment of the STAR merger
agreement was vital to securing the PT-1 asset sale agreement with Counsel
rapidly and to meeting STAR's obligations under the STAR merger agreement, the
amendment of the exchange ratio and other provisions of the STAR merger
agreement did not require an updated fairness opinion. In addition, the STAR
board of directors determined that neither the WorldxChange merger nor the
TelDaFax acquisition undertaken by World Access were material to STAR's decision
to enter into the STAR merger agreement. Finally, the STAR board of directors
assessed the volatility of the price of the World Access common stock, including
its recent significant decline and the general decline in the stock prices of
other public telecommunications companies, the likelihood that the value of the
consideration to be received by the STAR stockholders at the closing of the STAR
merger may be less than the consideration anticipated at the time the STAR
merger agreement was signed and the fact that an updated fairness opinion would
not materially develop the information currently available to the STAR board of
directors, and concluded that it continued to believe that the STAR merger
agreement is fair to, and in the best interests of, the STAR stockholders.
The conclusion of the STAR board of directors on June 6 that the STAR
merger remains fair to, and in the best interests of, the STAR stockholders is
based on the following factors:
- the general decline in the stock prices of other public
telecommunications companies since February 11, 2000;
- STAR's financial condition and cash flow situation that continue to
dictate that the STAR board of directors quickly implement a plan to
avoid insolvency and the need to seek bankruptcy protection; and
- the potential cost savings and synergies to be achieved by the combined
company as a result of the STAR merger.
The STAR board of directors considered the potential benefits of the
amendment to the STAR merger agreement, including the importance of completing
the STAR merger for the reasons discussed below under the heading "STAR's
reasons for the STAR merger." The STAR board of directors also considered the
potential negative consequences of the amendment to the STAR merger agreement
also discussed below.
On June 6, 2000, STAR entered into the PT-1 asset sale agreement with
Counsel. On June 7, 2000, STAR and World Access executed the amendment to the
STAR merger agreement and issued a joint press release announcing the amendment
to the STAR merger agreement. On October 6, 2000, the parties
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again amended the STAR merger agreement to extend the date after which either
party may terminate the STAR merger agreement from September 30, 2000 to
December 31, 2000.
WORLD ACCESS' REASONS FOR THE STAR MERGER
In approving the STAR merger, the World Access board of directors
considered the potential benefits of the STAR merger and the risks associated
with the STAR merger. All material business, financial, legal and market factors
are discussed below. In view of the number and wide variety of factors
considered in connection with its evaluation of the STAR merger, the board did
not consider it practicable to, nor did it attempt to, quantify or otherwise
assign relative weights to the material factors considered in reaching its
determination. The board viewed its position and recommendation as being based
on the totality of the information and factors presented to and considered by
it. In addition, individual directors may have given different weight to
different information and to the following factors.
The financial terms of the STAR merger. The World Access board of
directors considered information concerning the business, earnings, operations,
financial condition and prospects of World Access and STAR, individually, on a
combined basis, and in conjunction with the WorldxChange merger. The board
determined to approve the STAR merger agreement and the transactions
contemplated by the STAR merger agreement based on its consideration of these
factors with and without taking into account the WorldxChange merger. The board
also considered the opinion of Donaldson, Lufkin & Jenrette Securities
Corporation as to the fairness to World Access, from a financial point of view,
of the consideration to be paid by World Access pursuant to the STAR merger
agreement.
STAR's facilities-based network. The board considered the approximately
$350.0 million that STAR has invested in its international network and the
additional geographic coverage, connectivity and capacity this network would
bring World Access. The STAR network connects more than 51 countries worldwide
and includes 24 international gateway switches, 17 transoceanic cable systems
and a North American fiber network that connects 30 cities.
The board placed particular emphasis on the investments made by STAR in
recent years to implement its German network, including switching and
transmission equipment, cable connections between 23 German cities and related
operating licenses. The presence of the network and related infrastructure
within Germany was a significant factor in evaluating the STAR merger due to the
size of the German telecommunications market, the importance of this market to
World Access' future strategic plans and the ability of the network to support
future retail service offerings.
STAR's established revenue base. The board considered the current revenue
base of STAR, which consisted primarily of approximately $350.0 million in
U.S.-based carrier traffic and $150.0 million from traffic originated in
Germany.
Potential cost savings and synergies. The board reviewed financial
analyses prepared by World Access management that estimated a range of gross
margin improvement that could be realized by redirecting selected World Access
traffic over the STAR network, redirecting selected STAR traffic over the World
Access network and eliminating duplicate leased circuits. The board determined
that the World Access estimates were realistic and that based on the financial
analyses presented and their own business judgment, the annual gross margin
improvement for the combined company should be in excess of $10.0 million.
The board also reviewed financial analyses by World Access management that
estimated a range of selling, general and administrative cost savings that could
be realized by combining World Access and STAR, including the elimination of
redundant switching centers, redundant customer care operations, duplicate U.S.
divisional headquarters and corporate office functions. The board determined
that the World Access estimates were realistic and that based on the financial
analyses presented and their own business judgment, these annual cost savings
should be in excess of $35.0 million.
STAR's customer base. The board considered the compatibility of STAR's
established base of carrier customers with World Access' existing customer base.
STAR's customer base includes 14 of the
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top 40 global carriers, the vast majority of which are complementary to World
Access' customer base. In particular, STAR does considerable business with AT&T,
Sprint and Qwest Communications, three global telecommunications companies.
Although STAR does not have long-term contracts with its customers, World Access
currently does not do significant business with these companies and is
optimistic that these and other STAR customer relationships can be leveraged to
provide incremental revenue and further cost reductions.
Ability to accelerate plans to become a provider of bundled voice, data and
Internet services to key European markets. The board considered the additional
services offered by STAR, which would be made available to current and future
customers of World Access. Specifically, of STAR's German service offerings,
World Access management estimated approximately 90% was related to carrier
services and 10% from retail services. The addition of this base of service
offerings would establish World Access as one of the largest providers of
carrier services in the world and provide a significant base within Germany to
leverage future growth.
The World Access board of directors also considered the following material
risks associated with completing the STAR merger, but concluded that the
advantages of the STAR merger far outweighted the risks:
- STAR's history of operating losses and negative cash flow, though the
board felt that the spending plans and controls of World Access combined
with the realization of margin improvement and cost savings as a result
of the merger would eliminate these losses and negative cash flow within
a one year period;
- World Access' ability to service and repay STAR's outstanding debt and
financial commitments, though this risk was significantly reduced as a
result of the cancellation of STAR's participation in a China-U.S. cable
consortium and WorldCom's agreement to convert approximately $90.0
million of STAR trade debt into shares of World Access common stock upon
consummation of the STAR merger; and
- the risk that World Access would be unable to effectively integrate the
technical operations, customers, suppliers and management of both STAR
and WorldxChange and realize the margin and cost savings synergies noted
above.
Finally, the World Access board of directors considered the exclusion of
PT-1's operations from the planned merger and the related closing condition for
STAR to receive $150.0 million in net cash proceeds from the sale of PT-1. The
board agreed with World Access management that the U.S. prepaid calling card and
dial around business of PT-1 did not fit the long-term strategy for the combined
company, which is focused on market opportunities arising from the consolidation
of the European telecommunications market. They also shared management's concern
that World Access would not be interested in merging with STAR if it had to
assume the current debt position of STAR. The board concluded that the PT-1
closing condition adequately addressed these two management concerns and
supported management's plan to use the net cash proceeds from the sale of PT-1
to reduce the combined company's debt.
In connection with an amendment to the STAR merger agreement entered into
in June 2000, World Access agreed to reduce the PT-1 cash proceeds requirement
from $150.0 million to $120.0 million. This reduction was agreed to after
careful review of the terms and conditions of the Counsel asset purchase
agreement, STAR's agreement to reduce the merger exchange ratio and WorldCom's
agreement to convert an additional $30.0 million of STAR trade debt into World
Access common stock effective with the consummation of the STAR merger. Although
the net effect of these agreements required World Access to issue additional
shares of its common stock, there was no impact on the projected net cash and
net debt positions of the combined company. The board also considered that under
the terms of the PT-1 asset purchase agreement, Counsel is expected to become a
significant long-term customer of the combined company.
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THE WORLD ACCESS BOARD OF DIRECTORS' RECOMMENDATION THAT STOCKHOLDERS APPROVE
THE STAR MERGER
The World Access board of directors considered the advisability of the STAR
merger and believes that the terms of the STAR merger agreement and the
transactions contemplated by the STAR merger agreement are fair to and in the
best interests of the stockholders of World Access. The World Access board of
directors has unanimously approved the STAR merger agreement and the
transactions contemplated by the STAR merger agreement. The World Access board
of directors unanimously recommends that the stockholders of World Access vote
for the approval and adoption of the STAR merger agreement and the transactions
contemplated by the STAR merger agreement.
STAR'S REASONS FOR THE STAR MERGER
In approving the STAR merger, the STAR board of directors considered the
potential benefits of the STAR merger and the risks associated with the STAR
merger. All material business, financial, legal and market factors are discussed
below. After due deliberation, the STAR board of directors concluded that the
STAR merger was fair to and in the best interest of STAR and its stockholders
based on the following material factors:
The financial condition of STAR. The STAR board of directors examined the
current financial condition of STAR and determined that STAR was facing
significant cash restraints resulting in difficulty in meeting STAR's ongoing
obligations. STAR was experiencing substantial operating losses and negative
cash flow and its ability to implement its operating and business plans was
severely constrained by the absence of available capital. The STAR board of
directors noted that as of December 31, 1999 STAR had long term debt obligations
of $94.3 million and total debt obligations of $156.4 million. The STAR board of
directors also considered that STAR was unable to fund required future capital
expenditures needed to expand and maintain STAR's business. STAR's management
focused on minimizing losses and improving cash flow but it lacked the capital
necessary to implement a business plan designed to return STAR to profitability.
The STAR board of directors considered that all of these factors and STAR's debt
obligations created a substantial risk of insolvency and the need to seek
bankruptcy protection. On June 6, 2000, the STAR board of directors determined
that the financial condition of STAR required STAR to amend the STAR merger
agreement to reduce the exchange ratio without seeking an updated fairness
opinion from Deutsche Bank.
Lack of financing alternatives. During the first quarter of 1999, STAR
began to explore financing alternatives. The STAR board of directors engaged
financial advisors to examine STAR's options with respect to sources of
financing, including equity and debt financing. The STAR board of directors
determined that the necessary financing would not be available or would not be
available on acceptable terms.
The potential cost savings and synergies. The STAR board of directors
considered the potential cost savings and synergies that World Access and STAR
would achieve through the STAR merger. The STAR board of directors reviewed a
number of financial analyses prepared by World Access that estimated a range of
cost savings achievable through the STAR merger. World Access estimated annual
gross margin improvement for the combined company in excess of $10.0 million and
annual cost savings in excess of $35.0 million. The STAR board of directors
determined that the World Access estimates were realistic and that based on the
World Access analyses and their own business judgment, the cost savings would be
substantial. The STAR board of directors considered the following material
potential cost savings and synergies that would be achieved through the STAR
merger:
- the combined technical operations would create a more efficient
communications network than STAR's and World Access' networks on a
stand-alone basis;
- the combined company would have a geographically broader, more diverse
network and savings could be achieved through the elimination of
overlapping networks; and
- STAR could combine its network monitoring operations with those of World
Access, which would generate cost savings.
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<PAGE> 60
Diversified geographic market position. The STAR board of directors
considered that World Access' network coverage would complement STAR's existing
coverage. The STAR board of directors considered that STAR would obtain a
broader European presence through the combination of STAR's network assets and
licenses in Germany with World Access' existing operations.
Diversified product and service offering. The STAR board of directors
considered that the combined company would be in a position to offer a broader
array of services and products than STAR could individually. STAR was facing
declining profit margins in the wholesale business and STAR's efforts to enter
the retail market were encountering difficulty, in part due to capital
constraints. The combination with World Access would provide STAR with an
increased presence in foreign markets, expanded use of Internet based
technologies and expansion opportunities in selected retail markets, which the
STAR board of directors believed would increase stockholder value.
Enhanced Management Strength. The STAR board of directors considered that
the STAR merger would strengthen STAR's management team by providing additional
financial and technical expertise. The STAR board of directors noted that STAR
was facing difficulty filling key managerial positions and determined that the
STAR merger would obviate the need to fill key management positions and would
improve STAR's ability to recruit key personnel.
General decline in the stock prices of public telecommunications
companies. On June 6, 2000, the STAR board of directors reconsidered the
fairness of the STAR merger in light of a recent renegotiation of the exchange
ratio. The STAR board of directors determined that the volatility in the price
of World Access' stock since the execution of the STAR merger agreement did not
adversely affect the fairness of the STAR merger because the telecommunications
industry in general had experienced a decline in stock prices since February 11,
2000.
The STAR board of directors also considered the following material risks
associated with completing the STAR merger, but concluded that the advantages of
the STAR merger far outweighed these risks:
- the possibility that World Access would be unable to complete the STAR
merger and the WorldxChange merger simultaneously;
- the risk that World Access would be unable to effectively integrate the
technical operations and management of STAR, WorldxChange and TelDaFax,
or to effectively integrate future acquisitions considering the announced
intention of World Access to make acquisitions;
- the risk that World Access might not have sufficient funds available to
finance the combined companies, though the STAR board of directors
considered that at the time of its approval of the STAR merger, World
Access had significant capital resources;
- the risk that World Access' stock price would continue to decline and
therefore provide less consideration to STAR's stockholders;
- the likelihood that an updated fairness opinion in connection with the
amendment of the STAR merger agreement would not materially develop the
information available to the STAR board of directors;
- the risk that STAR's financial condition and cash flow situation would
continue to deteriorate and require the STAR board of directors to act
quickly to avoid insolvency and the need to seek bankruptcy protection;
and
- overall risks inherent in the highly competitive telecommunications
industry, but the STAR board of directors considered that the combined
companies would be better able to withstand and respond to competitive
risks.
The above discussion of the information and factors considered by the STAR
board of directors sets forth the material factors considered by the STAR board
of directors. The STAR board of directors considered many factors when
evaluating the STAR merger agreement and the STAR merger. The STAR board of
directors did not quantify, rank or attempt to assign relative weights to the
factors considered in
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<PAGE> 61
reaching its determination. In addition, the STAR board of directors conducted
an overall analysis of the above factors, including a thorough discussion with
and questioning of STAR's management. The STAR board of directors also
considered management's analysis of the STAR merger based on information
received from STAR's legal, financial and accounting advisors. The STAR board of
directors considered all these factors as a whole, and considered the factors
overall to be favorable to and to support its determination.
THE STAR BOARD OF DIRECTORS' RECOMMENDATION THAT STOCKHOLDERS APPROVE THE STAR
MERGER
The STAR board of directors carefully considered the advisability of the
STAR merger and believes that the terms of the STAR merger agreement and the
transactions contemplated by the STAR merger agreement are fair to and in the
best interests of the stockholders of STAR. The STAR board of directors approved
the STAR merger agreement and the transactions contemplated by the STAR merger
agreement. The STAR board of directors recommends that the stockholders of STAR
vote for the approval and adoption of the STAR merger agreement and the
transactions contemplated by the STAR merger agreement.
OPINION OF WORLD ACCESS' FINANCIAL ADVISOR REGARDING THE STAR MERGER
World Access asked Donaldson, Lufkin & Jenrette Securities Corporation in
its role as financial advisor, to render an opinion to the World Access board as
to the fairness, from a financial point of view, to World Access of the
consideration to be paid by World Access. On February 11, 2000, Donaldson,
Lufkin & Jenrette rendered an oral opinion to World Access' board of directors,
which was subsequently confirmed in writing as of the same date, to the effect
that, as of the date of the opinion, and based upon and subject to the
assumptions, limitations and qualifications set forth in the written opinion,
the consideration to be paid by World Access pursuant to the STAR merger
agreement was fair to World Access, from a financial point of view. The full
text of Donaldson, Lufkin & Jenrette's opinion is attached as Annex C to this
joint proxy statement/prospectus.
Donaldson, Lufkin & Jenrette's fairness opinion was delivered to the World
Access board on February 11, 2000 and relates to the fairness of the STAR merger
as of that date. Some of the assumptions relied upon by Donaldson, Lufkin &
Jenrette in preparing the analyses described below and in rendering its opinion
have changed since Donaldson, Lufkin & Jenrette was asked to deliver its
opinion. The following sets forth a summary of such changes:
- Donaldson, Lufkin & Jenrette assumed an exchange ratio of 0.3905 shares
of World Access common stock for each share of STAR common stock based on
net cash proceeds from the sale of PT-1 of $150.0 million as compared to
revised exchange ratio of 0.386595 and assumed net cash proceeds of
$120.0 million.
- Certain assumptions underlying the projections for World Access and STAR
have been revised to reflect lower carrier revenues for both World Access
and STAR due to a reduction in the number of carrier customers resulting
from a strengthened credit policy implemented by World Access as well as
lower organic growth in retail revenues for STAR due to a greater focus
on World Access' European retail acquisition strategy, which seeks to
increase retail revenues through acquisitions.
- The market prices of shares of World Access common stock and STAR common
stock have decreased significantly since Donaldson, Lufkin & Jenrette
rendered its opinion. The closing price per share of the World Access
common stock on February 9, 2000, the price Donaldson, Lufkin & Jenrette
used in its analyses, and the closing price on October 5, 2000 were
$22.88 and $5.25, respectively.
World Access has not asked, and does not intend to ask, Donaldson, Lufkin &
Jenrette for a new or updated fairness opinion and Donaldson, Lufkin & Jenrette
has not been asked to update the analyses described above and is not opining as
to the fairness of the STAR merger as of any date subsequent to the date of its
opinion.
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Donaldson, Lufkin & Jenrette expressed no opinion as to the prices at which
STAR common stock or World Access common stock would actually trade at any time.
Donaldson, Lufkin & Jenrette's opinion did not address the relative merits of
the STAR merger and the other business strategies considered by the World Access
board of directors nor did it address the decision of the World Access board of
directors to proceed with the STAR merger. Donaldson, Lufkin & Jenrette's
opinion did not constitute a recommendation to any World Access stockholder as
to how a stockholder should vote on the STAR merger.
World Access and STAR determined the consideration to be paid by World
Access in arm's length negotiations, in which Donaldson, Lufkin & Jenrette
advised World Access.
World Access selected Donaldson, Lufkin & Jenrette as its financial advisor
because Donaldson, Lufkin & Jenrette is an internationally recognized investment
banking firm that has substantial experience providing strategic advisory
services. Donaldson, Lufkin & Jenrette was not retained as an advisor or agent
to the stockholders of World Access or any other person. As part of its
investment banking business, Donaldson, Lufkin & Jenrette is regularly engaged
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
World Access did not impose any restrictions or limitations upon Donaldson,
Lufkin & Jenrette with respect to the investigations made or the procedures
followed by Donaldson, Lufkin & Jenrette in rendering its opinion.
In arriving at its opinion, Donaldson, Lufkin & Jenrette:
- reviewed the draft dated February 26, 2000 of the merger agreement and
assumed the final form of that agreement would not vary in any respect
material to Donaldson, Lufkin & Jenrette's analysis;
- reviewed financial and other information that was publicly available or
furnished to it by World Access and STAR, including information provided
during discussions with their respective managements, which included
financial projections of each of World Access and STAR that were prepared
by World Access' management;
- compared financial and securities data of World Access and STAR with
various other companies whose securities are traded in public markets;
- reviewed the historical stock prices and trading volumes of the common
stock of World Access and STAR;
- reviewed prices paid in selected other business combinations; and
- conducted other financial studies, analyses and investigations as
Donaldson, Lufkin & Jenrette deemed appropriate for purposes of rendering
its opinion.
In rendering its opinion, Donaldson, Lufkin & Jenrette relied upon and
assumed the accuracy and completeness of all of the financial and other
information that was available to it from public sources, that was provided to
it by World Access and STAR or their respective representatives, or that was
otherwise reviewed by it. Donaldson, Lufkin & Jenrette relied upon the estimates
of the management of World Access of the operating synergies achievable as a
result of the STAR merger. Donaldson, Lufkin & Jenrette also assumed that the
financial projections of World Access and STAR supplied to it were reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the management of World Access as to the future operating and
financial performance of World Access and STAR. In addition, Donaldson, Lufkin &
Jenrette relied upon and assumed net cash proceeds of $150.0 million from the
sale of PT-1 by STAR. Donaldson, Lufkin & Jenrette expressed no opinion with
respect to these forecasts or the assumptions on which they were based.
Donaldson, Lufkin & Jenrette did not assume any responsibility for making any
independent evaluation or appraisal of the assets or liabilities of World Access
or for making any independent verification of any of the information reviewed by
Donaldson, Lufkin & Jenrette. Donaldson, Lufkin & Jenrette also did not assume
any responsibility for making any independent investigation of any legal matters
affecting World Access or STAR and assumed the correctness of all legal advice
given to each of them and to World Access' board of directors, including
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advice as to the tax consequences of the STAR merger. Donaldson, Lufkin &
Jenrette assumed that the STAR merger would be accounted for as a purchase under
generally accepted accounting principles and that it would qualify as a tax-free
reorganization for U.S. federal income tax purposes.
Donaldson, Lufkin & Jenrette's opinion is necessarily based upon economic,
market, financial and other conditions as they existed on, and on information
available to Donaldson, Lufkin & Jenrette as of, the date of its opinion.
Donaldson, Lufkin & Jenrette states in its opinion that, although subsequent
developments may affect its opinion, Donaldson, Lufkin & Jenrette does not have
any obligation to update, revise or reaffirm its opinion.
SUMMARY OF FINANCIAL ANALYSES PERFORMED BY DONALDSON, LUFKIN & JENRETTE
The following is a summary of the financial analyses Donaldson, Lufkin &
Jenrette presented to the World Access board of directors on February 11, 2000
in connection with the preparation of Donaldson, Lufkin & Jenrette's opinion. No
company or transaction Donaldson, Lufkin & Jenrette used in the analyses
described below is directly comparable to World Access, STAR or to the STAR
merger. In addition, mathematical analysis such as determining the mean or
median is not in itself a meaningful method of using selected company or
transaction data. The analyses Donaldson, Lufkin & Jenrette performed are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by these analyses. The
information summarized in the tables which follow should be read in conjunction
with the accompanying text.
For purposes of the following analyses, Donaldson, Lufkin & Jenrette (i)
used the February 9, 2000 closing price of the World Access common stock of
$22.88 per share and (ii) assumed net cash proceeds of $150.0 million from the
sale by STAR of PT-1. It should be understood that Donaldson, Lufkin & Jenrette
makes no prediction, and there can be no assurance, as to what the closing price
of World Access common stock or the net cash proceeds from the sale of PT-1 will
actually be.
1. Consideration paid analysis
Donaldson, Lufkin & Jenrette reviewed the consideration to be paid by World
Access under the STAR merger agreement. In reviewing the consideration to be
paid by World Access, Donaldson, Lufkin & Jenrette assumed an exchange ratio of
0.3905, which represents the exchange ratio based on net cash proceeds from the
sale of PT-1 of $150.0 million.
2. Comparable publicly traded company analysis
Donaldson, Lufkin & Jenrette analyzed the market values and trading
multiples of selected publicly traded emerging multinational carriers that
Donaldson, Lufkin & Jenrette believed were reasonably comparable to STAR based
on business and financial characteristics. These comparable companies consisted
of:
<TABLE>
<S> <C>
(i) IDT Corporation;
(ii) Pacific Gateway Exchange, Inc.;
(iii) PRIMUS Telecommunications Group, Incorporated;
(iv) RSL Communications, Ltd.; and
(v) Startec Global Communications Corporation.
</TABLE>
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In examining these comparable companies, Donaldson, Lufkin & Jenrette
calculated the enterprise value of each company as a multiple of its respective:
- last quarter annualized revenue;
- projected calendar year 2000 revenue;
- gross property, plant and equipment and
- net property plant and equipment.
The enterprise value of a company is equal to the value of its
fully-diluted common equity plus debt and the liquidation value of outstanding
preferred stock, if any, minus cash and the value of other assets, including
minority interests in other entities. All historical data was derived from
publicly available sources as of February 9, 2000 and all projected data was
obtained from Wall Street research reports.
Donaldson, Lufkin & Jenrette performed this analysis in order to compare
the ratio of STAR's enterprise value to its last quarter annualized revenues,
estimated 2000 revenues as provided by World Access, gross property, plant and
equipment and net property, plant and equipment to those of the comparable
companies and to the reference range, which represents a tighter range of the
ratios as deemed reasonable by Donaldson, Lufkin & Jenrette. In addition,
Donaldson, Lufkin & Jenrette compared the enterprise value of STAR to the
implied enterprise values obtained by the above mentioned ratios of the
comparable companies and the reference range and STAR's last quarter annualized
revenues, estimated 2000 revenues as provided by World Access, gross property,
plant and equipment and net property, plant and equipment. Donaldson, Lufkin &
Jenrette's analysis of the comparable companies yielded the following multiple
ranges and implied enterprise values:
COMPARABLE COMPANY ANALYSIS
($ IN MILLIONS)
<TABLE>
<CAPTION>
COMPARABLE
COMPANIES REFERENCE RANGE
----------------- -------------------
STAR HIGH LOW HIGH LOW
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Enterprise Value/Last Quarter Annualized
Revenues........................................ 1.0x 2.2x 0.6x 1.7x 1.2x
Enterprise Value/2000 Estimated Revenues.......... 1.1x 1.9x 0.7x 1.5x 1.0x
Enterprise Value/Gross Property, Plant and
Equipment....................................... 1.6x 7.5x 2.5x 4.5x 3.5x
Enterprise Value/Net Property, Plant and
Equipment....................................... 2.0x 8.8x 2.9x 5.5x 4.5x
Implied Enterprise Value based on:
Last Quarter Annualized Revenues................ $619.7 $1,311.6 $391.9 $1,035.4 $ 730.9
2000 Estimated Revenues......................... 619.7 1,052.9 370.8 828.4 552.3
Gross Property, Plant and Equipment............. 619.7 2,882.5 943.3 1,718.4 1,336.5
Net Property, Plant and Equipment............... 619.7 2,786.4 924.5 1,742.9 1,426.0
</TABLE>
---------------
The comparable company analysis showed that the implied multiples of World
Access' consideration were either within or lower than the range of multiples
implied by the prevailing market prices of the comparable companies. In
addition, the analysis showed that the enterprise value based on World Access'
consideration was either within or lower than the range of enterprise values
implied by the multiples of the comparable companies and STAR's last quarter
annualized revenues, estimated 2000 revenues, gross property, plant and
equipment and net property, plant and equipment.
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3. Analysis of selected merger and acquisition transactions
Donaldson, Lufkin & Jenrette reviewed selected mergers and acquisitions
transactions of companies that operate businesses reasonably similar to that of
STAR. In addition, for purposes of this analysis, Donaldson, Lufkin & Jenrette
selected key mergers and acquisitions transactions deemed most relevant by
Donaldson, Lufkin & Jenrette based on the business characteristics of the
acquiror and/or target and the business nature of the transaction. The following
mergers and acquisitions transactions were deemed most relevant by Donaldson,
Lufkin & Jenrette:
- Viatel, Inc.'s acquisition of Destia Communications, Inc.
- PRIMUS Telecommunications Group, Incorporated's acquisition of TresCom
International, Inc.
In examining these acquisitions, Donaldson, Lufkin & Jenrette calculated
the enterprise value of the acquired company implied by each of these
transactions as a multiple of the last twelve-month revenue, last quarter
annualized revenue, and net property, plant and equipment. The last twelve-month
period for which financial data for the company at issue has been reported is
referred to as the last twelve-month revenue. In addition, Donaldson, Lufkin &
Jenrette calculated the enterprise values implied by the above mentioned ratios
of the selected mergers and acquisitions transactions and STAR's last
twelve-month revenue, last quarter annualized revenue and net property, plant
and equipment. Donaldson, Lufkin & Jenrette's analysis of these comparable
acquisitions yielded the following multiple ranges and implied enterprise
values:
SELECTED MERGERS AND ACQUISITIONS TRANSACTIONS
($ IN MILLIONS)
<TABLE>
<CAPTION>
ALL SELECTED M&A KEY SELECTED M&A
TRANSACTIONS TRANSACTIONS
-------------------- -------------------
STAR HIGH LOW HIGH LOW
------ --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Enterprise Value/Last Twelve Months Revenues... 1.1x 16.5x 1.1x 3.3x 1.1x
Enterprise Value/Last Quarter Annualized
Revenues..................................... 1.0x 4.0x 1.2x 2.6x 1.2x
Enterprise Value/Net Property, Plant and
Equipment.................................... 2.0x 42.0x 5.9x 6.2x 5.9x
Implied Enterprise Value based on:
Last Twelve Months Revenues.................... $619.7 $ 9,270.1 $ 622.8 $1,828.8 $ 622.8
Last Quarter Annualized Revenues............... 619.7 2,436.3 706.8 1,571.4 706.8
Net Property, Plant and Equipment.............. 619.7 13,307.0 1,876.5 1,971.8 1,876.5
</TABLE>
The analysis of selected mergers and acquisitions transactions showed that
the implied multiples of World Access' consideration were, in each case, within
or lower than the range of multiples paid by the selected mergers and
acquisitions transactions as well as by the key mergers and acquisitions
transactions. In addition, the analysis of selected mergers and acquisitions
transactions showed that the transaction value of World Access' consideration
was, in each case, within or lower than the range of implied transaction values
based on the multiples paid by selected mergers and acquisition transactions.
4. Discounted cash flow analysis
In addition, Donaldson, Lufkin & Jenrette performed a discounted cash flow
analysis for STAR on a stand-alone basis. The analysis was based upon financial
projections, including synergies, for the five-year period ending fiscal 2004 as
provided by the management of World Access. Donaldson, Lufkin & Jenrette
performed this analysis to estimate the net present value of STAR's enterprise
value and to compare it to the implied enterprise value based on World Access'
consideration. Donaldson, Lufkin & Jenrette calculated EBITDA for STAR. EBITDA
is earnings before interest, taxes, depreciation and amortization and other
items. Donaldson, Lufkin & Jenrette calculated the terminal value of STAR at the
end of the forecast period, by applying a range of estimated EBITDA multiples
selected in Donaldson, Lufkin & Jenrette's subjective judgment. The terminal
value estimates are a hypothetical approximation of the value of the
enterprise's cash flows beyond the end of the five-year period covered by the
management's projections. The management's projected EBITDA and Donaldson,
Lufkin & Jenrette's subjective estimate
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of the terminal values based on management's projected EBITDA were then
discounted to the present using a range of discount rates selected in Donaldson,
Lufkin & Jenrette's subjective judgment.
DISCOUNTED CASH FLOW ANALYSIS
($ IN MILLIONS)
<TABLE>
<S> <C>
Range of EBITDA Multiples.................... 10.0x - 12.0x
Discount rates............................... 15.0% - 18.3%
Implied Total Enterprise Value............... $507.6 - $662.4
STAR Enterprise Value........................ $619.7
</TABLE>
The above analysis shows that the implied enterprise value based on World
Access' consideration of $619.7 million is near the high range of the implied
enterprise values of $507.6 million to $662.4 million obtained by the analysis.
The summary set forth above does not purport to be a complete description
of the analyses performed by Donaldson, Lufkin & Jenrette but describes the
material elements of the presentation that Donaldson, Lufkin & Jenrette made to
the World Access board on February 11, 2000 in connection with the preparation
of Donaldson, Lufkin & Jenrette's fairness opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, an opinion is not readily
susceptible to summary description. Donaldson, Lufkin & Jenrette conducted each
of the analyses in order to provide a different perspective on the transaction
and to add to the total mix of information available. Donaldson, Lufkin &
Jenrette did not for a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support an opinion as to
fairness from a financial point of view. Rather, in reaching its conclusion,
Donaldson, Lufkin & Jenrette considered the results of the analyses in light of
each other and ultimately reached its opinion based on the results of all
analyses taken as a whole. Donaldson, Lufkin & Jenrette did not place any
particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, Donaldson, Lufkin &
Jenrette has indicated to World Access that it believes that its analyses must
be considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. The
analyses Donaldson, Lufkin & Jenrette performed are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by these analyses.
Engagement letter
Under the terms of an engagement letter dated January 12, 2000, World
Access agreed to pay Donaldson, Lufkin & Jenrette a fee of $400,000 at the time
that Donaldson, Lufkin & Jenrette delivered to the World Access board of
directors its opinion, irrespective of the conclusion reached in the opinion,
and to pay Donaldson, Lufkin & Jenrette a fee of $750,000, less any amounts paid
pursuant to delivery of the fairness opinion, payable in cash promptly upon
consummation of a business combination between World Access and STAR. In
addition, World Access agreed to reimburse Donaldson, Lufkin & Jenrette for all
of its out-of-pocket expenses, including the reasonable fees and expenses of
counsel incurred by Donaldson, Lufkin & Jenrette in connection with its
engagement, and to indemnify Donaldson, Lufkin & Jenrette for liabilities and
expenses arising out of Donaldson, Lufkin & Jenrette's engagement, including
liabilities under federal securities laws.
The terms of the fee arrangement with Donaldson, Lufkin & Jenrette, which
Donaldson, Lufkin & Jenrette and World Access believe are customary in
transactions of this nature, were negotiated at arms-length between World Access
and Donaldson, Lufkin & Jenrette. World Access' board of directors was aware of
the arrangement, including the fact that a significant portion of the aggregate
fee payable to Donaldson, Lufkin & Jenrette is contingent upon consummation of
the STAR merger.
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Other Relationships
In the ordinary course of business, Donaldson, Lufkin & Jenrette may own or
actively trade the securities of World Access and STAR for its own accounts and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in World Access or STAR securities. Donaldson, Lufkin &
Jenrette has performed investment banking and other services for World Access in
the past and has been compensated for such services, including;
- acting as financial advisor to World Access in connection with its
acquisition of FaciliCom International, Inc. in 1999 and acting as
financial advisor in connection with the exchange offer for FaciliCom's
outstanding senior notes;
- acting as financial advisor in connection with the sale of World Access'
Telco Systems Inc. subsidiary and World Access' Wireless Local Loop
Division in 2000; and
- acting as financial advisor to World Access in connection with its
pending acquisitions of both WORLDxCHANGE and TelDaFax in 2000.
OPINION OF STAR'S FINANCIAL ADVISOR REGARDING THE STAR MERGER
Deutsche Bank Securities Inc. acted as financial advisor to the board of
directors of STAR in connection with the proposed merger of World Access and
STAR. At the February 7, 2000, meeting of the board of directors of STAR,
Deutsche Bank delivered its oral opinion, subsequently confirmed in writing
dated as of the same date, to the board of directors of STAR to the effect that,
as of the date of the opinion, based upon and subject to the assumptions made,
matters considered and limits of the review undertaken by Deutsche Bank, the
merger consideration was fair, from a financial point of view, to STAR
stockholders. The full text of Deutsche Bank's opinion is attached as Annex E to
this joint proxy statement/prospectus.
DEUTSCHE BANK'S FAIRNESS OPINION RELATES TO THE FAIRNESS OF THE STAR MERGER
AS OF FEBRUARY 7, 2000. SOME OF THE ASSUMPTIONS RELIED UPON BY DEUTSCHE BANK IN
PREPARING ITS ANALYSES AND IN RENDERING ITS OPINION HAVE CHANGED SINCE DEUTSCHE
BANK WAS ASKED TO DELIVER ITS OPINION. THE FOLLOWING IS A SUMMARY OF THESE
CHANGES:
- DEUTSCHE BANK ASSUMED AN EXCHANGE RATIO OF 0.3905 SHARES OF WORLD ACCESS
COMMON STOCK FOR EACH SHARE OF STAR COMMON STOCK BASED ON NET CASH
PROCEEDS FROM THE SALE OF PT-1 OF $150.0 MILLION AS COMPARED TO A REVISED
EXCHANGE RATIO OF 0.386595 AND ASSUMED NET CASH PROCEEDS OF $120.0
MILLION.
- WORLD ACCESS HAS REVISED THE PROJECTIONS THAT WERE ORIGINALLY FURNISHED
TO, AND RELIED UPON BY, DEUTSCHE BANK IN RENDERING ITS FAIRNESS OPINION.
DEUTSCHE BANK HAS NOT BEEN ASKED TO ANALYZE, AND HAS NOT ANALYZED, ANY
PROJECTIONS GENERATED BY WORLD ACCESS SINCE FEBRUARY 7, 2000. FOR A
DESCRIPTION OF WORLD ACCESS' MOST RECENT FINANCIAL PROJECTIONS, PLEASE
SEE PAGE OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
- THE MARKET PRICE OF SHARES OF STAR COMMON STOCK AND WORLD ACCESS COMMON
STOCK HAVE DECREASED SIGNIFICANTLY FROM $6.41 AND $22.00 AT FEBRUARY 4,
2000 TO $1.66 AND $5.25 AT OCTOBER 5, 2000 FOR STAR AND WORLD ACCESS,
RESPECTIVELY.
- DEUTSCHE BANK DID NOT INCLUDE THE IMPACT OF THE WORLDXCHANGE MERGER OR
THE TELDAFAX ACQUISITION BY WORLD ACCESS IN ITS EVALUATION OF THE STAR
MERGER.
STAR HAS NOT ASKED, AND DOES NOT INTEND TO ASK, DEUTSCHE BANK FOR A NEW OR
UPDATED FAIRNESS OPINION AND DEUTSCHE BANK HAS NOT BEEN ASKED TO UPDATE THE
ANALYSES DESCRIBED ABOVE AND IS NOT OPINING AS TO THE FAIRNESS OF THE STAR
MERGER AS OF ANY DATE SUBSEQUENT TO THE DATE OF ITS OPINION.
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<PAGE> 68
In connection with Deutsche Bank's role as financial advisor to the board
of directors of STAR, and in arriving at its opinion, Deutsche Bank has, among
other things:
- reviewed publicly available financial information and other information
concerning STAR and World Access;
- reviewed internal analyses and other information furnished to it by STAR
and World Access;
- held discussions with the members of the senior managements of STAR and
World Access regarding the businesses and prospects of their respective
companies and the joint prospects of the World Access/STAR combined
company;
- reviewed the reported prices and trading activity for the common stock of
both STAR and World Access;
- compared financial and stock market information for STAR and World Access
with similar information for selected companies whose securities are
publicly traded;
- reviewed the terms of the draft STAR merger agreement, dated February 6,
2000, and assumed that the final form of the STAR merger agreement would
not vary in any respect that would be material to Deutsche Bank's
analysis; and
- performed other studies and analyses and considered other factors as it
deemed appropriate.
Deutsche Bank prepared its financial analyses of the STAR merger before the
merger agreement with WorldxChange was announced, the PT-1 asset sale agreement
was signed, or the STAR merger agreement was amended on June 7, 2000 to reduce
the exchange ratio from 0.3905 to 0.386595. Deutsche Bank did not consider the
WorldxChange merger, the terms of the PT-1 asset sale agreement, or the June 7,
2000 adjustment in the exchange ratio when analyzing the fairness, from a
financial point of view, of the STAR merger consideration to STAR stockholders.
In preparing its opinion, Deutsche Bank did not assume responsibility for
the independent verification of, and did not independently verify, any
information, whether publicly available or furnished to it, concerning STAR or
World Access, including, without limitation, any financial information,
forecasts or projections, considered in connection with the rendering of its
opinion. Accordingly, for purposes of its opinion, Deutsche Bank assumed and
relied upon the accuracy and completeness of all of this information. Deutsche
Bank did not conduct a physical inspection of any of the properties or assets,
and did not prepare or obtain any independent evaluation or appraisal of any of
the assets or liabilities of STAR or World Access. With respect to the financial
forecasts and projections made available to Deutsche Bank and used in its
analysis, Deutsche Bank assumed that the forecasts and projections were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of STAR and World Access. In rendering its
opinion, Deutsche Bank expressed no view as to the reasonableness of these
forecasts and projections, or the assumptions on which they are based. Deutsche
Bank's opinion was necessarily based upon economic, market and other conditions
as in effect on, and the information made available to Deutsche Bank as of, the
date of its opinion.
For purposes of rendering its opinion, Deutsche Bank assumed that, in all
respects material to its analysis:
- the representations and warranties of STAR and World Access contained in
the STAR merger agreement are true and correct;
- STAR and World Access will each perform all of the covenants and
agreements to be performed by it under the STAR merger agreement;
- all conditions to the obligations of each of STAR and World Access to
consummate the STAR merger will be satisfied without any waiver of these
obligations;
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<PAGE> 69
- all material governmental, regulatory or other approvals and consents
required in connection with the consummation of the transactions
contemplated by the STAR merger agreement will be obtained; and
- in connection with obtaining any necessary governmental, regulatory or
other approvals and consents, or any amendments, modifications or waivers
to any agreements, instruments or orders to which either STAR or World
Access is a party or is subject or by which it is bound, no limitations,
restrictions or conditions will be imposed or amendments, modifications
or waivers made that would have a material adverse effect on STAR or
World Access or materially reduce the contemplated benefits of the STAR
merger to STAR or its stockholders.
In addition, Deutsche Bank was advised by STAR, and accordingly assumed for
purposes of its opinion, that the STAR merger will be treated as a tax-free
reorganization for federal income tax purposes.
In connection with Deutsche Bank's role as financial advisor to STAR and in
arriving at its opinion, Deutsche Bank was not requested or authorized to
solicit, and did not solicit, any alternative transactions to the STAR merger.
The following is a summary of the material financial analyses used by
Deutsche Bank in reaching its opinion and does not purport to be a complete
description of the analyses performed by Deutsche Bank. The following
quantitative information, to the extent it is based on market data, is based on
market data as it existed at or about February 4, 2000, and is not necessarily
indicative of current market conditions. Readers should understand that the
order of analyses described below do not represent relative importance or weight
given to these analyses by Deutsche Bank.
Analysis of selected publicly traded companies. Deutsche Bank compared
financial information and commonly used valuation measurements for STAR and
World Access to corresponding information and measurements for three groups of
publicly traded telecom services companies: a group of large capitalization
competitive global carriers consisting of Global Telesystems, Energis and
Teleglobe; a group of mid capitalization competitive global carriers consisting
of Primus, RSL and Viatel; and a group of international long distance carriers
consisting of IDT, Pacific Gateway, Startec Global and Telscape International.
The financial information and valuation measurements of the selected
comparable companies included, among other things:
- total enterprise value, which is common equity market value plus debt and
cash;
- ratios of total enterprise value to sales for the last reported quarter,
which was the third quarter of 1999, annualized;
- ratios of total enterprise value to estimated sales for the year 2000;
- ratios of total enterprise value to earnings before interest expenses,
tax, depreciation and amortization, or EBITDA, for the last quarter
annualized;
- ratios of total enterprise value to property, plant and equipment, or
property, plant and equipment, net of depreciation; and
- ratios of total enterprise value to gross property, plant and equipment.
The total enterprise value of a company is equal to the value of its
fully-diluted common equity plus debt, cash and the liquidation value of
outstanding preferred stock, if any. Last quarter, annualized revenue means the
last quarter annualized for which financial data for the company at issue has
been reported. In this case, the last quarter was the third quarter of 1999.
To calculate the total enterprise value multiples for STAR, World Access
and the selected comparable companies, Deutsche Bank used publicly available
information concerning historical and projected financial performance, including
published historical financial information and estimates of future financial
results from published equity research analyst reports.
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<PAGE> 70
For each of the selected comparable companies, Deutsche Bank calculated
five trading multiples:
- total enterprise value to sales of the last quarter annualized;
- total enterprise value to 2000 estimated sales;
- total enterprise value to EBITDA of last quarter annualized;
- total enterprise value to property, plant and equipment net of
depreciation; and
- total enterprise value to gross property, plant and equipment.
This analysis indicated the following medians and means:
<TABLE>
<CAPTION>
TOTAL TOTAL TOTAL
ENTERPRISE ENTERPRISE TOTAL ENTERPRISE
VALUE/ VALUE/ ENTERPRISE VALUE/
LAST TOTAL LAST VALUE/ GROSS
QUARTER ENTERPRISE QUARTER NET PROPERTY, PROPERTY,
ANNUALIZED VALUE/ ANNUALIZED PLANT AND PLANT AND
COMPANY OR GROUP OF COMPANIES SALES 2000E SALES EBITDA EQUIPMENT EQUIPMENT
----------------------------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Big Cap Competitive Global Carrier
range:............................ 4.8x-29.1x 4.1x-18.8x 42.9x(1) 8.5x-18.6x 7.1x(2)
median:........................... 8.4x 5.8x 42.9x 12.0x 7.1x
mean:............................. 14.1x 9.6x 42.9x 13.0x 7.1x
Mid Cap Competitive Global Carrier
range:............................ 1.5x-7.8x 1.1x-4.5x NM (3) 3.5x-7.7x 3.2x-6.6x
median:........................... 1.9x 1.7x NM 5.2x 4.2x
mean:............................. 3.7x 2.4x NM 5.5x 4.7x
International Long Distance Carrier
range:............................ 0.4x-1.3x 0.4x-1.0x(4) 14.9x-24.5x(5) 2.5x-4.8x 2.3x-4.4x
median:........................... 1.0x 0.5x 19.7x 3.6x 2.8x
mean:............................. 0.9x 0.6x 19.7x 3.6x 3.1x
IDT................................. 0.4x 0.4x 24.5x 3.8x 2.8x
Pacific Gateway..................... 0.7x 0.5x 14.9x 3.4x 2.9x
STAR................................ 0.6x 0.5x 52.6x 1.7x 1.5x
World Access........................ 1.9x 1.5x 13.9x 8.4x 7.4x
</TABLE>
---------------
(1) The range, median and mean of the EBITDA multiple for the Big Cap
Competitive Global Carrier group were based solely on the EBITDA multiple
for Teleglobe because the EBITDA multiple was negative and therefore not
meaningful for each of Global Telesystems and Energis.
(2) The range, median and mean of the gross property, plant and equipment
multiple were based solely on the gross property, plant and equipment
multiple of Global Telesystems because the gross property, plant and
equipment multiple for each of Energis and Teleglobe was not applicable.
(3) The designation "NM" means "not meaningful." The range, median and mean of
the EBITDA multiple for the Mid Cap Competitive Global Carrier group were
not meaningful because the EBITDA for each of these companies is negative.
(4) The range, median and mean of the 2000E sales multiple for the International
Long Distance Carrier group was calculated excluding Telscape International
because the 2000E sales multiple for Telscape International was not
available.
(5) The range, median and mean of the EBITDA multiple for the International Long
Distance Carrier group was calculated excluding Startec Global and Telscape
International because the EBITDA multiple for each of these companies was
negative and therefore not meaningful.
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<PAGE> 71
Deutsche Bank calculated:
- the implied total enterprise value of STAR on a stand alone basis;
- the implied equity value of STAR on a stand alone basis; and
- the implied equity value per share of STAR on a stand alone basis, in
each case based on the trading multiples for the International Long
Distance Carrier group.
Deutsche Bank analyzed the three groups and concluded that STAR most
closely resembles the International Long Distance Carrier group and, more
specifically, IDT and Pacific Gateway in that group because STAR's business
strategy and the market segment in which STAR operates are most similar to those
two companies. Deutsche Bank deemed World Access most comparable, because of its
businesses, to a range between the International Long Distance Carrier group and
the Mid Cap Competitive Global Carrier Group with a closer emphasis on the
International Long Distance Carrier Group. The implied total enterprise value,
implied equity value and implied equity value per share for STAR, in each case
based on the multiple ranges for the International Long Distance Carriers, are
as follows:
<TABLE>
<CAPTION>
TOTAL ENTERPRISE VALUE AS A MULTIPLE OF
---------------------------------------------
LAST QUARTER GROSS PROPERTY,
ANNUALIZED PLANT AND
REVENUE 2000E REVENUE EQUIPMENT
------------- ------------- ---------------
($MM, EXCEPT PER SHARE)
<S> <C> <C> <C>
Comparable trading multiple range............ 0.6x-0.9x 0.5x-0.7x 2.3x-2.6x
STAR......................................... $1,116.9 $1,202.5 $382.9
Implied total enterprise value............... 670.1-1,005.2 601.2-841.7 880.7-995.5
Implied equity value......................... 400.8-735.9 282.3-522.8 611.4-726.2
Implied equity value per share............... $6.60-$12.11 $4.65-$8.61 $10.06-$11.96
</TABLE>
Deutsche Bank also calculated:
- the implied total enterprise value of World Access on a stand alone
basis;
- the implied equity value of World Access on a stand alone basis; and
- the implied equity value per share of World Access on a stand alone
basis,
in each case based on a comparable trading multiple range Deutsche Bank deemed
appropriate from the multiples of the three categories of Selected Comparable
Companies.
The implied total enterprise value, implied equity value and implied equity
value per share for World Access, in each case based on the multiple ranges
Deutsche Bank deemed appropriate, are as follows:
<TABLE>
<CAPTION>
TOTAL ENTERPRISE VALUE AS A MULTIPLE OF
----------------------------------------
LAST QUARTER
ANNUALIZED
REVENUE 2000E REVENUE
------------------- -------------------
($MM, EXCEPT PER SHARE)
<S> <C> <C>
Comparable trading multiple........................... 1.3x-1.6x 1.1x-1.4x
World Access Telecom Group............................ $1,106.8 $1,333.3
Implied total enterprise value........................ 1,438.8-1,770.9 1,466.7-1,866.7
Implied equity value.................................. 1,510.3-1,842.4 1,483.0-1,883.0
Implied equity value per share........................ $16.50-$20.13 $16.20-$20.57
</TABLE>
The gross property, plant and equipment for World Access (pro forma for its
previously announced acquisitions and divestitures) was not provided to Deutsche
Bank and therefore Deutsche Bank did not calculate total enterprise value as a
multiple of the gross property, plant and equipment.
The preceding analysis shows that the ranges of per share implied equity
values in the preceding analysis for STAR and for World Access are not
materially inconsistent with the per share trading value of
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<PAGE> 72
STAR and World Access common stock before the February 7, 2000 meeting of STAR's
board of directors. On February 4, 2000, STAR's stock closed at $6.41 and World
Access' stock closed at $22.00.
None of the companies utilized as a comparison are identical to STAR or
World Access. Accordingly, Deutsche Bank believes the analysis of the publicly
traded comparable companies is not simply mathematical. Rather, it involves
complex considerations and qualitative judgments concerning differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the comparable companies.
Contribution analysis. Deutsche Bank analyzed the relative contributions
of STAR and World Access to the estimated pro forma income statement and balance
sheet of the combined company. This analysis was based on the estimated 2000
figures and showed that on a pro forma combined basis, excluding the effect of
any synergies that may be realized as a result of the STAR merger and non-
recurring expenses relating to the STAR merger, the following:
<TABLE>
<CAPTION>
COMBINED COMBINED
COMPANY'S COMPANY'S COMBINED
PRO FORMA GROSS COMPANY'S
TOTAL REVENUES PROFIT EBITDA
-------------- --------- ---------
<S> <C> <C> <C>
World Access........................................ 52.6% 47.7% 108.2%
STAR................................................ 47.4% 52.3% (8.2%)
</TABLE>
These percentage contributions may be compared with the percentage of World
Access shares to be owned following the STAR merger, without giving effect to
the WorldxChange merger or the June 7, 2000 adjustment of the exchange ratio, by
former STAR stockholders and by the stockholders of World Access before the STAR
merger of 20.6% and 79.4%, respectively, and approximately 28.9% and 71.1%,
respectively, of the combined company's total enterprise value, based on the
closing price of World Access stock of $22.00 on February 4, 2000 and on the
assumptions that there will be no increase in the STAR merger consideration as a
result of the sale of PT-1 and that all of the merger consideration will be paid
in stock.
The contribution analysis shows that the percentage of World Access shares
to be owned by the former STAR holders is substantially higher than STAR's
contribution to the combined companies' EBITDA, but less than STAR's
contribution to the combined companies' revenues and gross profits.
Discounted cash flow analysis. Deutsche Bank performed a discounted cash
flow analysis for both World Access and STAR. Deutsche Bank calculated the
discounted cash flow values for each of World Access and STAR as the sum of the
net present values of:
- the estimated future cash flow that World Access or STAR, as the case may
be, will generate for the years 2000 through 2004, plus
- the value of World Access or STAR at the end of the period.
The total enterprise values, equity values and equity values per share for
STAR were based on the financial projections for STAR for the years 2000 through
2004 prepared by STAR's management. The discounted cash flow analysis of STAR
management's projections assumes ranges of discount rates of 14% to 16% and 2004
estimated EBITDA exit multiples of 9x to 11x. The total enterprise values,
equity values and equity values per share for World Access were based on the
financial projections for World Access for the years 2000 through 2004 prepared
by World Access' management. The discounted cash flow analysis of World Access
management's projections assumes ranges of discount rates of 12% to 14% and 2004
estimated EBITDA exit multiples of 11x to 13x. For the combined company,
Deutsche Bank used the same discounted cash flow methodology as for the
discounted cash flow analyses of STAR and World Access on a stand alone basis
and assumed the same ranges of discount rates and 2004 estimated exit
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<PAGE> 73
multiples as World Access on a stand alone basis. Projections for the combined
company included assumed synergies and transaction expenses. This analysis
indicated:
<TABLE>
<CAPTION>
COMBINED
STAR WORLD ACCESS COMPANY
---- ------------ --------
<S> <C> <C> <C>
Discount Rate Range................ 14-16% 12-14% 12-14%
2004E EBITDA Exit Multiple Range... 9x-11x 11x-13x 11x-13x
Total enterprise value............. $490-$658 million $1.3-$1.6 billion $2.6-$3.2 billion
Equity Value....................... $221-$389 million $1.4-$1.7 billion $2.4-3.0 billion
Equity Value Per Share............. $3.63-$6.41 $14.97-$18.71 $20.45-$26.35
</TABLE>
The preceding analysis indicates equity values per share for STAR and World
Access stock that are generally consistent with the closing prices for shares of
the two companies on February 4, 2000, which was $6.41 for STAR and $22.00 for
World Access. The exchange ratio in the merger agreement approved by the STAR
board of directors on February 7, 2000, which was .3905, is more favorable to
STAR stockholders than the exchange ratio indicated by the February 4, closing
prices for the two companies' shares, which was .2914.
Pro forma financial effects analysis. Deutsche Bank analyzed pro forma
effects of the STAR merger. Based on the analysis, Deutsche Bank computed the
share price, revenues per share and total debt per share for STAR stockholders
pre-transaction, for stockholders of the combined company and the STAR
equivalent post-transaction, based on management's 2000 estimates, after taking
into account the potential cost savings and other synergies identified by
management that STAR and World Access could achieve if the STAR merger was
consummated and after non-recurring costs relating to the STAR merger, and
assuming the exchange ratio is 0.3905 and also assuming that the entire
consideration is stock. Deutsche Bank calculated the following pro forma effects
of the STAR merger, after taking into account the potential cost savings and
other synergies and after non-recurring costs:
<TABLE>
<CAPTION>
STAR 2000E STAR
PRE- COMBINED EQUIVALENT
TRANSACTION COMPANY POST-TRANSACTION
----------- -------- ----------------
<S> <C> <C> <C>
Revenues per share.................................. $19.80 $22.00 $8.59
EBITDA per share.................................... (0.08) 1.03 0.40
Earnings before interest and taxes or EBIT per
share............................................. (0.92) (0.09) (0.04)
Total debt per share................................ 5.25 4.99 1.95
Total book value per share.......................... 3.87 10.15 3.96
</TABLE>
This analysis shows that, based on management's 2000 estimates, the
STAR-World Access merger (without giving effect to the WorldxChange merger or
the June 7, 2000 adjustment in the exchange ratio), on a pro forma basis per
STAR share equivalent, would increase EBITDA, EBIT and book value and reduce
debt, but would reduce revenues.
Premiums analysis. Deutsche Bank conducted a premiums analysis, comparing
the World Access/STAR transaction to the median and mean of 27 telecom
transactions, completed or pending, greater than $100 million and less than $2
billion for the period of May 1, 1997 to February 4, 2000 and to the median and
mean of 124 general transactions, completed or pending, greater than $250
million and less than $1 billion that resulted in a controlling stake for the
period of January 1, 1999 to February 4, 2000. The premiums analysis was
conducted one day prior to announcement date, one week prior to announcement
date and four weeks prior to announcement date. The premium to STAR's share
price was calculated using the original announcement date of the execution of
the letter of intent of December 20, 1999, to
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enter into the STAR merger and an exchange ratio of 0.3905 World Access share
per STAR share. This analysis indicated:
<TABLE>
<CAPTION>
MEDIAN AND MEAN PREMIUMS
--------------------------------------------------------
1 DAY PRIOR TO ANN. 1 WEEK PRIOR TO 4 WEEKS PRIOR TO
PERIOD DATE ANN. DATE ANN. DATE
------ ------------------- --------------- ----------------
<S> <C> <C> <C>
Telecom transactions (27 transactions)
Median................................... 21.3% 25.4% 28.7%
Mean..................................... 23.8 29.7 41.1
General transactions (124 transactions)
Median................................... 27.8 36.1 46.5
Mean..................................... 31.0 40.7 63.0
World Access/STAR.......................... 25.0 9.5 27.3
</TABLE>
This premium analysis permits a comparison between the premium over STAR's
share price, based on the market price of World Access and STAR shares at the
times shown, with the premiums involved at comparable times in other
transactions.
Other considerations and analyses. In connection with its opinion Deutsche
Bank also considered, among other things:
- telecom equipment company trading and transaction comparables to
corroborate World Access' statement that it will be able to sell its
Equipment Division for $525 to $600 million,
- the amounts of STAR shares that have traded at different price levels,
and
- precedent telecom services transactions.
Because many of the precedent transactions occurred in market conditions
for international long distance companies that differed from market conditions
at the time the financial analyses were conducted and/or because business mix or
other factors made the targets in the precedent transactions non-comparable to
STAR, while Deutsche Bank reviewed precedent telecom services transactions, it
did not rely on a precedent transactions analysis.
Deutsche Bank also considered historical exchange ratios of World Access
and STAR based on historical trading prices for the two companies' shares. From
August 1999 through the beginning of February 2000, the historical exchange
ratios were generally similar to the exchange ratio of .3905 in the original
merger agreement. The historical exchange ratios were higher before August 1999,
but Deutsche Bank viewed these exchange ratios as less relevant, since World
Access was in the process of transforming itself from an equipment provider to a
service provider. World Access' stock prices changed in response to the
acquisitions and divestitures World Access was involved in to facilitate this
shift in business strategy.
The foregoing summary describes analyses that Deutsche Bank deemed material
in its presentation to the STAR board of directors, but it is not a
comprehensive description of all analyses performed by Deutsche Bank in
connection with preparing its opinion. The preparation of a fairness opinion is
a complex process involving the application of subjective business judgment in
determining the most appropriate and relevant methods of financial analysis and
the application of those methods to the particular circumstances and, therefore,
is not readily susceptible to summary description. Deutsche Bank believes that
its analyses must be considered as a whole and that considering any portion of
the analyses and of the factors considered without considering all analyses and
factors could create a misleading view of the process underlying the opinion. In
arriving at its fairness determination, Deutsche Bank did not assign specific
weights to any particular analyses.
In conducting its analyses and arriving at its opinions, Deutsche Bank
utilized a variety of generally accepted valuation methods. The analyses were
prepared solely for the purpose of enabling Deutsche Bank to provide its opinion
to the board of directors of STAR as to the fairness to STAR stockholders, from
a financial point of view, of the merger consideration and do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold, which are inherently subject to
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uncertainty. In connection with its analyses, Deutsche Bank made, and was
provided by STAR's management with, numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond STAR's or World Access' control. Analyses
based on estimates or forecasts of future results are not necessarily indicative
of actual past or future values or results, which may be significantly more or
less favorable than suggested by the analyses. Because the analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of STAR, World Access or their respective advisors, neither
STAR nor Deutsche Bank nor any other person assumes responsibility if future
results or actual values are materially different from these forecasts or
assumptions.
The terms of the STAR merger were determined through negotiations between
STAR and World Access and were approved by the STAR board of directors. Although
Deutsche Bank provided advice to the STAR board of directors as to the fairness
of the merger consideration to the stockholders of STAR, from a financial point
of view, the decision to enter into the STAR merger was solely that of the STAR
board of directors. The opinion of Deutsche Bank was only one of a number of
factors taken into consideration by the STAR board of directors in making its
determination to approve the STAR merger. Deutsche Bank's opinion was provided
to the STAR board of directors to assist it in connection with its consideration
of the STAR merger and does not constitute a recommendation to any holder of
STAR common stock as to how to vote with respect to the STAR merger.
The STAR board of directors selected Deutsche Bank as financial advisor in
connection with the STAR merger based on Deutsche Bank's qualifications,
expertise, reputation and experience in mergers and acquisitions. STAR has
retained Deutsche Bank pursuant to an engagement letter dated January 25, 2000.
As compensation for Deutsche Bank's services in connection with the STAR merger,
a cash fee of $250,000 became payable by STAR to Deutsche Bank upon signing and
STAR will pay Deutsche Bank an additional $1,050,000 upon consummation of the
STAR merger. Regardless of whether the STAR merger is consummated, STAR has
agreed to reimburse Deutsche Bank for reasonable fees and disbursements of
Deutsche Bank's counsel and all of Deutsche Bank's reasonable travel and other
out-of-pocket expenses incurred in connection with the STAR merger or otherwise
arising out of the retention of Deutsche Bank under the engagement letter. STAR
has also agreed to indemnify Deutsche Bank and related persons to the full
extent lawful against liabilities, including liabilities under the federal
securities laws that may arise out of its engagement or the STAR merger.
Deutsche Bank is an internationally recognized investment banking firm
experienced in providing advice in connection with mergers and acquisitions and
related transactions. It is an affiliate of Deutsche Bank AG (together with its
affiliates, the DB Group).
One or more members of the DB Group have, from time to time, provided
investment banking, commercial banking, including extension of credit, other
financial services to STAR and World Access or their respective affiliates for
which it has received compensation. In the ordinary course of business, members
of the DB Group may actively trade in the securities and other instruments and
obligations of STAR and World Access for their own accounts and for the accounts
of their customers. Accordingly, the DB Group may at any time hold a long or
short position in these securities, instruments and obligations.
CONSIDERATION THAT STAR STOCKHOLDERS WILL RECEIVE IN THE STAR MERGER
Upon completion of the STAR merger, each outstanding share of STAR common
stock will be automatically canceled and converted into the right to receive one
of two forms of merger consideration to be determined by World Access.
- Under the first form of STAR merger consideration, each STAR stockholder
will be entitled to receive, for each share of STAR common stock,
0.386595 shares of World Access common stock, subject to upward
adjustment if STAR sells PT-1 prior to the completion of the STAR merger
for net cash proceeds in excess of $150.0 million. World Access and STAR
expect PT-1 to be sold to Counsel and accordingly, view any upside
adjustment as unlikely. STAR stockholders will receive cash in lieu of
any fractional shares based on the average of the daily closing price for
a share of
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World Access common stock on the Nasdaq National Market for the ten
consecutive trading days ending at the close of trading on the date the
STAR merger becomes effective. Please see page 2 for a table summarizing
the consideration that STAR stockholders will receive under the first
form of STAR merger consideration.
- Under the second form of STAR merger consideration, each STAR stockholder
will be entitled to receive, for each share of STAR common stock,
substantially the equivalent total value as that paid in the first form
of consideration. However, under the second form, each STAR stockholder
will receive up to 40% of the consideration in cash based on the average
closing price of World Access common stock on the Nasdaq National Market
for the ten trading day period ending at the close of trading on the
trading day immediately preceding the close of the STAR merger and the
remainder in World Access common stock. If World Access selects the
second form of consideration, each STAR stockholder will receive the same
percentages of stock and cash as other STAR stockholders. The following
table summarizes the consideration that STAR stockholders will receive
under the second form of STAR merger consideration, assuming that World
Access elects to pay 60% of the STAR merger consideration in World Access
stock and 40% in cash:
<TABLE>
<CAPTION>
SHARES OF SHARES OF VALUE OF VALUE
VALUE OF WORLD ACCESS STAR WORLD ACCESS WORLD ACCESS CASH TOTAL PER
COMMON STOCK OWNED RECEIVED STOCK RECEIVED VALUE STAR SHARE
--------------------- --------- ------------ ------------ -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 4.00 100 23 $ 92.00 $ 62.64 $154.64 $1.55
5.00 100 23 115.00 78.30 193.30 1.93
6.00 100 23 138.00 93.96 231.96 2.32
7.00 100 23 161.00 109.62 270.62 2.71
8.00 100 23 184.00 125.28 309.28 3.09
9.00 100 23 207.00 140.94 347.94 3.48
</TABLE>
Although World Access believes it has adequate cash reserves to support
current working capital requirements and business plans for at least the next 12
months, including the integration of STAR, WorldxChange and TelDaFax, World
Access intends to pay 100% of the STAR merger consideration through the issuance
of World Access common stock. World Access feels that the number one reason for
failure by companies operating in its business segment is the lack of sufficient
cash to operate and grow telecommunications businesses. World Access is also
aware that the ability for telecommunications companies to raise new capital has
become increasingly difficult during the past year. For these reasons, World
Access intends to use World Access common stock as consideration in the STAR
merger even if the prices of World Access and STAR common stock were to fall
below their current trading levels.
STAR has entered into an agreement to sell the assets of PT-1 to Counsel
for $150.0 million in cash, subject to a net assets purchase price adjustment.
Under the STAR merger agreement, STAR is required to sell PT-1 for net cash
proceeds of at least $120.0 million if the assets of PT-1 are sold to Counsel.
Net cash proceeds means the cash proceeds received by STAR at the consummation
of the PT-1 asset sale, net of all taxes, fees, expenses and costs incurred in
connection with the PT-1 asset sale. The net cash proceeds expected to be
received from the sale of PT-1 to Counsel are estimated as follows (in
thousands):
<TABLE>
<S> <C>
Gross purchase price........................ $150,000
Net assets adjustment....................... (8,000)
Fees and expenses........................... (2,100)
STAR income taxes........................... (19,000)
Other costs................................. (900)
--------
$120,000
========
</TABLE>
The gross PT-1 purchase price will be adjusted upward or downward to the
extent the net assets of PT-1 as of the closing date differ from the net assets
of PT-1 as of December 31, 1999. World Access and STAR currently estimate that
the net assets of PT-1 will be approximately $8.0 million lower on the
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closing date. The sale of PT-1 is expected to result in an income tax liability
of approximately $19.0 million for STAR. This liability will be assumed by World
Access in connection with the STAR merger.
If STAR completes the PT-1 asset sale with Counsel, STAR will not receive
net cash proceeds in excess of $150.0 million. Therefore, STAR stockholders will
receive 0.386595 shares of World Access common stock for each share of STAR
common stock if the PT-1 asset sale is completed. If STAR sells PT-1 to another
purchaser for net cash proceeds in excess of $150.0 million, the net cash
proceeds in excess of $150.0 million that STAR receives at the consummation of
the sale of PT-1 will be divided by 62,856,702 and added to the exchange ratio.
No fractional shares of World Access common stock will be issued in
connection with the STAR merger. Instead, STAR stockholders will receive cash,
without interest, instead of a fractional share of World Access common stock.
Shares of STAR common stock for which dissenters' rights of appraisal, if
available, have been perfected in accordance with Delaware law will not be
entitled to receive the merger consideration described above.
Upon completion of the STAR merger, each outstanding STAR stock option or
warrant will be automatically converted into an option to purchase the number of
shares of World Access common stock as is equal to the number of shares of STAR
common stock covered under the STAR stock option or warrant multiplied by the
exchange ratio at a per share price equal to the exercise price specified in the
STAR stock option or warrant divided by the exchange ratio. The amount of World
Access common stock each STAR stock option or warrant will be convertible into
is subject to upward adjustment if STAR sells PT-1 before the completion of the
STAR merger for net cash proceeds in excess of $150.0 million. Each newly issued
World Access stock option will contain terms which are substantially similar to
the terms governing the original STAR stock option or warrant.
COMPLETION OF THE STAR MERGER
The completion of the STAR merger will occur two business days after the
conditions to completion are satisfied or waived or at a later time agreed to by
World Access and STAR. The STAR merger will be effective at the time that the
certificate of merger is filed unless World Access and STAR specify a later
effective time in the certificate of merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE STAR MERGER
The following discussion summarizes the material federal income tax
consequences of the STAR merger. The following discussion is not a complete
analysis of all aspects of federal income taxation that may be relevant to you
as a STAR stockholder in light of your particular circumstances. For example, it
does not address the federal income tax considerations or the special tax rules
that may be relevant to you if you are one of the following types of holders:
- an insurance company;
- a tax-exempt organization;
- an employee stock ownership plan;
- a bank;
- a broker, dealer or financial institution;
- a holder that holds STAR common stock as part of a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for
federal income tax purposes;
- a holder that has a "functional currency" other than the United States
dollar;
- a holder subject to the alternative minimum tax;
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<PAGE> 78
- a holder that is not a citizen or resident of the United States, or that
is a foreign corporation, foreign partnership or foreign estate or trust
as to the United States;
- a holder who acquired shares of STAR common stock pursuant to the
exercise of options or otherwise as compensation or through a
tax-qualified retirement plan; or
- a holder of options to acquire shares of STAR common stock.
In addition, the discussion does not consider the effect of any foreign,
state, local, or other tax laws, or any tax consequences, such as estate or gift
tax, other than the federal income tax consequences of the STAR merger that may
be applicable to STAR stockholders, or the consequences of transactions
completed before or after the STAR merger. Further, this discussion assumes that
as a STAR stockholder, you hold your STAR common stock as a "capital asset"
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended. Generally, a capital asset is property held for investment. This
discussion is based on the Internal Revenue Code and final, temporary and
proposed treasury regulations promulgated under the Internal Revenue Code,
administrative pronouncements and rulings, and judicial decisions as of the date
of this joint proxy statement/prospectus, all of which are subject to change or
differing interpretations at any time with possible retroactive effect and any
such change could affect the continuity and validity of this discussion.
We have not requested a ruling from the Internal Revenue Service with
respect to the federal income tax consequences of the STAR merger nor is the
completion of the STAR merger conditioned on the receipt by World Access or STAR
of a ruling or an opinion of tax counsel concerning the tax consequences. YOU
ARE URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO YOU OF THE STAR MERGER.
The STAR merger
Long Aldridge & Norman LLP has rendered an opinion to World Access with
respect to the material federal income tax consequences of the STAR merger.
Among other opinions, counsel has opined that the STAR merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code. In rendering its opinion as to status of the STAR merger as a
"reorganization" and in rendering its other opinions summarized below concerning
the material federal income tax consequences of the STAR merger, counsel has
relied upon, and assumed that:
- the STAR merger and the related transactions described in the STAR merger
agreement (and all exhibits thereto) will be consummated as described in
the STAR merger agreement (and all exhibits thereto) and this joint proxy
statement/prospectus;
- the PT-1 asset sale is consummated by STAR prior to the effective time of
the STAR merger;
- the respective parties to such documents and all parties referred to in
such documents will act in all respects at all relevant times in
conformity with the requirements and provisions of such documents;
- none of the terms and conditions contained in such documents has been or
will be waived or modified in any respect prior to the closing of the
STAR merger;
- all statements, facts and representations made in the STAR merger
agreement, this joint proxy statement/prospectus and in those
representations to counsel contained in certificates of their officers
are true, complete and correct (without regard to any knowledge or other
qualifications set forth therein and without undertaking to verify such
statements, facts and representations by any independent investigation or
review thereof);
- all covenants contained in the STAR merger agreement (and all exhibits
thereto) are performed without waiver or breach of a material provision
thereof; and
- other customary assumptions as to the accuracy and authenticity of
documents provided to counsel.
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Counsel's opinion neither binds the Internal Revenue Service nor precludes
it or the courts from adopting a contrary position, and no assurance can be
given that contrary positions will not be successfully asserted by the Internal
Revenue Service or adopted by a court if the issues are litigated. If the
Internal Revenue Service or the courts successfully challenge the status of the
STAR merger as a reorganization or if any of the assumptions set forth above is
inaccurate, the STAR merger may not be treated as a reorganization. If the STAR
merger is not treated as a reorganization, each STAR stockholder generally will
be required to recognize gain or loss equal to the difference between the sum of
the fair market value of the World Access common stock and cash received in the
STAR merger and such stockholder's tax basis in the STAR common stock
surrendered in the STAR merger. In that case, the stockholder's tax basis in the
World Access common stock received the STAR merger generally would equal the
fair market value of that stock on the day of the STAR merger, and the holding
period for the World Access common stock received in the STAR merger generally
would begin on the day following the STAR merger. In addition, if the STAR
merger is not treated as a reorganization, STAR would incur gain equal to the
excess of the sum of the cash and fair market value of the World Access common
stock issued in the STAR merger over the tax basis in STAR's assets. This gain,
if recognized, would give rise to substantial tax liability and could have a
material adverse effect on the value of STAR and its stock.
The following discussion summarizes the opinions rendered by Long Aldridge
& Norman LLP to World Access with respect to the material federal income tax
consequences of the STAR merger. The discussion is based on the conclusion in
the opinion that the STAR merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code, and that STAR completes
the PT-1 asset sale prior to the STAR merger.
Tax considerations for World Access stockholders
World Access stockholders will not recognize any gain or loss for federal
income tax purposes solely as a result of the STAR merger.
Tax considerations for STAR stockholders
Receipt of World Access stock in the STAR merger. You will recognize
neither gain nor loss upon the exchange of your STAR common stock for World
Access common stock. Your tax basis in the shares of World Access common stock
you receive in the exchange will be the same as the tax basis of the shares of
STAR common stock you surrender in the exchange less any portion of such basis
allocable to any fractional share interest in any share of World Access common
stock for which cash is received. The holding period of the World Access common
stock you receive in the exchange will include the holding period during which
you held your STAR common stock, provided you held the shares as a capital asset
as of the effective time of the STAR merger.
Receipt of World Access stock and cash. If World Access elects to pay
cash, and you realize gain on the exchange of your STAR common stock for a
combination of cash and World Access common stock and fractional share
interests, you will be required to recognize the gain in an amount equal to the
lesser of:
- the amount of gain you realize on the exchange, which will be equal to
the excess of the sum of the cash and the fair market value of the World
Access common stock you receive over your tax basis in the STAR common
stock surrendered in the exchange and
- the amount of cash you receive in the exchange.
If, however, you realize a loss on the exchange of your STAR common stock for a
combination of cash and World Access common stock, you cannot recognize the
loss.
Your tax basis in the shares of World Access common stock you receive in
the exchange in which you also receive cash will be the same as the tax basis of
your shares of STAR common stock surrendered in the exchange, less any portion
of such basis allocable to any fractional share interest in any share of World
Access common stock for which cash is received, increased by the amount of any
gain recognized
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in the exchange, whether treated as a capital gain or a dividend as discussed
below, and decreased by the amount of cash you receive. The holding period of
the World Access common stock you receive in the exchange will include the
holding period during which you held your STAR common stock.
Character of gain recognized. The character of the gain you are required
to recognize upon your receipt of cash depends on your particular facts and
circumstances as a STAR stockholder. Assuming you held your STAR common stock as
a capital asset, any gain recognized will be characterized as capital gain
unless your receipt of cash is treated as having the effect of the distribution
of a dividend under the Internal Revenue Code.
To determine whether any recognized gain is capital gain or is a dividend,
a hypothetical redemption is deemed to occur under which a STAR stockholder that
receives a combination of cash and World Access common stock is treated as:
- hypothetically receiving solely shares of World Access common stock in
exchange for all of its STAR common stock, and
- having a portion of its shares of World Access common stock equal in
value to the cash actually received in the STAR merger redeemed by World
Access.
The cash you receive in the hypothetical redemption will have the effect of a
distribution of a dividend to you unless the hypothetical redemption:
- is "not essentially equivalent to a dividend" with respect to you or
- results in a "substantially disproportionate" redemption of your equity
interest in World Access,
in both cases after giving effect to the constructive ownership rules of the
Internal Revenue Code, which apply in determining a STAR stockholder's ownership
interest in World Access immediately after the STAR merger but before the
hypothetical redemption, and after the hypothetical redemption. Under those
rules, a STAR stockholder is deemed to own stock held by specific family
members, estates and trusts of which the shareholder is a beneficiary, a
partnership in which the stockholder is a partner, and a corporation in which
the stockholder is a direct or indirect 50% stockholder, as well as stock
subject to options that are held by the stockholder or the entities. Because
these constructive ownership rules are complex, each STAR stockholder who
believes that he or she may be subject to these rules should consult his or her
tax advisor.
The determination of whether the hypothetical redemption is "substantially
disproportionate" must be made by comparing (i) the percentage of the World
Access common stock that is owned, either actually or constructively, by the
STAR stockholder after the merger with (ii) the percentage of the World Access
common stock that would have been owned, either actually or constructively, by
the STAR stockholder if the STAR stockholder had received solely stock, and no
cash, in the STAR merger. If the percentage described in clause (i) of the
preceding sentence is less than 80% of the percentage described in clause (ii)
of that sentence, the hypothetical redemption is considered to be "substantially
disproportionate." For example, a STAR stockholder who receives a combination of
cash and stock in the STAR merger and who would have owned 5% of the outstanding
stock of World Access had it received solely stock in the merger, will satisfy
the "substantially disproportionate" test if the stockholder owns less than 4%
of the outstanding stock of World Access after the STAR merger.
The hypothetical redemption will not be "essentially equivalent to a
dividend" if it results in a "meaningful reduction" in the stockholder's
proportionate interest in World Access. Based on a published ruling of the
Internal Revenue Service, if a stockholder that is considered to have a
relatively minimal interest in World Access and no right to exercise control
over corporate affairs suffers a reduction in the stockholder's proportionate
interest in World Access, the stockholder should be regarded as having suffered
a meaningful reduction of its interest in World Access. For example, a STAR
stockholder whose relative stock interest in World Access after the STAR merger
is minimal (for example, an interest of less than 1%) and who exercises no
control with respect to corporate affairs is considered to have a "meaningful
reduction" if such stockholder is considered to experience even a very slight
reduction (for example, a
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reduction of as little as 3.5%) in the stockholder's percentage stock ownership
in World Access by virtue of the hypothetical redemption.
The determination of whether a STAR stockholder will satisfy either the
"substantially disproportionate" or the "not essentially equivalent to a
dividend" test will depend on such STAR stockholder's particular facts and
circumstances. The "substantially disproportionate" test will be satisfied if
the stockholder can comply with the objective numerical criteria described above
in light of its own particular facts and circumstances. The "not essentially
equivalent to a dividend" test, however, is not based on any numerical criteria;
rather it is highly subjective. Generally, the receipt of cash by a STAR
stockholder who does not actually or constructively own any World Access stock,
other than the shares of World Access stock that are received in the merger,
will satisfy those tests. However, because the consequences of the application
of those tests to each STAR stockholder will vary depending on each STAR
stockholder's particular facts and circumstances, there can be no assurance that
any STAR stockholder can satisfy either test. As a result, Long Aldridge &
Norman LLP has expressed no opinion as to whether gain recognized by a STAR
stockholder who receives a combination of World Access common stock and cash in
the STAR merger will be treated as capital gain or ordinary income. Each STAR
stockholder should consult his or her own tax advisor as to the character of the
gain.
If either of these redemption tests is satisfied, then your gain will be
capital gain, and will be long-term capital gain if your STAR common stock was
held for more than one year as of the effective time of the STAR merger.
If none of the redemption tests is satisfied, you will be treated as having
received a dividend distribution in that hypothetical redemption exchange. The
amount of the distribution will generally equal the amount of cash you receive,
but not in excess of the gain you realize on the exchange pursuant to the STAR
merger, and the amount will be treated as a dividend, and thus ordinary income,
to the extent of your allocable portion of the accumulated earnings and profits,
if any, as determined for federal income tax purposes of STAR. If the amount of
the distribution exceeds your allocable portion of STAR's accumulated earnings
and profits, then the excess will first be applied against and reduce your basis
in the stock, but not below zero, and then any excess will be treated as gain
from the sale or exchange of World Access common stock, and thus capital gain,
and will be long-term capital gain if your STAR common stock was held for more
than one year as of the effective time of the STAR merger. If the distribution
is taxable as a dividend to you as a corporate stockholder, it may qualify for
the "dividends received deduction;" such dividend distribution may, however,
also be subject to the "extraordinary dividend" provisions of the Internal
Revenue Code.
Cash for fractional shares. Based on the current published ruling position
of the Internal Revenue Service, you will recognize gain or loss measured by the
difference between the amount of cash received and the portion of the tax basis
of your STAR common stock allocable to the fractional share interest. The gain
or loss will be capital gain or loss, and will be long-term capital gain if your
STAR common stock was held for more than one year as of the effective time of
the STAR merger.
Cash received by dissenting STAR stockholders. If you exercise appraisal
rights, any cash received in connection with exercising your appraisal rights
will be treated as having been received in redemption of your STAR common stock,
provided the payment is not treated as a dividend pursuant to the Internal
Revenue Code. If, after the redemption, you own no World Access stock after
giving effect to the constructive ownership rules of the Internal Revenue Code,
then you will recognize gain or loss measured by the difference between the
amount of cash received and the tax basis of your STAR common stock surrendered,
which will be long-term capital gain or loss if your STAR common stock was held
for more than one year as of the effective time of the STAR merger.
Reporting requirements. When you file your federal income tax return for
the taxable year in which the STAR merger occurs, you will be required to attach
a statement to your return which includes information required by the Internal
Revenue Service concerning your participation as a STAR stockholder in the STAR
merger. ACCORDINGLY, YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR CONCERNING
COMPLIANCE WITH THIS REQUIREMENT AND ANY OTHER TAX REPORTING REQUIREMENTS.
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Tax considerations for the corporate parties
World Access, STI Merger Co. and STAR. No gain or loss will be recognized
by World Access, STI Merger Co. or STAR as a result of the STAR merger.
Limitation on STAR tax attributes. Under the Internal Revenue Code, STI
Merger Co. will succeed to the net operating losses, certain "recognized
built-in losses," capital losses, general business credits, minimum tax credits,
excess foreign tax credits and other tax attributes of STAR. Use of these tax
attributes by World Access is subject to specific limitations under the Internal
Revenue Code and provisions of the treasury regulations governing the filing of
a consolidated federal income tax return, such as the "separate return
limitation year" rules. After an ownership change, the amount of the loss
corporation's taxable income for a post-ownership change year that may be offset
by the loss corporation's net operating losses arising before the ownership
change is annually limited to an amount referred to as the "Section 382
limitation." The Section 382 limitation generally equals the product of (i) the
fair market value of the loss corporation's stock immediately before the
ownership change, multiplied by (ii) the federal long-term, tax-exempt rate
published monthly by the Internal Revenue Service, which is 5.41% for September
2000.
STAR and its domestic subsidiaries are members of a "consolidated group"
which files a consolidated federal income tax return. The STAR consolidated
group, with STI Merger Co. as STAR's corporate successor, will constitute a
"loss subgroup" which will undergo a Section 382 ownership change upon
completion of the STAR merger. Utilization of any STAR loss subgroup's net
operating loss carryover, after taking into account the PT-1 asset sale, which
we refer to as the "pre-change STAR loss subgroup net operating losses," against
future World Access consolidated federal taxable income will be subject to an
annual loss subgroup Section 382 limitation.
An additional limitation may apply under which the pre-change STAR loss
subgroup net operating losses can only be used to the extent of the "qualifying
separate return limitation year subgroup" members' aggregate, cumulative
contribution to World Access consolidated taxable income, or the "separate
return limitation year limitation." Because the STAR loss subgroup and its
separate return limitation year net operating loss subgroup should be treated as
co-extensive, and the Section 382 ownership change and separate return
limitation year event will occur at the same time, the separate return
limitation year limitation should be eliminated with respect to the STAR loss
subgroup net operating losses. Notwithstanding the foregoing, it is anticipated
that any net operating loss carryovers of STAR will be used to partially offset
gain to be recognized by STAR from the sale of the PT-1 assets.
Limitation on World Access tax attributes. World Access and its domestic
subsidiaries are members of a "consolidated group" which files a consolidated
federal income tax return. For its taxable year ended December 31, 1999, the
World Access consolidated group incurred a consolidated net operating loss, and
has a consolidated net operating loss carryover. As such, it constitutes a "loss
group." World Access believes that the World Access loss group may have already
incurred a Section 382 ownership change in either or both of its 1998 and 1999
taxable years. Thus, the World Access consolidated group's ability to utilize
its own consolidated net operating loss carryover as of December 31, 1999
against its future consolidated federal taxable income may already be subject to
an annual loss group Section 382 limitation.
If the completion of either or both the STAR merger and the WorldxChange
merger does result in an ownership change for the World Access loss group, the
amount of the annual loss group Section 382 limitation will depend in part, on
future values which cannot be predicted at this time. In the case of successive
ownership changes, the applicable pre-ownership change World Access loss group
or member's net operating losses will be subject to the lowest amount of Section
382 limitation which results from any of such successive ownership changes. If
instead, completion of either or both the STAR merger and the WorldxChange
merger does not result in an ownership change for the World Access loss group,
then any existing annual loss group Section 382 limitation for World Access will
simply continue to apply.
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EXCHANGE OF STAR STOCK CERTIFICATES FOR WORLD ACCESS STOCK CERTIFICATES
When the STAR merger is completed, World Access' exchange agent will mail a
letter of transmittal and instructions to former STAR stockholders describing
the procedures for surrendering STAR stock certificates in exchange for the
applicable STAR merger consideration. STAR stockholders will be required to
deliver their STAR stock certificates, an executed letter of transmittal and any
other required documents to the exchange agent. The STAR stock certificates will
be canceled, and STAR stockholders will receive the number of shares of World
Access common stock and a check for any cash consideration to which they are
entitled under the STAR merger agreement. STAR stockholders also will receive
cash instead of fractional shares of World Access common stock that they would
have otherwise received.
YOU SHOULD NOT SUBMIT YOUR STAR STOCK CERTIFICATES FOR EXCHANGE UNLESS AND
UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF WORLD ACCESS AND STAR
The World Access common stock that will be issued in the STAR merger will
be registered under the Securities Act. These shares will be freely transferable
under the Securities Act, except for shares issued to any person who is an
affiliate of either World Access or STAR. Affiliates include individuals or
entities that control, are controlled by, or are under common control of, either
World Access or STAR and may include some of their respective officers,
directors and principal stockholders. Affiliates may not sell the shares of
World Access common stock they acquire in the STAR merger except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- Rule 145 under the Securities Act, whereby an affiliate of either party
to the STAR merger may resell his or her shares without having to
register the shares so long as the affiliate complies with specific sale
restrictions; or
- any other exemption under the Securities Act.
ACCOUNTING TREATMENT OF THE STAR MERGER
World Access intends to account for the STAR merger as a purchase for
financial reporting and accounting purposes, under United States generally
accepted accounting principles. After the STAR merger, the results of operations
of World Access and STAR will be included in the consolidated financial
statements of World Access. The purchase price will be allocated based on the
fair values of the assets acquired and the liabilities assumed. Any excess of
cost over fair value of the net tangible assets of STAR acquired will be
recorded as goodwill and other intangible assets and will be amortized by
charges to operations under United States generally accepted accounting
principles. These allocations will be made based upon valuations and other
studies that have not yet been finalized.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE STAR MERGER
The STAR merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. The Hart-Scott-Rodino Act
prevents the completion of transactions until required information and materials
are furnished to the Antitrust Division of the Department of Justice and the
Federal Trade Commission and the appropriate waiting periods end or expire.
World Access and STAR have filed the required information and materials with the
Antitrust Division of the Department of Justice and the Federal Trade
Commission. The Department of Justice and Federal Trade Commission granted an
early termination of the waiting period, effective March 16, 2000. No further
action under the Hart-Scott-Rodino Act is required, as long as the STAR merger
is completed prior to March 16, 2001.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the STAR merger on antitrust grounds either before or
after expiration of the waiting period. Other persons could take action under
the antitrust laws, including seeking to enjoin the STAR merger. Additionally,
at any time before or after the completion of the STAR merger or the expiration
of the waiting period, any state could take action under the antitrust laws.
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The STAR merger also requires notification in certain European countries.
Under the German Competition Act, the German Cartel Office must be notified
of the STAR merger, and the STAR merger cannot be completed until it has been
approved by the German Cartel Office or a one month waiting period has expired.
The waiting period starts from the date that the German Cartel Office considers
the notification complete. On May 18, 2000, the German Cartel Office approved
the STAR merger.
Following the completion of the STAR merger, an information filing must be
made in Denmark with the national competition authority.
The STAR merger is subject to state and federal telecommunications
regulatory approvals. All but two of the state regulatory agencies and the
Federal Communications Commission require prior notice or approval of the STAR
merger. Requests for approval or notifications of the STAR merger have been
filed on behalf of World Access and STAR in 48 states and with the Federal
Communications Commission. The legal standard for approval varies from state to
state, but approval of the STAR merger generally requires a showing that it is
consistent with the public interest. The Federal Communications Commission has
approved the STAR merger.
STAR and World Access cannot complete the STAR merger unless and until the
registration statement of which this joint proxy statement/prospectus is a part
is declared effective and STAR and World Access are in compliance with Delaware
law.
Other than as described above, we are not aware of any other material
governmental or regulatory approval required for completion of the STAR merger.
RIGHTS OF DISSENTING STAR STOCKHOLDERS
If World Access elects to convert shares of STAR common stock into the
right to receive a combination of shares of World Access common stock and cash
in the STAR merger, and you are a STAR stockholder who does not wish to accept
the merger consideration, you have the right to demand the appraisal of and be
paid the fair value of your shares in cash. The fair value of your shares of
STAR common stock will exclude any element of value arising from the expectation
or completion of the STAR merger. Appraisal rights are not available if World
Access elects to convert shares of STAR common stock into the right to receive
shares of World Access common stock only.
THIS JOINT PROXY STATEMENT/PROSPECTUS CONSTITUTES THE NOTICE OF APPRAISAL
RIGHTS REQUIRED BY DELAWARE LAW. FAILURE TO PROPERLY AND TIMELY COMPLY WITH
THESE PROCEDURES WILL RESULT IN THE LOSS OF YOUR APPRAISAL RIGHTS. IF YOU LOSE
YOUR APPRAISAL RIGHTS, YOU WILL RECEIVE THE MERGER CONSIDERATION ONLY. THE
FOLLOWING DISCUSSION IS A SUMMARY OF DELAWARE LAW AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE RELEVANT PROVISIONS OF DELAWARE LAW, A COPY OF
WHICH IS ATTACHED AS ANNEX F AND INCORPORATED HEREIN BY REFERENCE.
If you have a beneficial interest in STAR common stock held of record by
another person or entity, such as a nominee, and you wish to exercise the right
to appraisal, if available, you must promptly act to cause the record holder to
follow the steps below and in Annex F properly and in a timely manner.
Delaware courts have decided that the statutory appraisal remedy, depending
on factual circumstances, may or may not be a stockholder's exclusive remedy in
connection with transactions such as the STAR merger. Several decisions of the
Delaware courts, which may or may not apply to the STAR merger, hold that the
statutory appraisal remedy may not be a stockholder's exclusive remedy in
circumstances in which a stockholder is able to prove a claim of unfair dealing
by fiduciaries. In these circumstances, the court is empowered to grant such
relief as the court deems appropriate, including recissory damages.
Written demand. If World Access elects to convert shares of STAR common
stock into the right to receive both shares of World Access common stock and
cash, and you are a STAR common stockholder who wishes to exercise appraisal
rights you must deliver a written demand for appraisal of your shares of
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STAR common stock to STAR before the vote on the STAR merger at the STAR
stockholders meeting. The demand should be delivered to STAR at 223 East De La
Guerra Street, Santa Barbara, California 93101, Attention: Corporate Secretary.
Your written demand must reasonably inform STAR:
- of your identity as a STAR common stockholder; and
- that by your written demand, you intend to demand appraisal of your
shares.
An abstention or proxy or vote against the STAR merger is not a written
demand for appraisal.
You must hold your shares of STAR common stock of record:
- on the record date for the STAR stockholders meeting; and
- from the time you make the written demand, continuously through the
STAR merger.
You must not vote in favor of the STAR merger or consent to the STAR
merger in writing.
After the STAR merger. Within ten days after the STAR merger, if appraisal
rights are available, World Access must send notice of the STAR merger to each
person who has satisfied the procedures established by Delaware law. Within 120
days after the STAR merger, if you are a STAR common stockholder who complied
with these appraisal procedures, you are, upon written request, entitled to
receive from World Access a statement of:
- the total number of shares of STAR common stock not voted for the STAR
merger and for which written demands for appraisal were received; and
- the total number of holders of the shares.
This statement must be mailed by World Access within ten days after its receipt
of the written request for the statement or within ten days after the expiration
of the period for delivery of written demand for appraisal, whichever is later.
Petition in the Court of Chancery. If you have followed the steps above,
if appraisal rights are available, and the STAR merger is completed, you or
World Access may file a petition in the Court of Chancery of the State of
Delaware, within 120 days after the STAR merger is completed, demanding a
determination of the "fair value" of your shares. World Access has no obligation
to file this petition, and does not currently intend to file this petition. If
you wish to have the Court of Chancery determine the "fair value" of your
shares, you must file the petition. You will fail to perfect and lose your right
to appraisal if no petition is filed within 120 days after the STAR merger is
completed.
The Court of Chancery may require you to submit your share certificates to
the Register in Chancery for notation of the appraisal proceeding. If you fail
to comply with this direction, the court may dismiss the appraisal proceedings
as to you.
If you have complied with these procedures, the Court of Chancery will
determine whether you have complied with Delaware law and if you are entitled to
appraisal rights. After determining the STAR common stockholders entitled to
appraisal, the court will appraise the "fair value" of shares of STAR common
stock. "Fair value" will be determined exclusive of any element of value arising
from the completion or expectation of the STAR merger. The court may consider
all relevant factors including market value, asset value, dividends, earning
prospects, and the nature of the business. "Fair value" may be more than, the
same as, or less than the value of the merger consideration.
The court will also determine if interest will be paid on the amounts to be
received by those STAR common stockholders whose shares have been appraised. The
costs of the appraisal proceeding may be determined by the court and taxed on
the parties as the court determines to be equitable. You also may apply to the
court to have the expenses of the appraisal proceeding incurred by you charged
pro rata against the value of all shares entitled to appraisal.
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Withdrawal of written demand for appraisal. If you fail to perfect, lose
or withdraw your right to appraisal under Delaware law, you will receive the
merger consideration provided in the STAR merger agreement. You may withdraw
your written demand for appraisal by delivering a written withdrawal of your
demand for appraisal and acceptance of the merger consideration to World Access.
Any attempt to withdraw made more than 60 days after the STAR merger will
require the written approval of World Access. No appraisal proceeding filed with
the Court of Chancery may be dismissed as to you without approval of the court.
Rights of STAR common stockholders demanding appraisal. If you have
complied with the procedures of Delaware law as to appraisal, after the STAR
merger, you will not be entitled to:
- vote your shares of STAR common stock subject to appraisal, or
- dividends or distributions on your shares of STAR common stock subject
to appraisal.
You will still be entitled to dividends or distributions payable on your shares
subject to appraisal as to a date prior to the STAR merger.
INTERESTS OF DIRECTORS, OFFICERS AND STOCKHOLDERS IN THE STAR MERGER
Option plans and change in control arrangements
STAR's stockholders should be aware that some of STAR's executive officers
and directors have interests in the STAR merger that are in addition to the
interests of the stockholders of STAR generally.
Under STAR's 1997 Omnibus Stock Incentive Plan, the administrator of the
plan, which is a committee of the STAR board of directors, may provide for the
acceleration of the stock options, stock appreciation rights, stock units or
restricted shares granted to employees and outside directors in the event of a
change in control.
Under STAR's 1996 Outside Director Nonstatutory Stock Option Plan, the STAR
board of directors may decide upon a change in control, that it is necessary or
desirable to accelerate the exercisability of outstanding options granted under
the plan. The STAR board of directors also has the discretion to terminate any
outstanding options that have been accelerated but not exercised during the
exercise period. The STAR merger constitutes a change in control under the 1997
Omnibus Stock Incentive Plan and the 1996 Outside Director Nonstatutory Stock
Option Plan.
Other than as discussed below, the STAR board of directors does not intend
to accelerate options or other securities held by executive officers or
directors of STAR under the 1997 Omnibus Stock Incentive Plan or the 1996
Outside Director Nonstatutory Stock Option Plan.
On January 3, 2000, STAR's non-executive stock option committee determined
that all of David Vaun Crumly's currently outstanding and future unvested
options would become exercisable five business days before a change in control.
The non-executive stock option committee accelerated Mr. Crumly's stock options
as an incentive for Mr. Crumly's continued employment with STAR through the
completion of the STAR merger. As of the STAR record date, Mr. Crumly's options
to purchase shares will accelerate upon the STAR merger. The
approximate value of his accelerated options as of the STAR record date, is
$ .
Change in control agreement
In January 1996, STAR entered into an employment agreement with David Vaun
Crumly, whereby Mr. Crumly became Executive Vice President. Under his employment
agreement, Mr. Crumly will receive a bonus equal to the lesser of $1,500,000 or
a percentage of the monthly gross sales of accounts relating to customers
introduced to STAR by Mr. Crumly for the month before a sale transaction. The
percentage is either ten, twenty or thirty percent, depending on the size of the
monthly gross sales. STAR must pay the bonus in cash within 90 days of the sale
transaction, or if the stockholders of STAR receive stock in the transaction,
STAR can pay up to 50% of the bonus in STAR common stock or the shares of common
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stock of the acquiring company. The STAR merger constitutes a sale transaction
under the agreement. As of the STAR record date, Mr. Crumly's bonus is
approximately $ .
Registration rights under voting agreement of Christopher Edgecomb
World Access and Christopher Edgecomb entered into a voting and stock
transfer restriction agreement under which World Access granted to Mr. Edgecomb
an unlimited right to include the shares of World Access common stock he
acquires in the STAR merger in any registration of capital stock for the account
of World Access or any selling stockholder. World Access has also agreed to pay
all of Mr. Edgecomb's expenses in any registration under the voting and stock
transfer restriction agreement, other than underwriting commissions and fees of
Mr. Edgecomb's legal counsel.
Mr. Edgecomb is restricted from selling his shares of World Access common
stock under Rule 145 of the Securities Act of 1933. Rule 145 allows persons with
restricted securities to publicly sell those securities in limited amounts where
adequate current public information concerning the issuer is available. However,
if Mr. Edgecomb invokes his registration rights, he will be able to sell all of
the shares of World Access common stock that he acquired in the STAR merger
without the sale restrictions that would otherwise be imposed by Rule 145. Mr.
Edgecomb can only exercise his registration rights if he requests the
registration of at least 25% of his World Access shares or his World Access
shares have a value of at least $2.0 million.
Election of member of board of directors of World Access
In the STAR merger agreement, World Access agreed to elect Christopher
Edgecomb to the board of directors of World Access or another person designated
by STAR and agreed to by World Access.
DESCRIPTION OF THE STAR MERGER AGREEMENT
World Access and STAR entered into the original STAR merger agreement on
February 11, 2000. On June 7, 2000, the parties amended the original STAR merger
agreement to:
- reduce the exchange ratio from 0.3905 to 0.386595;
- provide for a reduction in the amount of financing that World Access
would provide to STAR by the amount of financing provided to STAR by
WorldCom Network Services, on a dollar-for-dollar basis, up to an
aggregate of $30.0 million;
- provide that a material adverse effect will not be deemed to have
occurred if the change, circumstance or effect relates to an action taken
by STAR at the specific request of World Access;
- eliminate the requirement that STAR provide evidence of the termination
of its obligations with respect to the China-U.S. Cable Network; and
- provide that the condition to World Access' obligations under the STAR
merger agreement relating to STAR's sale of PT-1 will be satisfied if STAR sells
the assets of PT-1 to Counsel for net cash proceeds of at least $120.0 million
pursuant to the PT-1 asset sale agreement.
On October 6, 2000, the parties again amended the STAR merger agreement to
extend the date after which either party may terminate the STAR merger agreement
from September 30, 2000 until December 31, 2000.
The original STAR merger agreement as amended is referred to in this joint
proxy statement/prospectus as the STAR merger agreement. This is only a summary
of the material terms of the STAR merger agreement and may not contain all of
the information that is important to you. The STAR merger agreement is attached
to this joint proxy statement/prospectus as Annex A. World Access and STAR urge
you to read it carefully.
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Description of the STAR merger consideration
For a description of the consideration that each STAR stockholder will
receive in the STAR merger, please see page 62.
Representations and warranties contained in the STAR merger agreement
World Access and STAR each made representations and warranties in the STAR
merger agreement regarding their businesses, financial condition, structure and
other facts pertinent to the STAR merger, including:
- corporate existence, organization, standing, authority and
capitalization;
- consents and regulatory approvals necessary to complete the STAR merger;
- validity of required filings and reports with the Securities and Exchange
Commission;
- absence of pending or threatened suits, actions or other proceedings not
already disclosed in the STAR merger agreement;
- maintenance of permits and licenses necessary for the operation of
business;
- compliance with applicable laws and required licenses and permits;
- absence of material changes in business or the occurrence of certain
events since December 31, 1998;
- ownership of intellectual property and absence of infringement on any
intellectual property rights of any person or entity;
- fairness opinions to be received by financial advisors;
- the filing of tax returns and payment of taxes; and
- validity of material contracts.
In addition, STAR made representations and warranties regarding employees
and employee benefits matters.
Except with respect to breaches that occur before the completion of the
STAR merger, the representations and warranties of World Access and STAR do not
survive beyond the effective time of the STAR merger.
STAR's conduct of business before completion of the STAR merger
STAR has agreed that until the completion of the STAR merger or unless
World Access consents in writing, STAR will conduct its business in the ordinary
course and will use reasonable efforts to preserve intact its lines of business,
maintain its rights and franchises and preserve its relationships with customers
and suppliers.
STAR has also agreed that until the completion of the STAR merger or unless
World Access consents in writing, STAR will conduct its business in compliance
with restrictions relating to the following:
- the issuance, redemption, reclassification, combination or split of any
of its capital stock;
- employees and employee benefits and remuneration;
- the issuance of dividends or other distributions on its capital stock;
- modification of its certificate of incorporation or bylaws;
- the acquisition of assets or other entities;
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- the sale of assets;
- capital expenditures or other investments;
- the creation, assumption or incurrence of indebtedness not currently
outstanding;
- the settlement of litigation;
- the entering into of contracts that would restrict World Access from
engaging in business in specified geographic areas after the completion
of the STAR merger;
- the changing of its accounting policies and procedures; and
- actions which would jeopardize the tax treatment of the STAR merger.
No other negotiations involving potential acquirors of STAR
Until the STAR merger is completed or the STAR merger agreement is
terminated, STAR has agreed that it will not permit any of its agents or
representatives to take any of the following actions without World Access' prior
written consent:
- encourage or knowingly facilitate any inquiries regarding an acquisition
proposal;
- participate in any discussions or negotiations regarding an acquisition
proposal;
- disclose any confidential information to any person in connection with an
acquisition proposal; or
- knowingly facilitate any effort to make or accept an acquisition
proposal.
Notwithstanding the above limitations on STAR's actions, for any
unsolicited, bona fide written acquisition proposal by a person unaffiliated
with STAR that proposes:
- a business combination or similar action involving STAR;
- any purchase or sale of a material portion of STAR's assets, taken as a
whole; or
- any purchase or sale of, or tender or exchange offer for, a material
portion of the shares of STAR common stock.
STAR may:
- recommend approval by its stockholders of the proposal or withdraw,
modify or qualify its recommendation that the STAR stockholders approve
the STAR merger; or
- furnish information and engage in discussions regarding the proposal.
Provided that:
- the STAR stockholders meeting has not occurred;
- if the STAR board of directors changes its recommendation, the STAR board
of directors must conclude that the acquisition proposal is a superior
proposal to the STAR merger, terminate the STAR merger agreement and pay
the $14.0 million termination fee to World Access;
- if the STAR board of directors furnishes information regarding an
acquisition proposal, the STAR board of directors must conclude that the
proposal could reasonably be expected to result in a superior proposal;
- STAR enters into a confidentiality agreement with a third party making an
acquisition proposal before providing any confidential information; and
- STAR notifies World Access of any third party inquiries, proposals or
offers before providing any confidential information.
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Description of the management services between World Access and STAR
The STAR merger agreement provides that, to the extent permitted by
applicable law, World Access and STAR intend to enter into a management
agreement under which World Access would provide management services to STAR
pending the completion of the STAR merger. At the time of the mailing of this
joint proxy statement/prospectus, World Access and STAR have not entered into a
management services agreement.
Board of directors of World Access
World Access and STAR agreed that immediately following the completion of
the STAR merger, World Access will elect a STAR designee to the World Access
board of directors.
Conditions to completion of the STAR merger
Each party's obligation to complete the STAR merger is subject to the
satisfaction or waiver of each of the following material conditions:
- the STAR merger agreement and the STAR merger must be approved by the
required vote of the stockholders of World Access and STAR;
- this joint proxy statement/prospectus must be declared effective by the
Securities and Exchange Commission, and must not be subject to a stop
order;
- the representations and warranties of each party contained in the STAR
merger agreement must be true and correct as of February 11, 2000 and as
of the date the STAR merger is completed, except where any failure to be
true and correct would not have a material adverse effect on the other
party;
- each of the parties must perform or comply in all material respects with
all of its material agreements and covenants required by the STAR merger
agreement to be performed or complied with at or before completion of the
STAR merger;
- each of the parties must obtain all consents and approvals that are
necessary to complete the STAR merger. However, if the failure of a party
to use reasonable efforts to obtain the consents and approvals is the
cause of the failure to obtain the consents and approvals, the party
failing to use reasonable efforts must complete the STAR merger;
- no material adverse effect with respect to either party shall have
occurred since February 11, 2000; and
- the waiting period applicable to the STAR merger under the
Hart-Scott-Rodino Act must have terminated or expired.
World Access' obligations to complete the STAR merger are subject to the
satisfaction or waiver of each of the following material conditions:
- STAR must comply with all procedures and requirements applicable to it
under the dissenters' rights requirements of Delaware law, the period for
exercising appraisal rights in connection with the STAR merger must have
expired and fewer than 1% of the shares of STAR common stock must have
exercised appraisal rights;
- STAR must complete the PT-1 asset sale to Counsel for net cash proceeds
of at least $120.0 million pursuant to the PT-1 asset purchase agreement,
or sell PT-1 to another purchaser for net cash proceeds of at least
$150.0 million pursuant to an agreement reasonably satisfactory to World
Access; and
- STAR must not have received notification, and World Access must not have
any reasonable reason to believe, STAR's obligations relating to the
China-U.S. Cable Network were not fully satisfied by
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the reclamation of STAR's capacity in the network, and STAR must have no
further obligations or liabilities with respect to the network.
Termination of the STAR merger agreement
The STAR merger agreement may be terminated at any time before completion
of the STAR merger by either party for any of the following reasons:
- by mutual written consent;
- if the other party fails to comply with its material covenants or
agreements in the STAR merger agreement and fails to cure the
noncompliance within ten business days after receiving a notice of
breach; however, the non-breaching party may not terminate the STAR
merger agreement if the breaching party continues to use reasonable
efforts to cure the breach;
- if the other party has breached any of its representations or warranties,
and the breach remains uncured for ten business days after receiving a
notice of breach; however, the non-breaching party may not terminate the
STAR merger agreement if the breaching party continues to use reasonable
efforts to cure the breach;
- if the STAR merger has not been completed by December 31, 2000, unless
the failure to complete the STAR merger is the result of a breach of the
STAR merger agreement by the party seeking to terminate the STAR merger
agreement;
- if any permanent injunction, order, decree or ruling by any governmental
entity preventing the completion of the merger has become final and
nonappealable; or
- if the stockholders of World Access or STAR fail to approve the STAR
merger agreement by the required vote.
The STAR merger agreement may be terminated at any time prior to completion
of the STAR merger by STAR if, prior to the STAR stockholders vote and upon
three business days' prior notice to World Access, STAR's board of directors
determines that an acquisition proposal is a superior proposal. However, STAR's
termination of the STAR merger agreement is subject to the following conditions:
- prior to termination and upon request by World Access, STAR negotiates
with World Access regarding a revised proposal by World Access;
- the STAR board of directors determines, during the three-day period
and after considering the revised World Access proposal, that the
acquisition proposal is a superior proposal; and
- STAR pays the $14.0 million termination fee.
The STAR merger agreement may be terminated at any time prior to completion
of the STAR merger by World Access if STAR:
- is involved in a voluntary or involuntary bankruptcy or similar
proceeding;
- is subject to the appointment of a receiver or similar official;
- is subject to a winding up or a liquidation decree or order;
- shares a general assignment for the benefit of its creditors;
- prior to the stockholder vote, makes an adverse change in the board's
recommendation or approves or recommends a superior proposal before the
STAR stockholders meeting; or
- is involved in an event of default under the anticipated short-term loan
agreements between World Access and STAR.
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Payment of termination fee if the STAR merger agreement is terminated
STAR must pay World Access a termination fee of $14.0 million if the STAR
merger agreement is terminated for the following reasons:
- because the STAR board of directors determines that a competing
acquisition proposal is a superior proposal;
- if the STAR merger agreement is terminated by World Access because the
STAR board of directors makes an adverse change in the STAR
recommendation or approves or recommends a superior proposal; or
- because the stockholders of STAR have not adopted the STAR merger
agreement by the required vote and STAR enters into a definitive
agreement with respect to a business combination with an entity other
than World Access within 12 months after the termination of the STAR
merger agreement.
Extension, waiver and amendment of the STAR merger agreement
The STAR merger agreement may be amended by World Access and STAR at any
time before completion of the STAR merger. However, no amendment may be made
after adoption of the STAR merger agreement by the World Access and STAR
stockholders.
World Access or STAR may, at any time prior to completion of the STAR
merger:
- extend the time for the performance of any of the obligations or other
acts of the other party under the STAR merger agreement;
- waive any inaccuracies in representations and warranties of the other
party; or
- waive compliance with any of the agreements of the other party contained
in the STAR merger agreement.
STAR voting agreements and credit agreements
This section of the joint proxy statement/prospectus describes the voting
agreements of Christopher E. Edgecomb and Samer Tawfik and the anticipated STAR
credit agreements.
Edgecomb voting agreement
World Access and Christopher E. Edgecomb have entered into a voting and
stock transfer restriction agreement, dated February 11, 2000, under which Mr.
Edgecomb has agreed to vote all of his shares of STAR common stock in favor of
the STAR merger and against any action that would not be in favor of the STAR
merger.
Under the agreement, Mr. Edgecomb may not:
- sell or transfer any of his shares of STAR common stock;
- trade or take any position with respect to his shares of STAR common
stock;
- enter into any voting arrangement or understanding with respect to his
shares of STAR common stock; or
- take any action that would make his representations or warranties untrue
or prevent him from performing any of his obligations.
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The agreement also prohibits Mr. Edgecomb from transferring or taking a
position in any of the shares of World Access common stock he receives in the
STAR merger for six months after the completion of the STAR merger or as long as
he is a member of the World Access board of directors. World Access has the
first right to assist Mr. Edgecomb in the sale of his shares to an "accredited
investor" or "qualified institutional buyer," as defined in the Securities
Exchange Act of 1934, as amended. However, if World Access is unable to arrange
for a sale within 30 days, Mr. Edgecomb may complete the sale.
Mr. Edgecomb has also been granted registration rights with respect to the
shares of World Access common stock he acquires in the STAR merger. Mr.
Edgecomb's registration rights are summarized on page 74 under the subsection
entitled "Registration rights under voting agreement of Christopher Edgecomb."
For additional detail, see the voting and stock transfer restriction agreement
for Christopher Edgecomb filed as an exhibit to the registration statement filed
with the Securities and Exchange Commission that contains this joint proxy
statement/prospectus.
Mr. Edgecomb has also agreed to restrictions on the solicitation or
employment of STAR employees.
The voting and stock transfer restriction agreement terminates upon the
termination of the STAR merger agreement in accordance with its terms.
Tawfik voting agreement
On February 11, 2000, World Access also entered into a voting and stock
transfer restriction agreement with Samer Tawfik. Under this agreement, Mr.
Tawfik has agreed to vote all of his shares of STAR common stock in favor of the
STAR merger and against any action that would not be in favor of the STAR
merger.
Under the agreement, Mr. Tawfik may not:
- sell or transfer any of his shares of STAR common stock, except that Mr.
Tawfik can transfer up to 2,430,000 shares of his STAR common stock to
unaffiliated third parties;
- trade or take any position with respect to his shares of STAR common
stock;
- enter into any voting arrangement or understanding with respect to his
shares of STAR common stock; or
- take any action that would make his representations or warranties untrue
or prevent him from performing any of his obligations.
Mr. Tawfik may not transfer any of the shares of World Access common stock
he receives in the STAR merger agreement for six months after the completion of
the STAR merger. World Access has the first right to assist Mr. Tawfik in the
sale of his shares to an "accredited investor" or a "qualified institutional
buyer," as defined in the Securities Exchange Act of 1934. However, if World
Access is unable to arrange for a sale within 30 days, Mr. Tawfik may complete
the sale.
The voting and stock transfer restriction agreement terminates upon the
termination of the STAR merger agreement in accordance with its terms.
Because Mr. Edgecomb and Mr. Tawfik each hold a significant number of
shares of STAR common stock, there is a greater likelihood that the STAR merger
will be approved by the required vote of the STAR stockholders. Mr. Edgecomb's
voting agreement applies to shares representing approximately %
of the voting power for the STAR merger as of the STAR record date, Mr. Tawfik's
voting agreement applies to shares representing approximately %
of the voting power for the STAR merger as of the STAR record date. The combined
voting power for the STAR merger under the agreements of Mr. Edgecomb and Mr.
Tawfik is approximately % as of the STAR record date.
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STAR credit agreements
World Access expects to enter into a credit agreement with STAR which would
provide STAR with a short-term loan of up to $25.0 million. The loan will
provide an initial advance to STAR and additional advances, each of which will
be made in World Access' sole discretion. The loan will be secured by all
personal property of STAR, PT-1 and Helvey Com LLC, including all equipment,
inventory, Indefeasible Rights of Use in telecommunications cables and cable
systems, accounts receivable, and general intangibles of STAR, PT-1, and Helvey;
by a pledge of all capital stock owned by STAR in some of its subsidiaries; and
by a pledge of all capital stock owned by PT-1 in some of its subsidiaries. The
interest rate will be LIBOR plus 4% per year. The loan will be due on the
earlier of:
- one year from the date of the STAR credit agreement; or
- 90 days after the STAR merger agreement terminates.
World Access also expects to enter into a credit agreement with STAR
Telecommunications Holding GmbH, which is STAR's wholly-owned German subsidiary.
This credit agreement would provide STAR GmbH with a short-term loan of $10.0
million. This loan will provide an initial advance to STAR GmbH and additional
advances, each of which will be made in World Access' sole discretion. The loan
will be secured by all personal property of STAR GmbH. STAR will pledge all of
its interest in STAR GmbH and STAR GmbH will pledge all of its interest in STAR
Telecommunications Deutschland GmbH and STAR Telecommunications Network GmbH.
The interest rate will be LIBOR plus 4% per year. The loan will be due on the
earlier of:
- one year from the date of the STAR GmbH credit agreement; or
- 90 days after the STAR merger agreement is terminated.
World Access will reduce the amount of credit it provides to STAR or its
subsidiaries for each dollar of additional financing provided to STAR and its
subsidiaries by WorldCom Network Services up to an aggregate of $30.0 million.
INFORMATION REGARDING STAR
STAR provides high-quality, competitively priced, long distance
telecommunication services to consumer and commercial retail customers as well
as to other telecommunications carriers located within the U.S. and Europe. In
Germany, STAR offers Internet service providers wholesale dial-up services along
with a range of support services including dedicated facilities for secured
storage of data and servers, which includes resources such as a secure cage,
regulated power, dedicated Internet connection, security and support. In
Germany, STAR also offers Internet service providers the ability to increase or
decrease the amount of data they transfer in a fixed amount of time. STAR seeks
to capitalize on the increasing demand for high-quality international
communications services which is being driven by the globalization of the
world's economies, the worldwide trend toward telecommunications deregulation,
and the growth of voice, data and Internet traffic.
STAR was incorporated in Delaware on September 13, 1996. Additional
information regarding STAR is contained in STAR's filings with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934. See
"Where You Can Find More Information" on the inside front cover page of this
joint proxy statement/prospectus.
STAR LITIGATION
On March 11, 1999, a proceeding was commenced by PT-1 by notice of petition
following the election by a PT-1 stockholder to dissent from STAR's merger with
PT-1 and following a demand for payment of the fair value of approximately
2,731,330 shares of PT-1 held by the stockholder. The proceeding was commenced
in the Supreme Court of the State of New York. Under New York law, the PT-1
stockholder has the right to receive, in cash, the fair market value of his PT-1
shares as of the time
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of STAR's acquisition of PT-1. The PT-1 stockholder is seeking damages in
accordance with his appraisal rights under New York law. On July 26, 2000, the
Supreme Court of the State of New York of the County of Queens issued a
temporary restraining order in favor of the stockholder which prevents PT-1 from
distributing any of the proceeds of the PT-1 asset sale to STAR unless PT-1 has
first set aside a reserve in the amount of $37,649,800 in cash to satisfy the
stockholder's claim. On August 15, 2000, the temporary restraining order was
modified to reduce the required reserve to $25.0 million. By a decision dated
September 11, 2000, the Supreme Court of the State of New York denied the PT-1
stockholder's motion for a preliminary injunction and vacated the existing
injunction. STAR is no longer required to reserve $25.0 million from the
proceeds of the PT-1 asset sale.
From time to time, STAR is party to various legal proceedings, including
billing disputes and collection matters and actions brought by some terminated
employees that arise in the ordinary course of business.
COMPARISON OF RIGHTS OF HOLDERS OF WORLD ACCESS COMMON STOCK AND STAR COMMON
STOCK
This section of the joint proxy statement/prospectus summarizes the
differences between the World Access common stock and STAR common stock. STAR
stockholders should read this entire document, and each companies' certificate
of incorporation, bylaws and the other documents referred to carefully for a
more complete understanding of the differences between the World Access common
stock and STAR common stock. For information on how to obtain these documents,
see "Where You Can Find More Information" on the inside front cover page of this
joint proxy statement/prospectus.
The rights of World Access' stockholders are governed by its certificate of
incorporation, as amended, its bylaws and the laws of the State of Delaware. The
rights of STAR stockholders are currently governed by its certificate of
incorporation, as amended and restated, its bylaws and the laws of the State of
Delaware. After the completion of the STAR merger, STAR stockholders will become
stockholders of World Access. Because STAR and World Access are both Delaware
corporations, after the STAR merger is completed, the rights of STAR's
stockholders will continue to be governed by Delaware law. The following
paragraphs compare the rights of World Access stockholders and STAR stockholders
under the certificates of incorporation and bylaws of World Access and STAR, as
applicable.
Comparison of authorized and outstanding capital stock
The authorized capital stock of World Access currently consists of
160,000,000 shares, of which 150,000,000 shares are common stock of $.01 par
value per share, and 10,000,000 shares of which are preferred stock of $.01 par
value per share. Note, however, that pursuant to this joint proxy
statement/prospectus, the World Access stockholders are being asked to approve
an amendment to the World Access certificate of incorporation that would
increase the number of shares of common stock World Access is authorized to
issue to 290,000,000. As of October 1, 2000, 73,254,336 shares of World Access
common stock were outstanding and 613,905 shares of World Access preferred stock
were outstanding.
The authorized capital stock of STAR consists of 100,000,000 shares of
common stock, of which 58,656,802 shares were outstanding as of October 1, 2000
and 5,000,000 shares of preferred stock, of which no shares were outstanding as
of October 1, 2000.
Comparison of classes of common stock
World Access and STAR each have one class of common stock issued and
outstanding. Holders of World Access common stock and holders of STAR common
stock are each entitled to one vote for each share held.
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Comparison of requirements for special meeting of stockholders
Special meetings of World Access may be called by World Access' board of
directors or an officer instructed by the board of directors to call a meeting.
Special meetings of STAR may be called by the president of STAR and must be
called by the president or secretary of STAR at the request of a majority of the
board of directors.
Comparison of requirements for action by written consent in lieu of a
stockholders' meeting
Pursuant to the World Access certificate of incorporation, World Access
stockholders may not take action without a meeting by written consent except for
preferred stockholders.
STAR stockholders may take action without a meeting only by unanimous
written consent of the stockholders entitled to vote on the action.
Comparison of record date for determining stockholders
Both the World Access bylaws and the STAR bylaws provide that each of their
boards of directors may fix a record date that:
- in the case of determination of the stockholders entitled to vote at any
meeting of stockholders or adjournment of any meeting, may not be more
than 60 days or less than ten days before the date of the meeting; and
- in the case of any other action, may not be more than 60 days before the
action.
Furthermore, if the World Access board of directors or the STAR board of
directors do not fix a record date in the manner described above, then:
- the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders will be at the close of business on the
day after the day that notice is given, or, if notice is waived, at the
close of business on the day after the day that the meeting is held; and
- the record date for determining stockholders for any other purpose will
be at the close of business on the day the board of directors adopt the
related resolution.
Comparison of procedures to nominate directors
The World Access bylaws require that board nominations be made by the board
of directors or a stockholder who gives timely notice to the secretary of World
Access. To give timely notice, a stockholder's nomination notice must be
received by the secretary of World Access at least 120 days before the one-year
anniversary of the date of the proxy statement in connection with the previous
year's annual meeting of stockholders. A nominating stockholder's notice must be
received by World Access no later than the close of business on the tenth day
following the earlier of:
- the day on which notice of the upcoming meeting was mailed or given to
the World Access stockholders; or
- the day on which public disclosure of the date of the upcoming meeting
was made by World Access if:
- no annual meeting was held in the previous year;
- the date of the upcoming annual meeting has changed by more than 30
days from the date set forth in the previous year's proxy statement;
or
- the upcoming meeting is not an annual meeting.
The STAR certificate of incorporation and bylaws are silent with respect to
the nomination of persons for election to the STAR board of directors.
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Comparison of number of directors
The World Access amended certificate of incorporation and bylaws provide
that the World Access board of directors may not have less than three and not
more than 12 directors. The exact number of directors will be determined from
time to time by the World Access board of directors. Note, however, that in
connection with this joint proxy statement/prospectus, World Access is seeking
approval by its stockholders of an amendment to its certificate of incorporation
that would increase the maximum number of directors to 15.
The STAR certificate of incorporation and bylaws provide that the number of
directors will be determined from time to time by the STAR board of directors.
Comparison of classified board of directors
Each of World Access' and STAR's board of directors is currently divided
into three classes, as nearly equal in size as possible, in which each class of
directors is elected annually. Directors of World Access and STAR are elected
for a three year term and until their successors are elected and qualified.
You should note, however, that in connection with this joint proxy
statement/prospectus, World Access is seeking the approval of its stockholders
to amend its certificate of incorporation to eliminate World Access' classified
board of directors. If this amendment is approved by the required vote of the
World Access stockholders, all World Access directors would be elected annually
to serve a one-year term. At an annual meeting in which a quorum is present, the
persons receiving a plurality of the votes cast by World Access stockholders
would be elected as the directors.
Comparison of procedures for the removal of directors
The World Access bylaws provide that any director or the entire board of
directors may be removed at any time, with cause, by the holders of a majority
of the voting power of the shares entitled to vote at an election of directors.
Delaware law provides that any director or the entire board of directors of
STAR may be removed for cause, by the holders of a majority of the shares
entitled to vote at an election of directors.
Comparison of board of directors vacancies
The bylaws of both World Access and STAR provide that vacancies on the
board of directors may be filled by the vote of the majority of directors
remaining in office.
Comparison of notice requirements of special meetings of the board of directors
The World Access bylaws provide that the chairman of the board, the
vice-chairman of the board, the president or a majority of directors then in
office may call special meetings of the board of directors. The bylaws do not
require a specific notice period, but only require that the notice provide
sufficient time for the convenient assembly of the directors.
The STAR bylaws provide that special meetings may be called by the
president on ten days notice to each director by mail or 48 hours notice either
personally by telephone, telegram or facsimile. Special meetings must be called
in like manner and on like notice by the president or secretary upon the written
request of two directors, or the sole director if the board consists of only one
director.
Comparison of procedures for an amendment of certificate of incorporation and
bylaws
The World Access amended certificate of incorporation imposes a
super-majority voting requirement with respect to particular amendments. Any
amendment to the classified board provisions of the certificate of
incorporation, or any proposed change to the certificate or bylaws which is
inconsistent with such provision, requires the vote of holders of at least 75%
of the voting power of all shares entitled to vote in
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the election of directors, voting as a single class. The World Access bylaws may
be amended by either the board of directors or stockholders of World Access.
Except with respect to the corporate name, registered office, name of the
registered agent and purpose of the corporation, which require a majority vote,
the stockholders of STAR may amend the certificate of incorporation only by the
vote of at least 75% of the voting power of the outstanding shares entitled to
vote in the election of directors, voting as a single class. The STAR bylaws may
be amended by the STAR board of directors or by the vote of stockholders owning
75% of the shares of STAR.
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STAR SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, STAR provides you with selected consolidated financial
data of STAR. The selected consolidated statements of operations data for the
years ended December 31, 1997, 1998, and 1999 and the balance sheet data at
December 31, 1998 and 1999 are derived from STAR's audited financial statements
incorporated by reference in this joint proxy statement/prospectus. The
consolidated statement of operations data for the years ended December 31, 1995
and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997 are
derived from audited financial statements not contained herein. The selected
consolidated financial data as of June 30, 2000 and for the six-month periods
ended June 30, 1999 and 2000 are derived from STAR's unaudited consolidated
financial statements incorporated by reference in this joint proxy
statement/prospectus, which, in the opinion of management, include all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the information. When you read this selected consolidated
financial data, it is important that you also read the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and STAR's consolidated financial statements and the related notes
thereto incorporated by reference in this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- -------- -------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $66,964 $283,450 $434,086 $619,220 $1,061,774 $500,478 $497,400
Operating expenses:
Cost of services (exclusive of
depreciation and
amortization).................. 50,300 244,153 374,504 523,621 925,206 441,503 433,657
Selling, general and
administrative................. 13,356 41,804 48,906 66,140 160,067 77,053 61,555
Depreciation and amortization.... 952 2,343 5,650 15,054 44,236 19,640 26,539
Loss on impairment of goodwill... -- -- -- 2,604 -- -- --
Merger expense................... -- -- 286 1,026 1,878 1,872 --
------- -------- -------- -------- ---------- -------- --------
Total operating expenses......... 64,608 288,300 429,346 608,445 1,131,387 540,068 521,751
------- -------- -------- -------- ---------- -------- --------
Income (loss) from operations.... 2,356 (4,850) 4,740 10,775 (69,613) (39,590) (24,351)
Other income (expenses):
Interest income.................. 65 138 464 4,469 2,192 1,675 265
Interest expense................. (214) (1,270) (2,617) (3,386) (9,895) (3,532) (7,742)
Legal settlements and expense.... -- (100) (1,653) -- -- -- --
Other............................ (97) 186 208 (304) 1,373 (1,923) 7,554
------- -------- -------- -------- ---------- -------- --------
Income (loss) before provision
for income taxes............... 2,110 (5,896) 1,142 11,554 (75,943) (43,370) (24,274)
Provision (benefit) for income
taxes............................ 66 577 2,905 9,923 (12,096) (7,886) (5,706)
------- -------- -------- -------- ---------- -------- --------
Net income (loss).................. $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847) $(35,484) $(18,568)
======= ======== ======== ======== ========== ======== ========
Pro forma net income (loss)
(unaudited)(1)................... $ 478 $ (7,416) $ (1,958)
======= ======== ========
Income (loss) per common share(2)
Basic and Diluted................ $ 0.10 $ (0.27) $ (0.06) $ 0.04 $ (1.12) $ (0.64) $ (0.32)
======= ======== ======== ======== ========== ======== ========
Pro forma income (loss) per
common share (unaudited)(2)
Basic and Diluted................ $ 0.02 $ (0.31) $ (0.06)
======= ======== ========
Weighted average number of common
shares outstanding -- basic(2)
Basic............................ 19,916 24,076 31,101 40,833 57,036 55,541 58,609
Diluted.......................... 19,916 24,076 31,101 42,434 57,036 55,541 58,609
</TABLE>
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
------- -------- --------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $(1,065) $(10,913) $ 4,692 $ 46,698 $ (197,921) $ (85,773) $ (151,862)
Total assets................. 37,169 76,250 130,382 374,651 807,754 638,674 729,789
Total long-term liabilities,
net
of current portion......... 2,980 8,834 14,800 33,048 96,693 38,691 93,037
Accumulated deficit.......... (6,294) (12,077) (13,737) (12,106) (75,953) (19,657) (94,521)
Stockholders' equity......... 6,614 9,986 40,615 195,591 278,054 336,207 258,569
OTHER FINANCIAL DATA:
EBITDA from continuing
operations(3).............. $ 3,308 $ (2,507) $ 10,390 $ 25,829 $ (25,377) $ (19,950) $ 2,188
Cash flows (used in) provided
by operating activities.... 2,076 (2,847) 11,476 (12,379) 40,138 13,365 11,357
Cash flows (used in) provided
by investing activities.... (1,123) (10,403) (31,157) (100,986) (58,297) (63,331) 8,326
Cash flows (used in) provided
by financing activities.... (839) 14,721 19,174 158,526 (991) 11,860 (28,728)
Capital expenditures(4)...... 2,922 14,810 26,584 147,236 150,588 56,015 5,678
North American wholesale
billed minutes of use(5)... 38,106 479,681 1,034,187 1,657,523 2,129,296 1,102,804 921,885
North American wholesale
revenue per billed minute
of use(6).................. $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084 $ 0.2256 $ 0.1670
</TABLE>
---------------
(1) The pro forma net income or loss per share assumes that STAR and CEO
Telecommunications, Inc., which STAR acquired in a pooling of interests
transaction on November 30, 1997, were C-corporations for all periods
presented.
(2) See Note 2 of Notes to Consolidated Financial Statements set forth in STAR's
annual report on Form 10-K for the fiscal year ended December 31, 1999, as
amended by Form 10-K/A filed on September 11, 2000, and incorporated by
reference herein, for an explanation of the method used to determine the
number of shares used in computing basic and diluted income (loss) per
common share and pro form basic and diluted income (loss) per common share.
(3) EBITDA from continuing operations as used in this joint proxy
statement/prospectus is earnings (loss) before net interest expense
(income), income taxes, foreign exchange gains or losses, depreciation and
amortization and is presented because STAR believes that the information is
commonly used in the telecommunications industry as one measure of a
company's operating performance and historical ability to service debt.
EBITDA from continuing operations is not determined in accordance with
generally accepted accounting principles, is not indicative of cash provided
by operating activities, should not be used as a measure of operating income
and cash flows from operations as determined under generally accepted
accounting principles and should not be considered in isolation or as an
alternative to, or to be more meaningful than, measures of performance
determined in accordance with generally accepted accounting principles.
EBITDA, as calculated by STAR, may not be comparable to similarly titled
measures reported by other companies and could be misleading unless all
companies and analysts calculate EBITDA in the same manner.
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The following table reconciles STAR's income (loss) from continuing
operations to EBITDA from continuing operations (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------ ------- ------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations.................. $2,044 $(6,473) $(1,763) $ 1,631 $(63,847) $(35,484) $(18,568)
Net interest expense
(income).................... 149 1,132 2,153 (1,083) 7,703 1,857 7,477
Income tax expense
(benefit)................... 66 577 2,905 9,923 (12,096) (7,886) (5,706)
Other......................... 97 (86) 1,445 304 (1,373) 1,923 (7,554)
Depreciation and
amortization................ 952 2,343 5,650 15,054 44,236 19,640 26,539
------ ------- ------- ------- -------- -------- --------
EBITDA from continuing
operations.................. $3,308 $(2,507) $10,390 $25,829 $(25,377) $(19,950) $ 2,188
====== ======= ======= ======= ======== ======== ========
</TABLE>
(4) Includes assets financed with capital leases, notes and vendor financing
arrangements.
(5) Does not include wholesale billed minutes of use from T-One Corporation, a
former subsidiary of STAR, prior to the year ended December 31, 1997.
Includes wholesale billed minutes of use attributable to ALLSTAR Telecom,
formerly know as United Digital Network, Inc., a subsidiary of STAR, for all
years presented.
(6) Represents wholesale gross call usage revenue per billed minute. Amounts
exclude other revenue related items such as finance charges. This data does
not include wholesale billed minutes of use from T-One prior to the year
ended December 31, 1997.
PROPOSAL 2
THE MERGER BETWEEN WORLD ACCESS AND WORLDXCHANGE
This section of the joint proxy statement/prospectus describes the proposed
merger between World Access and WorldxChange. This proposal is for the
consideration of the World Access stockholders. Under California law, the
WorldxChange merger can be approved without a shareholders' meeting by the
written consent of holders of a majority of the outstanding shares of
WorldxChange's stock. WorldxChange expects to obtain the written consents of the
four shareholders that have executed agreements with World Access to approve the
WorldxChange merger. Since these shareholders collectively own a majority of
WorldxChange's outstanding shares, WorldxChange is not soliciting proxies from
any shareholder and is not seeking the approval of any other shareholder of the
merger with World Access. While we believe that the description covers the
material terms of the WorldxChange merger and the related transactions, this
summary may not contain all of the information that is important to you. You
should read this entire document and the other documents we refer to carefully
for a more complete understanding of the WorldxChange merger.
BACKGROUND OF THE WORLDXCHANGE MERGER
In the spring of 1999, Roger B. Abbott, Chief Executive Officer of
WorldxChange, met with John D. Phillips and W. Tod Chmar in Atlanta, Georgia. At
this meeting, Mr. Phillips explained his views regarding trends in the
international long distance industry, including the likely consolidation among
international long distance providers. Mr. Phillips expressed his desire to make
World Access a leader in the movement toward consolidation of the international
long distance industry and asked Mr. Abbott to consider a possible business
combination involving World Access and WorldxChange. No agreement regarding a
possible transaction was reached at this meeting, but the parties kept in
contact with periodic telephone conversations throughout the summer and
remainder of 1999.
On December 14, 1999, after World Access acquired FaciliCom International,
Inc. and entered into a definitive agreement to acquire Long Distance
International, Inc., Mr. Abbott called Mr. Phillips regarding
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a possible transaction. During numerous phone calls over the next few weeks, the
parties worked through the basic economic terms of a transaction and instructed
their representatives to begin working on a definitive merger agreement.
During the month of January and into the early part of February, the
parties worked on the definitive merger agreement and conducted their respective
due diligence investigations of the other party. On January 18, 2000, Roger
Abbott and Walter Anderson, the Chairman of the board of WorldxChange, met with
John D. Phillips and W. Tod Chmar in Atlanta to discuss Mr. Phillips' vision for
the combined company.
On February 8, 2000, the World Access board of directors met by telephonic
conference call to receive an update from World Access management on, and to
discuss the terms of, the proposed transaction with WorldxChange. On February
11, 2000, the World Access board of directors met again by telephonic conference
call to consider the merger with WorldxChange. At this meeting, management
reviewed, for the board of directors, the strategic reasons for a business
combination with WorldxChange and management and legal counsel described the
specific terms of the proposed merger agreement. During this meeting, Donaldson,
Lufkin & Jenrette Securities Corporation, or Donaldson, Lufkin & Jenrette gave
its oral opinion as to the fairness of the consideration to be paid by World
Access pursuant to the merger agreement. The board of directors also received
summaries of the results of World Access' due diligence investigation of
WorldxChange. After the foregoing, the World Access board of directors
unanimously approved the WorldxChange merger agreement and the related
transactions and unanimously agreed to recommend its adoption to the
stockholders of World Access. On February 11, 2000, Donaldson, Lufkin & Jenrette
forwarded its written opinion regarding the fairness of the consideration to be
paid by World Access pursuant to the merger agreement to the members of the
board of directors of World Access.
On February 5, 2000, the WorldxChange board of directors met by telephonic
conference call to consider the merger with World Access. During this meeting,
management reviewed the strategic reasons for a business combination with World
Access and described the specific terms of the proposed merger agreement. After
the foregoing, the WorldxChange board approved the WorldxChange merger agreement
and the related transactions.
Throughout April and early May 2000, Roger Abbott of WorldxChange and John
Phillips of World Access discussed the possibility of World Access increasing
its participation in WorldxChange's loan arrangement with Foothill Capital
Corporation. In connection with these discussions, Mr. Abbott and Mr. Phillips
discussed amending the merger agreement to eliminate contingent shares as a
component of the merger consideration. On May 22, 2000, the World Access board
of directors met by telephonic conference call and approved a $15 million
increase by World Access of its participation in the Foothill loan arrangement
with WorldxChange. The World Access board also discussed and approved an
amendment to the merger agreement eliminating contingent shares as a component
of the merger consideration. The WorldxChange board approved the same merger
agreement amendment at a telephonic meeting held May 22, 2000.
In July 2000 Mr. Abbott and Mr. Phillips discussed entering into an
arrangement under which World Access would provide executive management services
to WorldxChange. In connection with these discussions, Mr. Abbott and Mr.
Phillips also discussed further amending the merger agreement to reflect this
management services arrangement. On July 25, 2000, the World Access board met by
telephonic conference call and approved an executive management services
agreement between World Access and WorldxChange under which World Access would
provide management services to WorldxChange as described above. The World Access
board also considered and approved a further amendment to the merger agreement
reflecting the executive management services agreement, deleting the minimum
World Access stock price closing condition and extending the date by which the
WorldxChange merger must be completed to December 31, 2000. The WorldxChange
board approved the executive services management agreement and the same merger
agreement amendment by unanimous written consent on July 28, 2000.
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WORLD ACCESS' REASONS FOR THE WORLDXCHANGE MERGER
In approving the WorldxChange merger, the World Access board of directors
considered the potential benefits of the WorldxChange merger and the risks
associated with the WorldxChange merger. All material business, financial, legal
and market factors are discussed below. In view of the number and wide variety
of factors considered in connection with its evaluation of the WorldxChange
merger, the board did not consider it practicable to, nor did it attempt to,
quantify or otherwise assign relative weights to the material factors considered
in reaching its determination. The board viewed its position and recommendation
as being based on the totality of the information and factors presented to and
considered by it. In addition, individual directors may have given different
weight to different information and to the following factors:
The financial terms of the WorldxChange merger. The World Access board of
directors considered information concerning the business, earnings, operations,
financial condition and prospects of World Access and WorldxChange,
individually, on a combined basis, and in conjunction with the STAR merger. The
board determined to approve the WorldxChange merger agreement and the related
transactions based on its consideration of these factors with and without taking
into account the STAR merger. The board of directors also considered the opinion
of Donaldson, Lufkin & Jenrette as to the fairness to World Access, from a
financial point of view, of the consideration to be paid by World Access
pursuant to the WorldxChange merger agreement.
WorldxChange's global communications network. The board considered
WorldxChange's presence in Europe and the Pacific Rim and the potential for
entry into additional countries. The board believes WorldxChange's retail
presence in the United Kingdom will accelerate the implementation of World
Access' strategy to increase its retail telecommunications services throughout
Europe. The board also considered the technical capabilities, cost
effectiveness, expansion possibilities and available capacity of WorldxChange's
telecommunications network in multiple countries, ownership interest in undersea
cable telecommunications systems and indefeasible rights of use in additional
undersea cable systems.
Potential cost savings and synergies. The board reviewed financial
analyses prepared by World Access management that estimated a range of gross
margin improvement that could be realized by redirecting selected World Access
traffic over the WorldxChange network, redirecting WorldxChange traffic over the
World Access network and eliminating duplicate leased circuits. The board
determined that the World Access estimates were realistic and that based on the
financial analyses presented and their own business judgement, the annual gross
margin improvement for the combined company should be in excess of $30.0
million.
The board also reviewed financial analyses by World Access management that
estimated a range of selling, general and administrative cost savings that could
be realized by combining World Access and WorldxChange, including the
elimination of redundant switching centers, redundant customer care operations,
duplicate U.S. divisional headquarters and corporate office functions. The board
determined that the World Access estimates were realistic and that based on the
financial analyses presented and their own business judgement, the annual cost
savings should be in excess of $35.0 million.
WorldxChange's international presence. The board considered the
compatibility of WorldxChange's operations in Australia, Canada, the
Netherlands, New Zealand and the United Kingdom with World Access' existing
operations. The board also considered WorldxChange's agreements for
telecommunications services in Belgium, Chile, France, Germany and Guatemala in
light of potential expansion. The combination of World Access and WorldxChange
would result in a combined network covering 18 countries worldwide. This
increased international presence accelerates World Access' strategy to increase
its non-U.S. services.
Growing retail operations and diversified revenues. The board considered
WorldxChange's growing retail operations, which would be made available to World
Access in the future. Additionally, the board believes that WorldxChange would
strengthen World Access' position outside of North America because more than 40%
of WorldxChange's revenues originate outside of North America.
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The World Access board of directors also considered the following
potentially negative factors but concluded they were outweighed by the positive
factors described above:
Risks associated with integration. The board considered the risk that
World Access would be unable to effectively integrate the technical operations
and management of World Access and WorldxChange.
Risk of not achieving profitability. The board considered the risk that
the combined company may not be profitable. Both World Access and WorldxChange
had losses in the first quarter of 2000. Despite expected cost savings from the
WorldxChange merger, the combined company may continue to have losses which may
cause the price of the World Access common stock to decline.
THE WORLD ACCESS BOARD OF DIRECTORS' RECOMMENDATION THAT STOCKHOLDERS APPROVE
THE WORLDXCHANGE MERGER
The World Access board of directors has carefully considered the
advisability of the WorldxChange merger and believes that the terms of the
WorldxChange merger are fair to, and that the WorldxChange merger is in the best
interests of, the stockholders of World Access. The board of directors of World
Access has unanimously approved the WorldxChange merger agreement and the
transactions contemplated by the WorldxChange merger agreement and unanimously
recommends that the stockholders of World Access vote for the approval and
adoption of the WorldxChange merger agreement and the transactions contemplated
by the WorldxChange merger agreement.
WORLDXCHANGE'S REASONS FOR THE WORLDXCHANGE MERGER
The WorldxChange board of directors believes that the WorldxChange merger
is fair to and in the best interests of WorldxChange's stockholders for the
following reasons:
- The WorldxChange merger provides WorldxChange shareholders with an amount
of World Access shares, in a tax-free exchange, which, based on the World
Access share price at the time the WorldxChange merger agreement was
signed, represented a premium over the most recent price at which
WorldxChange sold shares of its capital stock;
- WorldxChange shareholders will be able to participate in the potential
growth of World Access' business after the WorldxChange merger and to
benefit from the potential appreciation in the value of World Access
common stock; and
- WorldxChange shareholders will have the liquidity of publicly traded
World Access shares in place of their WorldxChange shares, which are not
publicly traded.
In reaching its decision to approve the WorldxChange merger agreement and
the proposed WorldxChange merger, the WorldxChange board consulted with
WorldxChange management and its advisors and considered the following factors:
- The belief of the WorldxChange board that WorldxChange's
telecommunications equipment and other assets, together with
WorldxChange's presence in key European markets, would provide the
combined company with opportunities for growth superior to those of
WorldxChange as an independent company;
- The fact that WorldxChange requires significant additional financing to
fund operating cash needs and continue growing, and the belief of the
WorldxChange board that WorldxChange has limited ability to obtain this
needed capital as an independent company;
- The belief of the WorldxChange board that the terms of the merger
agreement, including the value of the World Access stock to be exchanged
for the shares of WorldxChange common stock, are fair to and in the best
interests of the WorldxChange shareholders;
- The fact that WorldxChange had not previously been successful in entering
into a satisfactory agreement with other potential acquirors or strategic
partners; and
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- The belief of the WorldxChange board that the combined company would have
a greater ability to serve customers and provide greater opportunities
for employees than WorldxChange as an independent company.
The WorldxChange board also considered the following potentially negative
factors but concluded that they were outweighed by the positive factors
described above:
- The risk that World Access's stock price would decline between the
signing of the merger agreement and the closing of the merger, resulting
in the WorldxChange shareholders receiving less value for their
WorldxChange shares;
- The risk that the WorldxChange merger would not be completed in a timely
manner or at all and that the public announcement of the merger could
hinder WorldxChange's ability to attract and retain key employees; and
- The risk that, after WorldxChange committed to complete the merger, a
more attractive strategic alternative would become available to the
Company.
Based on all of the above factors and considerations, the WorldxChange
board concluded that the WorldxChange merger was advisable, fair to, and in the
best interests of WorldxChange and its shareholders and that WorldxChange should
proceed with the WorldxChange merger.
OPINION OF WORLD ACCESS' FINANCIAL ADVISOR REGARDING THE WORLDXCHANGE MERGER
World Access asked Donaldson, Lufkin & Jenrette, in its role as financial
advisor, to render an opinion to the World Access board as to the fairness, from
a financial point of view, to World Access of the consideration to be paid by
World Access. On February 11, 2000, Donaldson, Lufkin & Jenrette rendered an
oral opinion to World Access' board of directors, which was subsequently
confirmed in writing as of the same date, to the effect that, as of the date of
the opinion, and based upon and subject to the assumptions, limitations and
qualifications set forth in the opinion, the consideration to be paid by World
Access pursuant to the WorldxChange merger agreement was fair to World Access,
from a financial point of view. The full text of Donaldson, Lufkin & Jenrette's
opinion is attached as Annex D to this joint proxy statement/prospectus.
DONALDSON, LUFKIN & JENRETTE'S FAIRNESS OPINION WAS DELIVERED TO THE WORLD
ACCESS BOARD ON FEBRUARY 11, 2000 AND RELATES TO THE FAIRNESS OF THE
WORLDXCHANGE MERGER AS OF THAT DATE. SOME OF THE ASSUMPTIONS RELIED UPON BY
DONALDSON, LUFKIN & JENRETTE IN PREPARING THE ANALYSES DESCRIBED BELOW AND IN
RENDERING ITS OPINION HAVE CHANGED SINCE DONALDSON, LUFKIN & JENRETTE WAS ASKED
TO DELIVER ITS OPINION. THE ASSUMPTIONS UNDERLYING THE PROJECTIONS FOR WORLD
ACCESS AND WORLDXCHANGE HAVE BEEN REVISED TO REFLECT LOWER CARRIER REVENUES FOR
BOTH WORLD ACCESS AND WORLDXCHANGE DUE TO A REDUCTION IN THE NUMBER OF CARRIER
CUSTOMERS RESULTING FROM A STRENGTHENED CREDIT POLICY IMPLEMENTED BY WORLD
ACCESS AS WELL AS LOWER ORGANIC GROWTH IN RETAIL REVENUES FOR WORLDXCHANGE DUE
TO A GREATER FOCUS ON WORLD ACCESS' EUROPEAN RETAIL ACQUISITION STRATEGY, WHICH
SEEKS TO INCREASE RETAIL REVENUES THROUGH ACQUISITIONS. IN ADDITION, THE MARKET
PRICE OF SHARES OF WORLD ACCESS COMMON STOCK HAS DECREASED SIGNIFICANTLY SINCE
DONALDSON, LUFKIN & JENRETTE RENDERED ITS OPINION. WORLD ACCESS HAS NOT ASKED,
AND DOES NOT INTEND TO ASK, DONALDSON, LUFKIN & JENRETTE FOR A NEW OR UPDATED
FAIRNESS OPINION AND DONALDSON, LUFKIN & JENRETTE HAS NOT BEEN ASKED TO UPDATE
THE ANALYSES DESCRIBED ABOVE AND IS NOT OPINING AS TO THE FAIRNESS OF THE
WORLDXCHANGE MERGER AS OF ANY DATE SUBSEQUENT TO THE DATE OF ITS OPINION.
Donaldson, Lufkin & Jenrette expressed no opinion as to the price at which
World Access common stock would actually trade at any time. Donaldson, Lufkin &
Jenrette's opinion did not address the relative merits of the WorldxChange
merger and the other business strategies considered by the World Access board of
directors nor did it address the decision of the World Access board of directors
to proceed with the WorldxChange merger. Donaldson, Lufkin & Jenrette's opinion
did not constitute a recommendation to any World Access stockholder as to how a
stockholder should vote on the WorldxChange merger.
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World Access and WorldxChange determined the consideration to be paid by
World Access in arm's length negotiations, in which Donaldson, Lufkin & Jenrette
advised World Access.
World Access selected Donaldson, Lufkin & Jenrette as its financial advisor
because Donaldson, Lufkin & Jenrette is an internationally recognized investment
banking firm that has substantial experience providing strategic advisory
services. Donaldson, Lufkin & Jenrette was not retained as an advisor or agent
to the stockholders of World Access or any other person. As part of its
investment banking business, Donaldson, Lufkin & Jenrette is regularly engaged
in the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
World Access did not impose any restrictions or limitations upon Donaldson,
Lufkin & Jenrette with respect to the investigations made or the procedures
followed by Donaldson, Lufkin & Jenrette in rendering its opinion.
In arriving at its opinion, Donaldson, Lufkin & Jenrette:
- reviewed the draft dated February 10, 2000 of the WorldxChange merger
agreement and assumed the final form of that agreement would not vary in
any respect material to Donaldson, Lufkin & Jenrette's analysis;
- reviewed financial and other information that was publicly available or
furnished to it by World Access and WorldxChange, including information
provided during discussions with their respective managements, which
included financial projections of each of World Access and WorldxChange
that were prepared by World Access' management;
- compared financial and securities data of World Access and WorldxChange
with various other companies whose securities are traded in public
markets;
- reviewed the historical stock prices and trading volumes of the common
stock of World Access;
- reviewed prices paid in selected other business combinations; and
- conducted other financial studies, analyses and investigations as
Donaldson, Lufkin & Jenrette deemed appropriate for purposes of rendering
its opinion.
In rendering its opinion, Donaldson, Lufkin & Jenrette relied upon and
assumed the accuracy and completeness of all of the financial and other
information that was available to it from public sources, that was provided to
it by World Access and WorldxChange or their respective representatives, or that
was otherwise reviewed by it. Donaldson, Lufkin & Jenrette relied upon the
estimates of the management of World Access of the operating synergies
achievable as a result of the WorldxChange merger. Donaldson, Lufkin & Jenrette
also assumed that the financial projections of World Access and WorldxChange
supplied to it were reasonably prepared on the basis reflecting the best
currently available estimates and judgments of the management of World Access as
to the future operating and financial performance of World Access and
WorldxChange. Donaldson, Lufkin & Jenrette expressed no opinion with respect to
the forecasts or the assumptions on which they were based, and Donaldson, Lufkin
& Jenrette did not assume any responsibility for making any independent
evaluation or appraisal of the assets or liabilities of World Access or for
making any independent verification of any of the information reviewed by
Donaldson, Lufkin & Jenrette. Donaldson, Lufkin & Jenrette also did not assume
any responsibility for making any independent investigation of any legal matters
affecting World Access or WorldxChange and assumed the correctness of all legal
advice given to each of them and to World Access' board of directors, including
advice as to the tax consequences of the WorldxChange merger. Donaldson, Lufkin
& Jenrette assumed that the WorldxChange merger would be accounted for as a
purchase under generally accepted accounting principles and that it would
qualify as a tax-free reorganization for U.S. federal income tax purposes.
Donaldson, Lufkin & Jenrette's opinion is necessarily based upon economic,
market, financial and other conditions as they existed on, and on information
available to Donaldson, Lufkin & Jenrette as of, the date of its opinion.
Donaldson, Lufkin & Jenrette states in its opinion that, although subsequent
developments may affect its opinion, Donaldson, Lufkin & Jenrette does not have
any obligation to update, revise or reaffirm its opinion.
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SUMMARY OF FINANCIAL ANALYSES PERFORMED BY DONALDSON, LUFKIN & JENRETTE
The following is a summary of the financial analyses Donaldson, Lufkin &
Jenrette presented to the World Access board of directors on February 11, 2000
in connection with the preparation of Donaldson, Lufkin & Jenrette's opinion. No
company or transaction Donaldson, Lufkin & Jenrette used in the analyses
described below is directly comparable to World Access, WorldxChange or to the
WorldxChange merger. In addition, mathematical analysis such as determining the
mean or median is not in itself a meaningful method of using selected company or
transaction data. The analyses Donaldson, Lufkin & Jenrette performed are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by these analyses. The
information summarized in the tables which follow should be read in conjunction
with the accompanying text. For purposes of the following analyses, Donaldson,
Lufkin & Jenrette used the February 9, 2000 closing price of the World Access
common stock of $22.88 per share.
1. Consideration paid analysis
Donaldson, Lufkin & Jenrette reviewed the consideration to be paid by World
Access pursuant to the WorldxChange merger agreement by using an exchange ratio
of (i) 0.6583, which assumes an average stock price of at least $20.38 per share
and is referred to as the initial exchange ratio for the ten-day period ending
at the close of trading on the second trading day preceding the closing, which
is referred to as the average period, and (ii) 1.1666, which assumes an average
stock price of less than $20.38 per share during the averaging period and the
issuance of the maximum number of contingent shares on the first anniversary of
the completion of the WorldxChange merger, which is referred to as the maximum
exchange ratio. In reviewing the consideration to be paid by World Access,
Donaldson, Lufkin & Jenrette used the closing stock price on February 9, 2000 of
$22.88 per share to determine the consideration to be paid based on the initial
exchange ratio and $11.50 per share, the floor price, to determine the
consideration to be paid based on the maximum exchange ratio.
2. Comparable publicly traded company analysis
Donaldson, Lufkin & Jenrette analyzed the market values and trading
multiples of selected publicly traded emerging multinational carriers that
Donaldson, Lufkin & Jenrette believed were reasonably comparable to WorldxChange
based on business and financial characteristics. These comparable companies
consisted of:
<TABLE>
<S> <C>
(i) IDT Corporation;
(ii) Pacific Gateway Exchange, Inc.;
(iii) PRIMUS Telecommunications Group, Incorporated;
(iv) RSL Communications, Ltd.; and
(v) Startec Global Communications Corporation.
</TABLE>
In examining these comparable companies, Donaldson, Lufkin & Jenrette
calculated the enterprise value of each company as a multiple of its respective:
- last quarter annualized revenue;
- projected calendar year 2000 revenue;
- gross property, plant and equipment; and
- net property plant and equipment.
The enterprise value of a company is equal to the value of its
fully-diluted common equity plus debt and the liquidation value of outstanding
preferred stock, if any, minus cash and the value of other assets, including
minority interests in other entities. All historical data was derived from
publicly available sources as of February 9, 2000 and all projected data was
obtained from Wall Street research reports.
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Donaldson, Lufkin & Jenrette performed this analysis in order to compare
the ratio of WorldxChange's enterprise value to its last quarter annualized
revenues, estimated 2000 revenues as provided by World Access, gross property,
plant and equipment and net property, plant and equipment to those of the
comparable companies and to the reference range, which represents a tighter
range of the ratios as deemed reasonable by Donaldson, Lufkin and Jenrette. For
purposes of this analysis, Donaldson, Lufkin & Jenrette compared the implied
multiples of World Access' consideration to be paid based on the initial
exchange ratio, which results in a higher value for the consideration to be paid
than the maximum exchange ratio. In addition, Donaldson, Lufkin & Jenrette
compared the enterprise value of WorldxChange, based on the initial exchange
ratio, to the implied enterprise values obtained by the above mentioned ratios
of the comparable companies and the reference range and WorldxChange's last
quarter annualized revenues, estimated 2000 revenues as provided by World
Access, gross property, plant and equipment and net property, plant and
equipment. Donaldson, Lufkin & Jenrette's analysis of the comparable companies
yielded the following multiple ranges and implied enterprise values:
COMPARABLE COMPANY ANALYSIS
($ IN MILLIONS)
<TABLE>
<CAPTION>
COMPARABLE COMPANIES REFERENCE RANGE
-------------------- --------------------
WORLDXCHANGE HIGH LOW HIGH LOW
------------ --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Enterprise Value/Last Quarter
Annualized Revenues................ 1.5x 2.2x 0.6x 1.7x 1.2x
Enterprise Value/2000 Estimated
Revenues........................... 1.2x 1.9x 0.7x 1.5x 1.0x
Enterprise Value/Gross Property,
Plant and Equipment................ 3.2x 7.5x 2.5x 4.5x 3.5x
Enterprise Value/Net Property, Plant
and Equipment...................... 4.8x 8.8x 2.9x 5.5x 4.5x
Implied Enterprise Value based on:
Last Quarter Annualized Revenues... $924.5 $1,361.9 $406.9 $1,075.1 $ 758.9
2000 Estimated Revenues............ 924.5 1,450.6 510.8 1,141.3 760.9
Gross Property, Plant and
Equipment....................... 924.5 2,173.8 711.4 1,295.9 1,007.9
Net Property, Plant and
Equipment....................... 924.5 1,705.1 565.7 1,066.5 872.6
</TABLE>
The comparable company analysis showed that the implied multiples of World
Access' consideration, based on the initial exchange ratio, were either within
or lower than the range of multiples implied by the prevailing market prices of
the comparable companies. In addition, the analysis showed that the enterprise
value based on World Access' consideration, based on the initial exchange ratio,
was either within or lower than the range of enterprise values implied by the
multiples of the comparable companies and WorldxChange's last quarter annualized
revenues, estimated 2000 revenues, gross property, plant and equipment and net
property, plant and equipment.
3. Analysis of selected M&A transactions
Donaldson, Lufkin & Jenrette reviewed selected mergers and acquisitions
transactions of companies that operate businesses reasonably similar to that of
WorldxChange. In addition, for purposes of this analysis, Donaldson, Lufkin &
Jenrette selected key mergers and acquisitions transactions deemed most relevant
by Donaldson, Lufkin & Jenrette based on the business characteristics of the
acquiror and/or target and the business nature of the transaction. The following
mergers and acquisitions transactions were deemed most relevant by Donaldson,
Lufkin & Jenrette:
- Viatel, Inc.'s acquisition of Destia Communications, Inc.
- PRIMUS Telecommunications Group, Incorporated's acquisition of TresCom
International, Inc.
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In examining these acquisitions, Donaldson, Lufkin & Jenrette calculated
the enterprise value of the acquired company implied by each of these
transactions as a multiple of last quarter annualized revenue and net property,
plant and equipment. In addition, Donaldson, Lufkin & Jenrette calculated the
enterprise values implied by the above mentioned ratios of the selected mergers
and acquisitions transactions and WorldxChange's last quarter annualized revenue
and net property, plant and equipment. Donaldson, Lufkin & Jenrette's analysis
of these comparable acquisitions yielded the following multiple ranges and
implied enterprise values:
SELECTED MERGERS AND ACQUISITIONS TRANSACTIONS
($ IN MILLIONS)
<TABLE>
<CAPTION>
ALL SELECTED M&A KEY SELECTED M&A
TRANSACTIONS TRANSACTIONS
-------------------- --------------------
WORLDXCHANGE HIGH LOW HIGH LOW
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Enterprise Value/Last Quarter
Annualized Revenues.............. 1.5x 4.0x 1.2x 2.6x 1.2x
Enterprise Value/Net Property,
Plant and Equipment.............. 4.8x 42.0x 5.9x 6.2x 5.9x
Implied Enterprise Value based on:
Last Quarter Annualized Revenues... $924.5 $2,529.6 $ 733.9 $1,631.6 $ 733.9
Net Property, Plant and
Equipment........................ 924.5 8,143.1 1,148.3 1,206.6 1,148.3
</TABLE>
The analysis of selected mergers and acquisitions transactions showed that
the implied multiples of World Access' consideration, based on the initial
exchange ratio, were, in each case, within or lower than the range of multiples
paid by the selected mergers and acquisitions transactions as well as by the key
mergers and acquisitions transactions. In addition, the analysis of selected
mergers and acquisitions transactions showed that the transaction value of World
Access' consideration, based on the initial exchange ratio, was, in each case,
within or lower than the range of implied transaction values based on the
multiples paid by selected mergers and acquisition transactions, as well as by
the key merger and acquisitions transactions.
4. Discounted cash flow analysis
In addition, Donaldson, Lufkin & Jenrette performed a discounted cash flow
analysis for WorldxChange on a stand-alone basis. The analysis was based upon
financial projections, including synergies, for the five-year period ending
fiscal 2004 as provided by the management of World Access. Donaldson, Lufkin &
Jenrette performed this analysis to estimate the net present value of
WorldxChange's enterprise value and to compare it to the implied enterprise
value based on World Access' consideration. Donaldson, Lufkin & Jenrette
calculated EBITDA for WorldxChange. EBITDA is earnings before interest, taxes,
depreciation and amortization. Donaldson, Lufkin & Jenrette calculated the
terminal value of WorldxChange at the end of the forecast period, by applying a
range of estimated EBITDA multiples selected in Donaldson, Lufkin & Jenrette's
subjective judgment. The terminal value estimates are a hypothetical
approximation of the value of the enterprise's cash flows beyond the end of the
five-year period covered by the management's projections. The management's
projected EBITDA and Donaldson, Lufkin & Jenrette's subjective estimate of the
terminal values based on management's projected EBITDA were then discounted to
the present using a range of discount rates selected in Donaldson, Lufkin &
Jenrette's subjective judgment.
DISCOUNTED CASH FLOW ANALYSIS
($ IN MILLIONS)
<TABLE>
<S> <C>
Range of EBITDA Multiples................................... 10.0x - 12.0x
Discount rates.............................................. 15.0% - 18.3%
Implied Total Enterprise Value.............................. $758.2 - $998.1
WorldxChange Enterprise Value............................... $924.5
</TABLE>
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The above analysis shows that the implied enterprise value based on World
Access' consideration, based on the initial exchange ratio, of $924.5 million is
near the high range of the implied enterprise values of $758.2 million to $998.1
million obtained by the analysis.
The summary set forth above does not purport to be a complete description
of the analyses performed by Donaldson, Lufkin & Jenrette but describes the
material elements of the presentation that Donaldson, Lufkin & Jenrette made to
the World Access board on February 11, 2000 in connection with the preparation
of Donaldson, Lufkin & Jenrette's fairness opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, an opinion is not readily
susceptible to a summary description. Donaldson, Lufkin & Jenrette conducted
each of the analyses in order to provide a different perspective on the
transaction and to add to the total mix of information available. Donaldson,
Lufkin & Jenrette did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion as
to fairness from a financial point of view. Rather, in reaching its conclusion,
Donaldson, Lufkin & Jenrette considered the results of the analyses in light of
each other and ultimately reached its opinion based on the results of all
analyses taken as a whole. Donaldson, Lufkin & Jenrette did not place any
particular reliance or weight on any individual analysis, but instead concluded
that its analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, Donaldson, Lufkin &
Jenrette has indicated to World Access that it believes that its analyses must
be considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. The
analyses Donaldson, Lufkin & Jenrette performed are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by these analyses.
Engagement letter
Under the terms of an engagement letter dated January 18, 2000, World
Access agreed to pay Donaldson, Lufkin & Jenrette a fee of $850,000 at the time
that Donaldson, Lufkin & Jenrette delivered to the World Access board of
directors its opinion, irrespective of the conclusion reached in the opinion,
and to pay Donaldson, Lufkin & Jenrette a fee of $1.5 million, less any amounts
paid pursuant to delivery of the fairness opinion, payable in cash promptly upon
consummation of a business combination between World Access and WorldxChange in
one or a series of transactions, by merger, consolidation, or any other business
combination, by purchase involving all or a substantial amount of the business,
securities or assets of WorldxChange or otherwise. In addition, World Access
agreed to reimburse Donaldson, Lufkin & Jenrette for all of its out-of-pocket
expenses, including the reasonable fees and expenses of counsel incurred by
Donaldson, Lufkin & Jenrette in connection with its engagement, and to indemnify
Donaldson, Lufkin & Jenrette for liabilities and expenses arising out of
Donaldson, Lufkin & Jenrette's engagement, including liabilities under federal
securities laws.
The terms of the fee arrangement with Donaldson, Lufkin & Jenrette, which
Donaldson, Lufkin & Jenrette and World Access believe are customary in
transactions of this nature, were negotiated at arms-length between World Access
and Donaldson, Lufkin & Jenrette. World Access' board of directors was aware of
the arrangement, including the fact that a significant portion of the aggregate
fee payable to Donaldson, Lufkin & Jenrette is contingent upon consummation of
the WorldxChange merger.
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Other relationships
In the ordinary course of business, Donaldson, Lufkin & Jenrette may own or
actively trade the securities of World Access for its own accounts and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in World Access securities. Donaldson, Lufkin & Jenrette has performed
investment banking and other services for World Access in the past and has been
compensated for such services, including:
- acting as financial advisor to World Access in connection with its
acquisition of FaciliCom International, Inc. in 1999 and acting as
financial advisor in connection with the exchange offer for FaciliCom's
outstanding senior notes;
- acting as financial advisor in connection with the sale of World Access'
Telco Systems Inc. subsidiary and World Access' Wireless Local Loop
Division in 2000; and
- acting as financial advisor to World Access in connection with its
pending acquisitions of both STAR and TelDaFax in 2000.
CONSIDERATION THAT WORLDXCHANGE SHAREHOLDERS WILL RECEIVE IN THE WORLDXCHANGE
MERGER
After the completion of the WorldxChange merger, WorldxChange will be a
wholly-owned subsidiary of World Access and each outstanding share of
WorldxChange common stock held by WorldxChange or a subsidiary of WorldxChange
will be cancelled and will no longer be outstanding. Each share of WorldxChange
common stock not held by WorldxChange or a subsidiary of WorldxChange will be
converted into the right to receive 0.6583 shares of World Access common stock.
Under the WorldxChange articles of incorporation, all outstanding shares of
WorldxChange preferred stock voted in favor of the WorldxChange merger will be
deemed automatically converted into shares of WorldxChange common stock
immediately prior to the completion of the WorldxChange merger. Therefore,
outstanding shares of WorldxChange preferred stock voted in favor of the
WorldxChange merger will be entitled to the WorldxChange merger consideration
described above on an as-converted basis. No fractional shares will be issued.
Instead, WorldxChange shareholders will receive cash based on the market price
of World Access common stock.
COMPLETION OF THE WORLDXCHANGE MERGER
The closing of the WorldxChange merger will occur on the second business
day following the satisfaction or waiver of all conditions to the completion of
the WorldxChange merger, or at another time as World Access and WorldxChange
agree. On the date of the closing of the WorldxChange merger, World Access and
WorldxChange will file a certificate of merger with the Delaware Secretary of
State and an agreement of merger with the California Secretary of State. The
WorldxChange merger will be effective upon the filing of the certificate of
merger and the agreement of merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE WORLDXCHANGE MERGER
The following discussion summarizes the material federal income tax
consequences of the WorldxChange merger. The following discussion is not a
complete analysis of all aspects of federal income taxation that may be relevant
to you as a WorldxChange shareholder in light of your particular circumstances.
For example, it does not address the federal income tax considerations or the
special tax rules that may be relevant to you if you are one of the following
types of holders:
- an insurance company;
- a tax-exempt organization;
- an employee stock ownership plan;
- a bank;
- a broker, dealer or financial institution;
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- a holder that holds WorldxChange capital stock as part of a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for
federal income tax purposes;
- a holder that has a "functional currency" other than the United States
dollar;
- a holder subject to the alternative minimum tax;
- a holder that is not a citizen or resident of the United States, or that
is a foreign corporation, foreign partnership or foreign estate or trust
as to the United States;
- a holder who acquired shares of WorldxChange capital stock pursuant to
the exercise of options or otherwise as compensation or through a
tax-qualified retirement plan; or
- a holder of options to acquire shares of WorldxChange capital stock.
In addition, the discussion does not consider the effect of any foreign,
state, local, or other tax laws, or any tax consequences, such as estate or gift
tax, other than the federal income tax consequences of the WorldxChange merger
that may be applicable to WorldxChange shareholders, or except as expressly
provided below, the consequences of transactions completed before or after the
WorldxChange merger. Further, this discussion assumes that as a WorldxChange
shareholder, you hold your WorldxChange capital stock as a "capital asset"
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended. Generally, a capital asset is property held for investment. This
discussion is based on the Internal Revenue Code and final, temporary and
proposed treasury regulations promulgated under the Internal Revenue Code,
administrative pronouncements and rulings, and judicial decisions as of the date
hereof, all of which are subject to change or differing interpretations at any
time with possible retroactive effect and any such change could affect the
continuing validity of this discussion.
We have not requested a ruling from the IRS with respect to the federal
income tax consequences of the WorldxChange merger nor is the completion of the
WorldxChange merger conditioned on the receipt by World Access or WorldxChange
of a ruling or an opinion of tax counsel concerning the tax consequences. YOU
ARE URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO YOU OF THE WORLDXCHANGE MERGER.
The WorldxChange merger
Long Aldridge & Norman LLP has rendered an opinion to World Access with
respect to the material federal income tax consequences of the WorldxChange
merger. Among other opinions, counsel has opined that the WorldxChange merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code. In rendering its opinion as to status of the WorldxChange
merger as a "reorganization" and in rendering its other opinions summarized
below concerning the material federal income tax consequences of the
WorldxChange merger, counsel has relied upon, and assumed that:
- the WorldxChange merger and the related transactions described in the
WorldxChange merger agreement and exhibits will be consummated as
described in the WorldxChange merger agreement and exhibits and this
joint proxy statement/prospectus;
- the respective parties to such documents and all parties referred to in
such documents will act in all respects at all relevant times in
conformity with the requirements and provisions of such documents;
- none of the terms and conditions contained in such documents has been or
will be waived or modified in any respect prior to the closing of the
WorldxChange merger;
- all statements, facts and representations made in the WorldxChange merger
agreement, this joint proxy statement/prospectus and in those
representations to counsel contained in certificates of their officers
are true, complete and correct, without regard to any knowledge or other
qualifications set forth therein and without undertaking to verify such
statements, facts and representations by any independent investigation or
review;
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- all covenants contained in the WorldxChange merger agreement and exhibits
are performed without waiver or breach of a material provision; and
- other customary assumptions as to the accuracy and authenticity of
documents provided to counsel.
Counsel's opinion neither binds the Internal Revenue Service nor precludes
it or the courts from adopting a contrary position, and no assurance can be
given that contrary positions will not be successfully asserted by the Internal
Revenue Service or adopted by a court if the issues are litigated. If the
Internal Revenue Service or the courts successfully challenge the status of the
WorldxChange merger as a reorganization or if any of the assumptions set forth
above is inaccurate, the WorldxChange merger may not be treated as a
reorganization. If the WorldxChange merger is not treated as a reorganization,
each WorldxChange shareholder generally will be required to recognize gain or
loss equal to the difference between the sum of the fair market value of the
World Access common stock and cash received in the WorldxChange merger and such
shareholder's tax basis in the WorldxChange common stock surrendered in the
WorldxChange merger. In that case, the stockholder's tax basis in the World
Access common stock received in the WorldxChange merger generally would equal
the fair market value of that stock on the day on the WorldxChange merger, and
the holding period for the World Access common stock received in the
WorldxChange merger generally would begin on the day following the WorldxChange
merger. In addition, if the WorldxChange merger is not treated as a
reorganization, WorldxChange would incur gain equal to the excess of the sum of
the cash and fair market value of the World Access common stock issued in the
WorldxChange merger over the tax basis in WorldxChange's assets. This gain, if
recognized, would give rise to substantial tax liability and could have a
material adverse effect on the value of WorldxChange and its stock.
The balance of this discussion is based on the conclusion in the opinion
that the WorldxChange merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code.
WorldxChange has received the opinion of O'Melveny & Myers LLP to the
effect that the WorldxChange merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a)(1) of the
Internal Revenue Code.
The following discussion summarizes the opinions rendered solely by Long
Aldridge & Norman LLP to World Access with respect to the material federal
income tax consequences of the WorldxChange merger.
World Access stockholders will not recognize any gain or loss for federal
income tax purposes solely as a result of the WorldxChange merger.
Tax considerations for WorldxChange shareholders
Receipt of World Access stock in the WorldxChange merger. You will not
recognize gain or loss upon the exchange of your WorldxChange common stock and
preferred stock for World Access common stock, except for the receipt of cash in
lieu of a fractional share of World Access common stock and the portion of the
World Access common stock you received in payment of accrued and unpaid
dividends on your WorldxChange preferred stock that is treated by the Internal
Revenue Service as a dividend distribution to you, as more fully described
below.
Your tax basis in the shares of World Access common stock you receive in
the exchange will be the same as the tax basis of your shares of WorldxChange
capital stock, and if you hold shares of both common stock and preferred stock
in WorldxChange, by aggregating the tax basis of all such shares, surrendered in
the exchange less any portion of such basis allocable to any fractional share
interest in any share of World Access common stock for which you receive cash.
The holding period of the World Access common stock you receive in the exchange
will include the holding period during which you held your WorldxChange capital
stock.
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Cash for fractional shares. Based on the current published ruling position
of the Internal Revenue Service, you will recognize gain or loss measured by the
difference between the amount of cash received in lieu of a fractional share
interest in World Access common stock and the portion of the tax basis of your
WorldxChange capital stock allocable to the fractional share interest. The gain
or loss will be capital gain or loss, provided that you held the WorldxChange
capital stock as a capital asset as of the effective time of the WorldxChange
merger, and will be long-term capital gain if your WorldxChange capital stock
was held for more than one year as of the effective time of the WorldxChange
merger.
Dividends on escrowed World Access common stock. Dividends paid to you by
World Access on World Access common stock you receive in the exchange, including
the shares held pursuant to the escrow agreement established under the
WorldxChange merger agreement will be treated as if you held the shares of World
Access common stock directly.
Return of escrowed shares to World Access to satisfy claims. Pursuant to
the escrow agreement established under the WorldxChange merger agreement, if a
claim is successfully asserted by World Access against the escrow fund, the
escrow agent will be instructed to return to World Access that number of shares
of World Access common stock with a value in an amount equal to the claim using
the $20.38 share price to value the returned shares. Any returned shares would
reduce on a pro rata basis the escrowed shares that could be distributed to
WorldxChange shareholders after any indemnification claims of World Access under
the merger agreement are satisfied. Because the number of shares to be returned
to World Access from the escrow account is based on the initial negotiated value
of $20.38 per share of World Access common stock, you will realize no benefit or
detriment from any appreciation or depreciation of the World Access common stock
following the effective time of the WorldxChange merger. Accordingly, the return
of the shares to World Access in satisfaction of escrow claims will not result
in your recognition of gain or loss and instead, will be treated as a
non-taxable purchase price adjustment as part of the original stock-for-stock
exchange. Upon a return of any such shares to World Access, your tax basis in
your pro rata share of the returned shares will be added to the tax basis of
your remaining shares of World Access common stock received in the exchange.
Sale of escrowed shares held in the expense fund. To the extent escrowed
shares of World Access common stock held in the expense fund established under
the WorldxChange merger agreement are sold by the shareholder representative,
you will be required to recognize gain or loss for federal income tax purposes
with respect to your allocable share of the gross proceeds as if you sold the
shares of World Access common stock directly.
Release of escrowed shares to WorldxChange shareholders. You will not
recognize any gain or loss or any interest income, as a result of the
distribution to you of any of the World Access common stock held in either the
escrow fund or the expense fund. Under both arrangements established under the
WorldxChange merger agreement, the stock-for-stock exchange takes place at the
effective time of the WorldxChange merger, not later when the escrowed shares of
World Access common stock are released from the applicable escrow provisions to
you as former WorldxChange shareholders.
World Access common stock received for accrued dividends on WorldxChange
preferred stock. The law is unclear as to how shares you receive that are or
could be attributed to accrued but undeclared and unpaid dividends, or "dividend
related shares," will be characterized for federal income tax purposes. In at
least two private letter rulings, which cannot be relied upon by other taxpayers
as binding legal precedent, the Internal Revenue Service has taken the position
that common stock issued by an acquiring company in payment of the dividends
would be treated as part of an overall stock-for-stock exchange and would be
tax-free to the recipient shareholders. Moreover, dividends have not been
declared on any of the shares of the WorldxChange preferred stock, will not be
declared as of the effective time of the WorldxChange merger, and, in general,
with exceptions not here applicable, shareholders are not taxable on unpaid
dividends that have not been declared. Based upon these principles, you would
not recognize gain or loss on the receipt of the dividend related shares.
Furthermore, the Internal Revenue Service has not taken a position in any
reported case or in any published or private ruling that shares received in
exchange for shares in an otherwise tax-free acquisition should be treated in
part as payment of unpaid dividends. In
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this case, your tax basis in the dividend related shares will be the same as
your basis in the other shares of World Access common stock received in the
exchange and your holding period for the dividend related shares will include
the holding period during which you held your WorldxChange preferred stock.
Notwithstanding the absence of authority on point, however, it is possible that
the Internal Revenue Service could attempt to treat the receipt of shares
identified with accrued but unpaid dividends, including the dividend related
shares, as the actual or deemed payment of dividends, and therefore taxable as
ordinary income to the extent of your allocable portion of the accumulated
earnings and profits, if any, as determined for federal income tax purposes, of
WorldxChange. If the amount of the actual or deemed payment exceeds the earnings
and profits, then the excess first will be applied against and reduce your basis
in your preferred stock, but not below zero, and then any excess over the amount
will be treated as capital gain from the sale of the WorldxChange stock and will
be long-term capital gain if your WorldxChange preferred stock was held for more
than one year as of the effective time of the WorldxChange merger. If the actual
or deemed payment is treated as a dividend and you are a corporation, the
distribution may qualify for the "dividends received deduction", and may
possibly be subject to the "extraordinary dividend" provisions of the Internal
Revenue Code. Here, your tax basis in the dividend related shares will be the
fair market value of such shares upon receipt and your holding period will begin
upon receipt of such shares.
Due to the inherently factual nature of these determinations, coupled with
the lack of Internal Revenue Service or judicial authority as to how your
receipt of the dividend related shares should be characterized for federal
income tax purposes, Long Aldridge & Norman LLP has expressed no opinion with
respect to this matter. World Access intends to take the position that the
dividend related shares should be treated as part of the overall stock-for-stock
exchange. No ruling from the Internal Revenue Service has been sought. Thus, no
assurance can be given to you that the position currently intended to be taken
by World Access described above will be accepted by the Internal Revenue
Service.
Cash received by dissenting WorldxChange shareholders. If you exercise
appraisal rights, any cash received in connection with exercising your appraisal
rights will be treated as having been received in redemption of your
WorldxChange common stock, provided the payment is not treated as a dividend
payment. If, after the redemption, you own no World Access stock after giving
effect to the constructive ownership rules of the Internal Revenue Code, then
you will recognize gain or loss measured by the difference between the amount of
cash received and the tax basis of your WorldxChange common stock surrendered,
which will be long-term capital gain or loss if your WorldxChange common stock
was held for more than one year as of the effective time of the WorldxChange
merger.
Reporting requirements. When you file your federal income tax return for
the taxable year in which the WorldxChange merger occurs, you will be required
to attach a statement to your return which includes information required by the
Internal Revenue Service concerning your participation as a WorldxChange
shareholder in the WorldxChange merger. Accordingly, you are urged to consult
with your tax advisor concerning compliance with this requirement and any other
tax reporting requirements.
Tax considerations for the corporate parties
World Access, WorldxChange Communications, Inc. formerly known as CTI
Merger Co. and WorldxChange. No gain or loss will be recognized by World
Access, WorldxChange Communications, Inc., which was formerly known as CTI
Merger Co. and is a subsidiary of World Access, or WorldxChange as a result of
the WorldxChange merger.
Potential "Excess Parachute Payments." Under circumstances, acceleration
of the vesting of specific WorldxChange options and the making of payments by
World Access to WorldxChange employees following the WorldxChange merger may
result in "excess parachute payments" to a "disqualified individual" within the
meaning of Section 280G of the Internal Revenue Code. World Access will not be
entitled to a tax deduction for the amounts determined to be excess parachute
payments, which will increase World Access' taxable income or reduce its taxable
loss, if applicable, by the amount of any excess parachute payments. Excess
parachute payments are also subject to a 20% excise tax payable by the
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disqualified individual receiving the payment. Because the calculation of
whether the amounts may be determined to be excess parachute payments cannot be
made until the effective time of the WorldxChange merger or thereafter, no
determination can be made at this time whether any amounts will be determined to
be excess parachute payments. Therefore, Long Aldridge & Norman LLP has
expressed no opinion with respect to this matter.
Limitation on WorldxChange tax attributes. Under the Internal Revenue
Code, WorldxChange Communications, Inc., which was formerly known as CTI Merger
Co. will succeed to the net operating losses, certain "recognized built-in
losses," capital losses, general business credits, minimum tax credits, excess
foreign tax credits and other tax attributes of WorldxChange. Use of these tax
attributes by World Access is subject to specific limitations under the Internal
Revenue Code and provisions of the treasury regulations governing the filing of
a consolidated federal income tax return, such as the "separate return
limitation year" rules. After an ownership change, the amount of the loss
corporation's taxable income for a post-ownership change year that may be offset
by the loss corporation's net operating losses arising before the ownership
change is annually limited to an amount referred to as the "Section 382
limitation." The Section 382 limitation generally equals the product of (i) the
fair market value of the loss corporation's stock immediately before the
ownership change, multiplied by (ii) the federal long-term, tax-exempt rate
published monthly by the Internal Revenue Service (5.41% for September 2000).
WorldxChange and its domestic subsidiaries are members of a "consolidated
group" which files a consolidated federal income tax return. The WorldxChange
consolidated group, with WorldxChange Communications, Inc., which was formerly
known as CTI Merger Co. as WorldxChange's corporate successor will constitute a
"loss subgroup" which will undergo a Section 382 ownership change upon the
completion of the WorldxChange merger. Utilization of any such loss subgroup's
net operating loss carryover, which we refer to as the "pre-change WorldxChange
loss subgroup net operating losses," against future World Access consolidated
federal taxable income will be subject to an annual loss subgroup Section 382
limitation.
An additional limitation may apply under which the pre-change WorldxChange
loss subgroup net operating losses can only be used to the extent of the
"qualifying separate return limitation year subgroup" members' aggregate,
cumulative contribution to World Access consolidated taxable income or the
"separate return limitation year limitation." Because the WorldxChange loss
subgroup and its separate return limitation year net operating loss subgroup
should be treated as co-extensive, and the Section 382 ownership change and
separate return limitation year event will occur at the same time, the separate
return limitation year limitation should be eliminated with respect to the
WorldxChange loss subgroup net operating losses.
Limitation on World Access tax attributes. World Access and its domestic
subsidiaries are members of a "consolidated group" which files a consolidated
federal income tax return. For its taxable year ended December 31, 1999, the
World Access consolidated group incurred a consolidated net operating loss, and
has a consolidated net operating loss carryover. As such, it constitutes a "loss
group." World Access believes that the World Access loss group may have already
incurred a Section 382 ownership change in either or both of its 1998 and 1999
taxable years. Thus, the World Access loss group's ability to utilize its own
consolidated net operating loss carryover as of December 31, 1999 against its
future consolidated federal taxable income may already be subject to an annual
loss group Section 382 limitation.
If the completion of either or both the WorldxChange merger and the STAR
merger does result in an ownership change for the World Access loss group, the
amount of the annual loss group Section 382 limitation will depend in part, on
future values which cannot be predicted at this time. In the case of successive
ownership changes, the applicable pre-ownership change World Access loss group
or member's net operating losses will be subject to the lowest amount of Section
382 limitation which results from any of such Section 382 ownership changes. If
instead, consummation of either or both the WorldxChange merger and the STAR
merger does not result in an ownership change for the World Access loss group,
then any existing annual loss group Section 382 limitation for World Access will
simply continue to apply.
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EXCHANGE OF WORLDXCHANGE STOCK CERTIFICATES FOR WORLD ACCESS STOCK CERTIFICATES
When the WorldxChange merger is completed, World Access' exchange agent
will mail to WorldxChange shareholders a letter of transmittal and instructions
for use in surrendering WorldxChange stock certificates in exchange for World
Access stock certificates. When WorldxChange shareholders deliver their
WorldxChange stock certificates to the exchange agent along with an executed
letter of transmittal and any other required documents, their WorldxChange stock
certificates will be canceled, and WorldxChange shareholders will receive World
Access stock certificates representing the number of full shares of World Access
common stock to which the WorldxChange shareholder is entitled under the
WorldxChange merger agreement. WorldxChange shareholders will receive payment in
cash in lieu of any fractional shares of World Access common stock which would
have been otherwise issuable in the WorldxChange merger.
YOU SHOULD NOT SUBMIT YOUR WORLDXCHANGE STOCK CERTIFICATES FOR EXCHANGE
UNLESS AND UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER
OF TRANSMITTAL FROM THE EXCHANGE AGENT.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF WORLD ACCESS AND WORLDXCHANGE
The shares of World Access common stock to be issued in the WorldxChange
merger will be registered under the Securities Act of 1933. These shares will be
freely transferable under the Securities Act of 1933, except for shares of World
Access common stock issued to any person who is an affiliate of either of World
Access or WorldxChange. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under common
control with either of World Access or WorldxChange and may include some of
their respective officers and directors, as well as their respective principal
stockholders. Affiliates may not sell their shares of World Access common stock
acquired in the WorldxChange merger except pursuant to:
- an effective registration statement under the Securities Act of 1933
covering the resale of those shares;
- Rule 145 under the Securities Act of 1933; or
- any other applicable exemption under the Securities Act of 1933.
Because the WorldxChange merger is a statutory merger in which WorldxChange
shareholders will exchange shares for shares of World Access, the WorldxChange
merger will be subject to Rule 145. Under Rule 145, any person who is an
affiliate of either WorldxChange or World Access as of the time the merger is
approved by shareholders will be able to sell World Access shares received in
the merger only as follows:
- immediately following the merger, in limited quantity through a broker so
long as World Access has timely filed all reports required to be filed
with the Securities and Exchange Commission for the 12 months preceding
the sale of the shares; or
- after that person has held the shares for at least 12 months following
the closing of the merger, in unlimited quantity, so long as World Access
has timely filed all reports required to be filed with the Securities and
Exchange Commission for the 12 months preceding the sale of the shares;
or
- after that person has held the shares for at least 24 months after the
closing of the merger, without restriction.
ACCOUNTING TREATMENT OF THE WORLDXCHANGE MERGER
We intend to account for the WorldxChange merger as a purchase for
financial reporting and accounting purposes, under United States generally
accepted accounting principles. World Access and WorldxChange have entered into
an executive management services agreement, which provides World Access with
effective control over the operations and business affairs of WorldxChange. In
addition, World Access and WorldxChange have each entered into voting agreements
with stockholders representing more than 50% of their respective voting stock,
under which these stockholders have agreed to vote in favor of the WorldxChange
merger. For more information regarding the voting agreements, please see pages
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and 112. Accordingly, the results of operations of WorldxChange have been
included in the consolidated financial statements of World Access as of August
1, 2000. The purchase price will be allocated based on the fair values of the
assets acquired and the liabilities assumed. Any excess of cost over fair value
of the net tangible assets of WorldxChange acquired will be recorded as goodwill
and other intangible assets and will be amortized by charges to operations under
United States generally accepted accounting principles. These allocations will
be made based upon valuations and other studies that have not yet been
finalized.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE WORLDXCHANGE MERGER
The WorldxChange merger is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which prevents
transactions from being completed until required information and materials are
furnished to the Antitrust Division of the Department of Justice and the Federal
Trade Commission and the appropriate waiting periods end or expire. World
Access, WorldxChange and related parties have filed the required information and
materials with the Antitrust Division of the Department of Justice and the
Federal Trade Commission. The Department of Justice and Federal Trade Commission
granted an early termination of the waiting period, effective April 6, 2000. No
further action under the Hart-Scott-Rodino Act is required, as long as the
WorldxChange merger is completed prior to April 6, 2001.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the WorldxChange merger on antitrust grounds either
before or after expiration of the waiting period. Accordingly, at any time
before or after the completion of the WorldxChange merger, either the Antitrust
Division of the Department of Justice or the Federal Trade Commission could take
action under the antitrust laws. Other persons could take action under the
antitrust laws, including seeking to enjoin the WorldxChange merger.
Additionally, at any time before or after the completion of the WorldxChange
merger, notwithstanding that the applicable waiting period expired or ended, any
state could take action under the antitrust laws. There can be no assurance that
a challenge to the WorldxChange merger under the antitrust laws will not be made
or that, if a challenge is made, it would not be successful.
Under the German Competition Act, the German Cartel Office must be notified
of the WorldxChange merger, and the WorldxChange merger cannot be completed
until approved by the German Cartel Office or a one month waiting period has
expired. The waiting period starts from the date that the notification is
considered by the German Cartel Office to be complete. During the initial one
month waiting period, the German Cartel Office may decide to open a further
investigation of the transaction. If a further investigation is instituted, the
WorldxChange merger may not be completed until a further three month period has
expired or the WorldxChange merger has been cleared. At any time during the
period, the German Cartel Office may act to block the WorldxChange merger or
impose conditions upon its completion. On May 24, 2000, the German Cartel Office
approved the WorldxChange merger.
Following the completion of the WorldxChange merger, an information filing
must be made in Denmark with the national competition authority.
The WorldxChange merger is subject to state and federal telecommunications
regulatory approvals. All but two of the state regulatory agencies and the
Federal Communications Commission require prior notice or approval of the
WorldxChange merger. Applications or notices, as required, requesting either
approval or providing notification of the WorldxChange merger have been filed on
behalf of World Access and WorldxChange in 48 states and at the Federal
Communications Commission. The governing legal standard for approval varies from
state to state, but approval of the WorldxChange merger generally requires a
showing that it is consistent with the public interest. The Federal
Communications Commissions has approved the WorldxChange merger.
Except for approvals by state and federal authorities having jurisdiction
over telecommunications activities conducted by World Access and WorldxChange,
World Access and WorldxChange are not aware of any other material governmental
or regulatory approval required for completion of the WorldxChange merger, other
than the effectiveness of the registration statement of which this joint proxy
statement/prospectus is a part, and compliance with applicable corporate laws of
Delaware and California.
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RIGHTS OF DISSENTING WORLDXCHANGE SHAREHOLDERS
The following provides a summary of the statutory procedure a dissenting
WorldxChange shareholder must follow in order to exercise dissenters' rights
under Chapter 13 of the California General Corporation Law. This is a summary of
the material aspects of dissenters' rights under California law and is qualified
in its entirety by reference to the full text of Chapter 13 of the California
law. A copy of Chapter 13 of the California law is attached as Annex G to this
joint proxy statement/prospectus and is incorporated by reference into this
document. Failure to comply with the procedures set forth in California law will
result in the loss or waiver of dissenters' rights. Therefore, this discussion
and Chapter 13 of the California law should be reviewed carefully by any
WorldxChange shareholder who wishes to exercise statutory dissenters' rights or
who wishes to preserve the right to do so.
If the WorldxChange merger is completed, only WorldxChange shareholders
owning shares on the date for the determination of shareholders entitled to vote
on or consent to the WorldxChange merger are entitled to dissenters' rights.
Such WorldxChange shareholders must not vote their shares in favor of the
WorldxChange merger and must comply with the provisions and procedures of
Chapter 13 of the California law to be entitled to require WorldxChange to
purchase for cash at their fair market value the WorldxChange shares owned by
such shareholder.
The fair market value of the WorldxChange shares will be determined as of
the day before the first announcement of the terms of the proposed WorldxChange
merger, excluding any appreciation or depreciation resulting from the merger but
adjusted for any stock split, reverse stock split or share dividend that becomes
effective after the announcement. A failure to vote against the WorldxChange
merger will not constitute a waiver of dissenters' rights set forth in Chapter
13 of the California law. Any WorldxChange shares as to which dissenters' rights
are exercised will not be converted into the right to receive shares of World
Access common stock in the merger.
The merger agreement provides that WorldxChange will not be the surviving
corporation in the WorldxChange merger. Under California law, the surviving
corporation will assume WorldxChange's obligations under Chapter 13 of the
California law.
To qualify as a dissenting share under California law, shares of
WorldxChange stock must satisfy each of the following requirements:
- the shares of WorldxChange stock must have been outstanding on the record
date;
- the shares of WorldxChange stock must not have been voted in favor of the
WorldxChange merger;
- the holder of the shares of WorldxChange stock must make a written demand
that WorldxChange repurchase such shares of WorldxChange stock at fair
market value; and
- the holder of the shares of WorldxChange stock must submit share
certificates for endorsement.
WorldxChange is required within ten days after the date of the approval of
the merger by the required WorldxChange shareholder vote or consent to mail a
notice of the approval of the merger to each shareholder who has not voted to
approve and adopt the WorldxChange merger, together with:
- a copy of Sections 1300 through 1304 of Chapter 13 of the California law;
- a statement of the price determined by WorldxChange to represent the fair
market value of the dissenting WorldxChange shares; and
- a brief description of the procedure to be followed if the shareholder
desires to exercise dissenters' rights. The statement of price by
WorldxChange constitutes an offer by WorldxChange to purchase all
properly dissenting shares at the stated amount.
In order to exercise dissenters rights, shareholders must send a written
demand to WorldxChange that WorldxChange repurchase their dissenting shares.
WorldxChange must receive this demand within 30 days after the date on which
notice of the approval of the WorldxChange merger by the outstanding shares of
WorldxChange stock is mailed to dissenting shareholders. The demand must state
the number and class of
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shares held of record that the shareholder demands that WorldxChange purchase,
and a statement of what the dissenting shareholder claims to be the fair market
value of the dissenting shares as of the day before the announcement of the
proposed merger. The statement of fair market value in this demand by the
dissenting shareholder constitutes an offer by the shareholder to sell the
shares at this price to WorldxChange.
In addition, within 30 days after the date on which notice of the approval
by the outstanding shares was mailed to shareholders, the dissenting shareholder
must also submit to WorldxChange at its principal office or the office of its
transfer agent share certificates representing any dissenting shares that the
dissenting shareholder demands that WorldxChange purchase, so that the
dissenting shares may either be stamped or endorsed with the statement that the
shares are dissenting shares or may be exchanged for certificates of appropriate
denomination so stamped or endorsed.
If the dissenting shareholder and WorldxChange agree that the shares
qualify as dissenting shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed upon price plus the legal rate
of interest on judgments from the date of the agreement. This amount is to be
paid to the dissenting shareholder within the later of 30 days after the date of
the agreement or 30 days after any statutory or contractual conditions to the
closing of the WorldxChange merger are satisfied or waived, subject to surrender
by the dissenting shareholder of his, her or its certificates representing the
dissenting shares to WorldxChange unless provided otherwise by agreement. Any
agreement between WorldxChange and a shareholder fixing the fair market value of
any dissenting shares will be filed with the secretary of WorldxChange.
If the dissenting shareholder and WorldxChange fail to agree upon the fair
market value of the dissenting shares or whether the shares qualify as
dissenting shares, the dissenting shareholder may file a complaint in California
superior court of the proper county within six months after the date on which
notice of the approval of the WorldxChange merger is mailed to shareholders
requesting that the court determine the fair market value of the dissenting
shares and, if applicable, whether the shares qualify as dissenting shares.
The costs and expenses of the action, including reasonable compensation to
the appraisers, will be fixed and assessed or apportioned as the court considers
equitable. However, if the appraisal exceeds the price offered by WorldxChange,
then WorldxChange would be required to pay the costs, including, in the
discretion of the court, attorneys' fees, fees of expert witnesses and interest
at a legal rate on the judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is 125 percent of
the price offered by WorldxChange.
Under the provisions of Chapter 5 of the California law and Section 1306 of
the California law, a California corporation is legally prohibited from
purchasing shares of stock through the payment of cash or other property, even
if all dissenters' rights conditions are fulfilled, unless the corporation
satisfies particular financial conditions. Due to these legal restrictions,
neither WorldxChange nor the surviving corporation in the WorldxChange merger
may be legally able to repurchase all or any dissenting shares of the dissenting
shareholders for cash.
To the extent that WorldxChange is prohibited from making cash payments to
holders of dissenting shares who exercise and perfect their dissenters' rights
of their fair market value, unpaid dissenting shareholders will become creditors
of WorldxChange for the unpaid amount plus interest at the legal rate on
judgments until the date of payment. The rights of unpaid dissenting
shareholders, however, will be subordinate to the rights of all other creditors
of WorldxChange in any liquidation proceeding, with the unpaid debt to be
payable when permissible under the provisions of Chapter 5.
If any shareholder who demands the purchase of his, her or its shares under
Chapter 13 of the California law fails to perfect, or effectively withdraws or
loses his, her or its right to such purchase, the shares of that holder will be
converted into a right to receive the applicable merger consideration in
accordance with the WorldxChange merger agreement.
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Dissenting shares lose their status as dissenting shares if:
- the WorldxChange merger is abandoned, in which case WorldxChange must pay
on demand to any dissenting shareholder who has initiated proceedings in
good faith under Chapter 13 of the California law all necessary expenses
incurred in these proceedings and reasonable attorney's fees;
- the shares are transferred prior to their submission for the required
endorsement or are surrendered for conversion into shares of another
class in accordance with the amended and restated articles of
incorporation of WorldxChange;
- the dissenting shareholder and WorldxChange do not agree upon the status
of the shares as dissenting shares or do not agree on the purchase price
of the shares, but neither WorldxChange nor the shareholder files a
complaint or intervenes in a pending action within six months after
mailing the notice of approval of the WorldxChange merger; or
- with WorldxChange's consent, the shareholder delivers to WorldxChange a
written withdrawal of the shareholder's demand for purchase of his, her
or its shares.
Except as expressly limited by provisions of California law pertaining to
dissenters' rights, holders of dissenting shares continue to have all of the
rights and privileges incident to their shares until the fair market value of
their shares is agreed upon or determined. A dissenting shareholder may not
withdraw the demand for payment of the fair market value of dissenting shares
unless WorldxChange consents to the request for withdrawal.
FAILURE TO FOLLOW THE STEPS REQUIRED BY CHAPTER 13 OF THE CALIFORNIA
GENERAL CORPORATION LAW FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS
OF THE RIGHTS, IN WHICH EVENT A SHAREHOLDER WILL BE ENTITLED TO RECEIVE THE
APPLICABLE MERGER CONSIDERATION IN EXCHANGE FOR THOSE DISSENTING SHARES IN
ACCORDANCE WITH THE WORLDXCHANGE MERGER AGREEMENT. BECAUSE OF THE COMPLEXITY OF
THE PROVISIONS OF CHAPTER 13, WORLDXCHANGE SHAREHOLDERS WHO ARE CONSIDERING
OBJECTING TO THE WORLDXCHANGE MERGER SHOULD CONSULT THEIR OWN LEGAL ADVISORS.
INTERESTS OF WORLDXCHANGE'S DIRECTORS, OFFICERS AND SHAREHOLDERS IN THE
WORLDXCHANGE MERGER
WorldxChange officers, directors and shareholders may have interests in the
merger that are different from or in addition to those of the other shareholders
of WorldxChange, as follows:
- World Access is obligated under the WorldxChange merger agreement to
cause Walter Anderson, WorldxChange's Chairman of the board, or another
person designated by Mr. Anderson, to be elected to the World Access
board.
- In the WorldxChange merger, the WorldxChange shares beneficially owned by
WorldxChange executive officers (including common stock issuable upon
conversion of the preferred stock owned beneficially by directors Walter
Anderson and Tom Cirrito) and directors as of September 7, 2000 will be
converted into a total of 25,144,433 shares of World Access with a total
value of approximately $226,299,897, assuming a per share value of the
World Access common stock of $9.00. In addition, these officers and
directors held options and warrants that were exercisable within 60 days
of October 1, 2000 to purchase a total of 828,950 shares of WorldxChange
common stock at exercise prices ranging between $.67 and $11.00. To the
extent these options are not exercised before the merger, these options
will carry over and be exercisable for World Access common stock, with
the exercise price and number of shares applicable to each option
adjusted based on the exchange ratio.
- Roger Abbott, WorldxChange's Chief Executive Officer and a director, and
Edward Soren, WorldxChange's Executive Vice President and a director,
have agreed with World Access not to sell shares of World Access common
stock received by them in the WorldxChange merger for a period of six
months after the WorldxChange merger is completed. However, World Access
has agreed to permit Roger Abbott to sell up to $30 million worth of the
World Access shares he receives in the WorldxChange merger beginning
immediately after the WorldxChange merger is
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completed. In addition, World Access has agreed to allow Mr. Soren to
sell up to 750,000 of the World Access shares received by him in the
merger beginning immediately after the WorldxChange merger is completed.
- Under his employment agreement with WorldxChange, Patrick Aelvoet,
WorldxChange's Chief Financial Officer, will be entitled to a $25,000
bonus upon completion of the WorldxChange merger. He is also entitled to
a $50,000 severance payment if, after the WorldxChange merger, his
employment with WorldxChange is terminated without cause and without at
least 90 days' advance notice. In addition, if Mr. Aelvoet's employment
with WorldxChange is involuntarily terminated within 12 months after the
WorldxChange merger, all of his unvested options to purchase World Access
common stock will become immediately fully vested and remain so until the
earlier of one year following such termination or ten years from the
applicable grant date. Mr. Aelvoet has options to purchase a total of
350,000 shares of WorldxChange common stock at exercise prices ranging
from $5.72 to $11.00 per share. As of October 1, 2000, 105,626 of these
options were vested and 244,374 options were unvested. Unless their
vesting is accelerated as described above, these unvested options will
vest at varying rates each calendar quarter.
- WorldxChange directors Sen. Paul Laxalt and Dann Angeloff each have
options to purchase 57,500 shares of WorldxChange common stock at $10.00
per share. As of October 1, 2000, a total of 56,458 of these options were
vested. Following the WorldxChange merger, all of these unvested options
will immediately fully vest and remain exercisable for one year following
the completion of the merger.
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PRINCIPAL SHAREHOLDERS OF WORLDXCHANGE
The following table sets forth information regarding beneficial ownership
of WorldxChange's common stock as of October 1, 2000 by the following:
- each person who is known by WorldxChange to own beneficially 5% or more
of the outstanding shares of WorldxChange's common stock;
- each of WorldxChange's directors;
- each of WorldxChange's Chief Executive Officer and its next four most
highly compensated executive officers whose total compensation for fiscal
1999 was at least $100,000; and
- all of WorldxChange's directors and executive officers as a group.
Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares of
WorldxChange's common stock shown as beneficially owned by them, subject to
community property laws where applicable, and are located at WorldxChange's
principal offices at 9999 Willow Creek Road, San Diego, California 92131.
Shares of common stock subject to options or warrants exercisable, or
securities convertible, within 60 days of October 1, 2000 are deemed outstanding
for the purpose of computing the percentage ownership of the person holding
those options, warrants or securities, but are not deemed outstanding for
computing the percentage ownership of any other person.
<TABLE>
<CAPTION>
TOTAL SHARES PERCENTAGE
NAME BENEFICIALLY OWNED OWNED
---- ------------------ ----------
<S> <C> <C>
Roger B. Abbott(2)(3)....................................... 14,984,087 35.2%
Edward S. Soren(3).......................................... 7,311,812 17.2
Walter Anderson(4).......................................... 11,799,750 25.9
Tom Cirrito(5).............................................. 5,222,561 12.3
Eric G. Lipoff(6)........................................... 277,820 *
Christopher Bantoft(7)...................................... 0 *
Patrick M. Aelvoet(7)....................................... 105,626 *
Dann V. Angeloff(7)......................................... 56,458 *
Paul Laxalt(7).............................................. 56,458 *
All directors and executive officers as a group (10
persons)(2)(3)(4)(5)(6)(7)................................ 38,879,091 84.5
</TABLE>
---------------
* Less than 1%.
(1) Percentage calculation is based upon 42,613,954 shares outstanding.
(2) All shares, other than (i) 1,000,000 shares as to which Mr. Abbott,
WorldxChange's Chief Executive Officer and a director, has sole voting power
pursuant to a voting trust agreement with Mr. Soren (see note 3 below), (ii)
81,176 shares that are held directly by Mr. Abbott, and (iii) 81,176 shares
that are held directly by Mr. Abbott's spouse, Rosalind Abbott, are jointly
held by Mr. Abbott and Ms. Abbott as community property.
(3) Includes 1,000,000 shares of common stock as to which Mr. Abbott has sole
voting power and Mr. Soren has sole investment power pursuant to the terms
of a voting trust agreement between Mr. Abbott and Mr. Soren.
(4) The record owner of these shares is Gold & Appel Transfer, S.A. Includes
170,000 shares issuable upon the exercise of a warrant held by Gold & Appel
Transfer, S.A. Under a power of attorney from Gold & Appel Transfer, S.A.,
Mr. Anderson, the Chairman of the board of WorldxChange, has sole investment
power over these shares and as a result may be deemed to be the beneficial
owner of these shares. Mr. Anderson, however, disclaims beneficial ownership
of these shares. Also includes a total of 6,893,937 shares of common stock
issuable upon conversion of the WorldxChange Series A
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Convertible Preferred Stock and WorldxChange Series B Convertible Preferred
Stock held by Gold & Appel Transfer, S.A. The address for each of Walter
Anderson and Gold & Appel Transfer, S.A. is c/o Gold & Appel Transfer, S.A.,
Omar Hodge Building, Wickhams Cay, Road Town, Tortula, British Virgin
Islands.
(5) All of these shares are owned of record by Atocha, L.P., of which Tom
Cirrito, a WorldxChange director, is a general partner. As a result, Mr.
Cirrito may be deemed to have beneficial ownership of these shares. The
address for each of Tom Cirrito and Atocha, L.P. is c/o Atocha, L.P., 6429
Georgetown Pike, McLean, Virginia 22101. Also includes a total of 1,388,889
shares of common stock issuable upon conversion of the WorldxChange Series B
Convertible Preferred Stock held by Atocha.
(6) Includes a total of 250,000 shares issuable pursuant to options that were
exercisable as of October 1, 2000 or within 60 days of such date.
(7) Represents shares issuable pursuant to options that were exercisable as of
October 1, 2000, or within 60 days of that date. Mr. Bantoft resigned from
WorldxChange as of May 31, 2000.
DESCRIPTION OF THE WORLDXCHANGE MERGER AGREEMENT
World Access and WorldxChange entered into the original WorldxChange merger
agreement on February 11, 2000. On May 23, 2000, the parties amended the
original WorldxChange merger agreement to delete the provisions relating to the
possible payment by World Access to the WorldxChange shareholders of contingent
shares after the completion of the WorldxChange merger and to make the necessary
conforming changes. On August 1, 2000, World Access and WorldxChange again
amended the WorldxChange merger agreement to reflect the fact that the parties
entered into a management services agreement and to eliminate the minimum World
Access common stock price condition to completion of the WorldxChange merger.
The original WorldxChange merger agreement, as amended, is referred to in
this joint proxy statement/prospectus as the WorldxChange merger agreement. This
is only a summary of the material terms of the WorldxChange merger agreement and
may not contain all of the information that is important to you. World Access
and WorldxChange urge you to read the WorldxChange merger agreement carefully
and in its entirety.
Description of the WorldxChange merger consideration
For a description of the consideration that each WorldxChange stockholder
will receive in the WorldxChange merger, please see page .
Representations and warranties contained in the WorldxChange merger agreement
World Access and WorldxChange each made representations and warranties in
the WorldxChange merger agreement regarding aspects of their respective
businesses, financial condition, structure and other facts pertinent to the
WorldxChange merger, including:
- corporate existence, organization, standing, authority and capitalization
- financial statements;
- compliance with applicable laws and required licenses and permits;
- absence of conflicts between each party's obligations under the
WorldxChange merger agreement and its charter, bylaws, and material
contracts, and applicable law;
- absence of pending or threatened suits, actions or other proceedings not
already disclosed in the WorldxChange merger agreement;
- the filing of tax returns and payment of taxes;
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- consents and regulatory approvals required to complete the WorldxChange
merger; and
- required approvals by the respective boards of directors and
stockholders.
WorldxChange's conduct of business before completion of the WorldxChange merger
WorldxChange has agreed that until the completion of the WorldxChange
merger, it will conduct its business in the ordinary course and substantially in
accordance with past practice.
WorldxChange also agreed that until the completion of the WorldxChange
merger, it would conduct business in compliance with specific restrictions
relating to:
- the issuance, redemption, reclassification, combination or split of any
of its capital stock;
- employees and employee benefits and remuneration;
- the issuance of dividends or other distributions on its capital stock;
- the modification of its certificate of incorporation or bylaws;
- the acquisition of assets or other entities;
- the sale of assets;
- the incurrence of new indebtedness;
- capital expenditures and other investments;
- entering into contracts that would restrict World Access from engaging in
business in particular geographic areas after the completion of the
WorldxChange merger;
- changing its accounting policies and procedures; and
- the settlement of litigation.
No other negotiations involving WorldxChange
Until the WorldxChange merger is completed, WorldxChange has agreed that it
will not permit any of its agents and representatives to, directly or indirectly
take any of the following actions without World Access' written consent:
- solicit any inquiries regarding an acquisition proposal;
- participate in any discussions or negotiations regarding an acquisition
proposal; or
- disclose any confidential information with respect to an acquisition
proposal.
WorldxChange also agreed that it would cause its agents and representatives
to, immediately discontinue any discussions or negotiations regarding an
acquisition proposal in effect on February 11, 2000.
Treatment of WorldxChange stock options and warrants
After completion of the WorldxChange merger, each outstanding WorldxChange
stock option or warrant will be automatically converted into an option to
purchase the number of shares of World Access common stock as is equal to the
number of shares of WorldxChange common stock covered under the WorldxChange
stock option or warrant multiplied by 0.6583 at a per share price equal to the
exercise price of the WorldxChange option or warrant divided by 0.6583. Each
newly issued World Access stock option will contain terms substantially similar
to the terms of the original STAR stock option or warrant.
Board of directors and officers of World Access
World Access and WorldxChange agreed that, immediately following the
completion of the WorldxChange merger, World Access will elect a WorldxChange
designee to the World Access board of directors. The WorldxChange designee will
be Walter Anderson, or a person designated by Gold & Appel Transfer S.A. and
acceptable to World Access. Gold & Appel S.A. is a shareholder of WorldxChange.
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Conditions to completion of the WorldxChange merger
Each party's obligations to complete the WorldxChange merger is subject to
the satisfaction or waiver of each of the following material conditions:
- the WorldxChange merger agreement and the WorldxChange merger must be
approved by the required vote of the stockholders of World Access and
WorldxChange;
- this joint proxy statement/prospectus must have been declared effective
by the Securities and Exchange Commission, and must not be subject to a
stop order suspending the effectiveness of this joint proxy
statement/prospectus; and
- World Access and WorldxChange must have entered into an escrow agreement
governing the terms and conditions of the holding and release of the
shares of World Access common stock issued in the WorldxChange merger.
- each of the representations and warranties of the other party must be
true and correct as of February 11, 2000 and as of the date the
WorldxChange merger is completed except where any failure to be true and
correct results from any act of World Access performed under the
management services agreement between World Access and WorldxChange or
would not have a material adverse effect on the other party;
- each party must perform or comply with its agreements and covenants
required by the WorldxChange merger agreement, except that WorldxChange
will be deemed to have satisfied this condition even if it has not
performed or complied with its agreements and covenants if the failure to
do so is due to WorldxChange's performance of its obligations under the
management services agreement between World Access and WorldxChange; and
- each party must obtain all consents and approvals required by the
WorldxChange merger, except where the failure to obtain the consent or
approval would not have a material adverse effect on the other party or
if the failure results from acts performed by World Access under the
management services agreement between World Access and WorldxChange.
Additionally, World Access' obligations to complete the WorldxChange merger
are subject to the satisfaction or waiver of the following conditions before
completion of the WorldxChange merger:
- WorldxChange must have complied with all procedures and requirements
applicable to it under the dissenters' rights chapter of the California
General Corporation Law, the period for exercising dissenters' rights
under the California General Corporation Law must have expired and fewer
than 1% of the shares of WorldxChange capital stock shall have exercised
dissenters' rights with respect to the WorldxChange merger; and
- all shares of WorldxChange preferred stock will have been voted in favor
of the WorldxChange merger agreement, and the shares will have been
deemed converted into not more than 8,282,829 shares of WorldxChange
common stock.
Termination of the WorldxChange merger agreement
The WorldxChange merger agreement may be terminated at any time prior to
completion of the WorldxChange merger by either party for any of the following
reasons:
- by mutual written consent;
- if the other party fails to comply in any material respects with any of
its covenants or agreements in the WorldxChange merger agreement and
fails to cure the failure within 30 days after receipt of notice of
breach. However, the non-breaching party may not terminate the
WorldxChange merger agreement if the breaching party is using reasonable
efforts to cure the breach, and World Access may not terminate the
WorldxChange merger agreement if WorldxChange's breach is because of
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acts of World Access performed under the management services agreement
between World Access and WorldxChange;
- if the other party has breached any of its representations or warranties,
which breach has not been cured within 30 days after receipt of written
notice of the breach. However, the non-breaching party may not terminate
the WorldxChange merger agreement as long as the breaching party is using
reasonable efforts to cure the breach, and World Access may not terminate
the WorldxChange merger agreement if WorldxChange's breach is because of
acts of World Access performed under the management services agreement
between World Access and WorldxChange;
- if the WorldxChange merger is not completed before December 31, 2000,
except that the right to terminate the WorldxChange merger agreement is
not available to the party whose action or failure to act has been the
cause of or resulted in the failure of the WorldxChange merger to occur
on or before December 31, 2000; or
- if the WorldxChange merger agreement fails to receive the requisite vote
for approval by the stockholders of World Access or WorldxChange, in each
case upon the taking of the vote.
Extension, waiver and amendment of the WorldxChange merger agreement
The WorldxChange merger agreement may be amended by World Access and
WorldxChange at any time before completion of the WorldxChange merger. However,
following stockholder approval, no amendment may be made that requires further
approval by the stockholders. World Access and WorldxChange may extend the time
for the performance of any of the obligations or other acts of the other party
under the WorldxChange merger agreement, waive any inaccuracies of the other
party's representations and warranties and waive compliance with any of the
agreements or conditions of the other party contained in the WorldxChange merger
agreement.
Post-closing indemnification; escrowed shares
After the completion of the WorldxChange merger, World Access will be
entitled to indemnification from and against any and all losses incurred by
World Access, its successors or assigns, and their respective officers,
employees, consultants and agents as a result of any of the following:
- a breach of any representation or warranty of WorldxChange in the
WorldxChange merger agreement;
- a breach of any representation or warranty of WorldxChange in the
certificate to be provided by WorldxChange at the closing with respect to
the truth, accuracy and fulfillment of representations, warranties and
covenants of WorldxChange;
- a breach prior to the completion of the WorldxChange merger of any
covenant or agreement of WorldxChange contained in the WorldxChange
merger agreement; or
- the imposition of the suspended $17.6 million dollar fine, or other
monetary penalty, imposed in connection with or related to a matter
involving WorldxChange before the California Public Utilities Commission.
However, World Access will only be entitled to indemnification if the
imposition arises out of wrongful acts or omissions of WorldxChange which
occur after the effective date of the order related to the matter and
before the completion of the WorldxChange merger.
WorldxChange will not have to indemnify World Access for losses incurred
because of acts of World Access performed under the management services
agreement between World Access and WorldxChange. All claims for indemnification
must be asserted no later than one year following the completion of the
WorldxChange merger. No claim may be made, except in limited circumstances,
until the amount of each loss in excess of $150,000 exceeds $3.0 million in the
aggregate, at which time World Access may claim indemnification for the amount
of losses, in each case net of $150,000, in excess of $3.0 million.
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The merger agreement contemplates that World Access and WorldxChange will
enter into an escrow agreement at the closing of the merger. Under this escrow
agreement, a total of 2,453,385 shares of the World Access shares to be issued
to WorldxChange shareholders in the merger will be escrowed as security for
potential post-closing indemnification claims of World Access as described
above. These escrowed shares will reduce the shares to be distributed to each
WorldxChange shareholder immediately after the merger on a pro rata basis. The
escrowed shares will constitute World Access's sole source of recovery for any
indemnification claims. Under the escrow agreement, shares released from escrow
to pay indemnification claims of World Access will be valued at $20.38 per
share. Any shares remaining not released to World Access as of the first
anniversary of the closing of the merger, or that are valued in excess of any
indemnification claims of World Access that may be pending at that time, will be
released to the WorldxChange shareholders on a pro rata basis.
Upon approval of the WorldxChange merger agreement and the transactions
contemplated by the WorldxChange merger agreement by the WorldxChange
shareholders, Edward S. Soren, a shareholder of WorldxChange, will serve as the
attorney-in-fact and agent of the WorldxChange shareholders with authority to
take any actions permitted to be taken by the WorldxChange shareholders under
the WorldxChange merger agreement and the escrow agreement, including those
related to indemnification.
WORLDXCHANGE SERVICES, VOTING AND PARTICIPATION AGREEMENTS
This section of the joint proxy statement/prospectus describes agreements
related to the WorldxChange merger agreement, including the World Access
stockholders' voting and stock transfer restriction agreement, the WorldxChange
shareholders' voting and stock transfer restriction agreements, the escrow
agreement, the World Access -- WorldxChange services agreement and the Foothill
Capital Corporation participation agreement. While World Access and WorldxChange
believe that these descriptions cover the material terms of these agreements,
these summaries may not contain all of the information that is important to you.
World Access voting agreement
On February 11, 2000, WorldxChange and certain World Access stockholders,
including Armstrong International Telecommunications, Inc., WorldCom Network
Services, Inc., The 1818 Fund III, L.P., John D. Phillips, Walter J. Burmeister,
W. Tod Chmar Geocapital V, L.P., Geocapital Advisors, L.P., Geocapital Investors
V, L.P., Gilbert Global Equity Partners, L.P., Gilbert Global Equity Partners
(Bermuda), L.P. and Resurgens Partners, LLC, entered into a voting and stock
transfer restriction agreement, pursuant to which each World Access stockholder
agreed to vote all of its shares of World Access capital stock, whether owned
beneficially or of record, as well as any other shares of World Access capital
stock such World Access stockholder acquires prior to the completion of the
WorldxChange merger, in favor of the WorldxChange merger and the adoption and
approval of the WorldxChange merger agreement. Each World Access stockholder
also agreed to vote against any action or agreement that would result in a
material breach of any covenant, representation or warranty of World Access
contained in the WorldxChange merger agreement. Further, each World Access
stockholder agreed not to, except in limited circumstances, sell, hypothecate,
transfer, pledge, encumber, assign or otherwise dispose of any of its shares of
World Access capital stock prior to the termination of the voting and stock
transfer restriction agreement. The voting and stock transfer restriction
agreement terminates upon the first to occur of:
- the termination of the WorldxChange merger agreement in accordance with
the termination provisions of the WorldxChange merger agreement,
- the completion of the WorldxChange merger and
- October 31, 2000.
As of the World Access record date, the World Access stockholders that
entered into the voting and stock transfer restriction agreement owned shares of
World Access capital stock representing approximately % of the voting stock
of World Access voting together as a single class.
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WorldxChange voting agreements
World Access has entered into separate voting and stock transfer
restriction agreements with the following WorldxChange shareholders: Tom
Cirrito; Roger B. Abbott and Rosalind Abbott, whose shares of WorldxChange
capital stock are owned jointly; Walter Anderson; and Edward S. Soren. Each
voting and stock transfer restriction agreement is substantially similar and
contains the following provisions:
- each WorldxChange shareholder must vote all of its shares of WorldxChange
capital stock (whether owned beneficially or of record), as well as any
other shares of WorldxChange capital stock acquired prior to the
completion of the WorldxChange merger, in favor of the WorldxChange
merger and the adoption and approval of the WorldxChange merger
agreement;
- each WorldxChange shareholder must vote against any action or agreement
that would result in a material breach of any covenant, representation or
warranty of WorldxChange contained in the WorldxChange merger agreement;
- subject to exceptions designed to ensure that the same number of shares
of WorldxChange capital stock remain subject to the restrictions and
obligations set forth in the voting and stock transfer restriction
agreements, no WorldxChange shareholder may:
- sell, transfer, or otherwise dispose of any shares of WorldxChange
capital stock or options to acquire shares,
- trade or take any position, hedge or otherwise, with respect to shares
of WorldxChange capital stock or options to acquire such shares,
- enter into any voting arrangement with respect to shares of
WorldxChange capital stock or options to acquire such shares or
- take any action that would make any of such WorldxChange shareholder's
representations or warranties untrue to a material extent or have the
effect of preventing or materially impeding the WorldxChange
shareholder from performing any of its obligations;
- except for Edward S. Soren, Roger B. Abbott and Rosalind Abbott (as
described below), until six months following the completion of the
WorldxChange merger, no WorldxChange shareholder may (i) transfer or
enter into any contract or understanding with respect to the transfer of
any of the shares of World Access common stock to be received by the
shareholder in the WorldxChange merger or (ii) trade or take any
position, hedge or otherwise, with respect to the shares of World Access
common stock received by the shareholder in the WorldxChange merger; and
- each voting and stock transfer restriction agreement terminates upon the
first to occur of (i) the termination of the WorldxChange merger
agreement in accordance with its termination provisions
Because the above-referenced shareholders hold a significant number of
WorldxChange stock, there is a greater likelihood that the WorldxChange merger
will be approved. The WorldxChange voting agreements represent approximately an
aggregate of 35,440,940 WorldxChange capital stock, which is approximately 83.2%
of the voting stock of WorldxChange.
Executive management services agreement with WorldxChange
World Access has entered into an Executive Management Services Agreement
with WorldxChange under which World Access will manage the operations and
business affairs of WorldxChange as if World Access and WorldxChange had already
completed the WorldxChange merger. The agreement calls for World Access to serve
as the exclusive agent for WorldxChange to provide all management services
required for the operation and management of WorldxChange. World Access has the
authority, to the fullest extent permitted by law, to take all actions and make
all decisions on behalf of WorldxChange in the operation and management of
WorldxChange's day to day business affairs. World Access may contract with third
parties to perform the management services. WorldxChange will reimburse World
Access, on a monthly basis, for all expenses incurred by World Access on behalf
of WorldxChange. WorldxChange is
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obligated to provide and furnish World Access with any reasonable assistance
and/or information necessary for World Access to perform the services under the
agreement. The agreement will terminate on the first to occur of the following:
- the parties terminate the WorldxChange merger agreement;
- the completion of the WorldxChange merger;
- World Access gives WorldxChange 15 days notice or WorldxChange materially
breaches the services agreement; or
- World Access materially breaches the services agreement.
Foothill Capital Corporation participation agreement
On February 11, 2000, World Access entered into a participation agreement
with Foothill Capital Corporation under which WorldxChange can borrow money. A
participation agreement is an agreement that establishes the terms under which
an additional lender, referred to as a participant and in this case World
Access, provides a portion of the funds to be borrowed under a loan arrangement
to a lead lender. In this participation agreement, Foothill is the lead lender
and will act as agent for World Access in dispersing the funds and in
administering and collecting the loan. The Foothill participation agreement
allows World Access to advance up to $45.0 million to WorldxChange. The terms of
the World Access loan are governed by the terms of an existing loan arrangement
between Foothill and WorldxChange.
Advances by World Access under the Foothill agreement are structured as a
term loan which bears interest at a rate of 11% per annum and matures on
February 11, 2001. Both the term loan and the existing indebtedness to Foothill
under the loan arrangement are secured by a security interest in all personal
property of WorldxChange. The participation interest of World Access in the term
loan is a last-out participation, which means that at any time after an
acceleration by Foothill of the maturity of the obligations under the loan
arrangement, or the failure of WorldxChange to repay such obligations in full
upon the obligations stated maturity, all amounts collected or received by
Foothill will be applied first to the repayment of all principal, interest and
costs owing to Foothill, and then, to repayment of amounts owing to World
Access.
World Access elected to participate in this facility instead of loaning
directly to WorldxChange in order to establish a stronger security position
related to these borrowings. Under the Foothill loan, participant lenders have a
first lien on essentially all the assets of WorldxChange. If for any reason the
WorldxChange merger was not consummated, World Access fully expected to be
repaid and wanted to provide its stockholders the maximum security available
related to this loan. World Access has no business relationship with Foothill
other than it's participation in this loan.
As of October 1, 2000, WorldxChange owes $69.2 million under the Foothill
loan, including $35.7 million advanced by World Access. World Access expects the
entire $45.0 million in bridge funds to be advanced to WorldxChange prior to the
consummation of the WorldxChange merger. These funds are being used to finance
operating losses expected to be incurred by WorldxChange prior to the merger
date as well as to make permanent investments in working capital that are
required to support WorldxChange's growth. Upon consummation of the merger,
World Access intends to forgive this loan and, as a result will account for this
$45.0 million as additional purchase price.
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INFORMATION REGARDING WORLDXCHANGE
WorldxChange is a global telecommunications company that specializes in
providing high-quality, low-cost domestic and international telecommunications
services. WorldxChange has established operations in North America, Europe and
the Pacific Rim. WorldxChange's global facilities include 43 switches located in
major metropolitan areas in ten countries. Switches are devices that direct
calls and record billing information. WorldxChange connects its switches with a
network of owned and leased undersea and land-based cables.
WorldxChange's services currently include international and domestic long
distance telephone service, pre-paid calling card services, operator services,
and Internet access. WorldxChange markets these services through direct mail,
independent agents, direct sales and media advertising. WorldxChange currently
serves customers in the United States, Australia, Belgium, Canada, France,
Germany, Guatemala, The Netherlands, New Zealand and the United Kingdom.
Services
WorldxChange provides a variety of retail telecommunication and information
services to residential and commercial customers, including international and
domestic long distance telephone service and pre-paid calling card services,
operator services and Internet access. WorldxChange also provides wholesale and
resale services to carrier customers.
Retail services
WorldxChange offers international and domestic long distance telephone
service and pre-paid calling card services in all of its primary geographic
markets, including the United States, Australia, Belgium, Canada, France,
Germany, The Netherlands, New Zealand and the United Kingdom. In addition,
WorldxChange offers Internet access service in the United States, The
Netherlands, New Zealand, and the United Kingdom. Each of these services is
described in more detail below.
International and domestic long distance telephone service. International
and domestic long distance telephone service is accessed from a customer's
billing location, such as the home or office. In North America, Germany,
Australia and New Zealand, customers who have subscribed to WorldxChange's
service may access the WorldxChange network by dialing a prefix. U.S. customers
who have subscribed to WorldxChange's service may use the service by dialing
"1+," and U.S. customers who have not subscribed must dial a seven-digit code.
Most of WorldxChange's U.S. residential customers use the seven-digit access
code. WorldxChange's international and domestic long distance telephone service
generally enables customers to call to any destination.
Calling card services. WorldxChange sells pre-paid calling card services
in most of the countries in which it operates. In these countries, customers
access WorldxChange's calling card service by dialing a national toll-free
number or a local access number.
Internet access services. WorldxChange introduced its Internet access
service, known as "wxc.net", in June 1999. Customers access WorldxChange's
Internet service by dialing a local or toll-free number. This service is offered
to residential and commercial customers for a fixed monthly price.
Other retail services. WorldxChange also provides the other retail
services described below. These services currently account for a relatively
small portion of WorldxChange's revenues and are currently provided as ancillary
offerings.
- Toll-free service. WorldxChange provides domestic toll-free service to
customers in most of the countries in which it operates. Toll-free
customers in the United States also may obtain an enhanced feature known
as "follow me" service, under which toll-free calls are automatically
forwarded to alternate numbers until answered.
- Directory assistance. WorldxChange provides its U.S. and Canadian long
distance customers with nationwide directory assistance service 24 hours
a day.
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- Dedicated access service. This service provides customers with a
dedicated, leased transmission line that connects the customer's business
directly to our network. This service is marketed to high-volume
customers in the United States, Germany and the United Kingdom and can be
used for voice, data, video and Internet access.
- Operator services. In the United States, WorldxChange offers 24-hour
operator service to customers that have pre-selected the WorldxChange
service. In addition, alternative operator services are offered,
predominately for U.S. bound calls originating from countries outside the
United States.
Wholesale services
Carrier services. WorldxChange sells long distance transmission capacity
to carriers through a direct sales force in the United States, Australia,
Canada, New Zealand and the United Kingdom. These customers, which include some
of the largest carriers in the world, may purchase capacity to carry traffic
where they do not have their own routes, where they require additional or
reserve capacity, or where WorldxChange is able to provide more favorable
pricing. These carrier customers use WorldxChange transmission capacity to
provide service to their customers.
Other wholesale services. WorldxChange sells transmission capacity to
customers that offer their own branded products and services such as private
label calling cards. In addition, WorldxChange also sells transmission capacity
to resellers for subsequent sale of long distance services to their customers.
The WorldxChange network
As of October 1, 2000, WorldxChange's network consisted of:
- 43 switches in ten countries;
- long-term rights to use on-land cable capacity in the United States;
- seven satellite earth stations at locations in the United States and
abroad; and
- an international transmission network consisting of direct ownership
interests and long-term rights to use the following undersea cables:
Americas-I
APCN
Atlantic Crossing
Cantat 3
Canus 1
Columbus II
F.L.A.G.
Guam-Philippines
HAW-5
Jasuraus
PacRim East
Pan American
PTAT
Taino-Caribe
Tasman 2
TAT-12/TAT-13
TPC-5
UK-Belgium 6
UK-Germany 6
UK-Japan
UK-Netherlands 12
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WorldxChange also has arrangements to connect with the telecommunications
networks of large telecommunications carriers in each of Australia, Belgium,
Canada, Chile, France, Germany, Guatemala, The Netherlands, New Zealand and the
United Kingdom, as well as arrangements to connect with the networks of major
carriers in the United States.
Costs of call origination, transmission and termination
The major components of WorldxChange's costs include the cost of
origination, transmission and termination.
Origination and termination. In general, WorldxChange pays a per-minute
fee to originate and terminate calls. WorldxChange can reduce the costs of its
U.S. calls by having a direct connection with the applicable local telephone
companies, which allows WorldxChange to carry a larger portion of each call on
its network. WorldxChange can reduce these costs outside North America by
connecting with the large national carriers. In addition, these connections
allow WorldxChange to provide network access through prefix code dialing and to
transport calls on its network originating in a greater number of locations.
Transmission. WorldxChange currently uses a combination of direct
ownership interests in undersea cables, long-term rights to use on-land and
undersea cables, leased lines and arrangements with other carriers, to manage
its transmission costs. WorldxChange usually tries to acquire ownership
interests in long-term rights to use undersea cables and/or that connect cities
with substantial calling traffic between them. However, WorldxChange has used
leased lines in regions where long-term rights of use are either too expensive
or if WorldxChange believes prices for long-term rights of use will decline, or
where long-term rights of use are not available. In some cases, WorldxChange
uses specialized equipment to further increase the capacity of the cables on
which it has long-term rights of use.
Other. In addition to the cost of origination, transmission and
termination, the other costs of the WorldxChange network relate primarily to
switching and related equipment, WorldxChange's Internet access equipment and
network management and related software.
Network operations
North America. WorldxChange monitors and maintains the North American
portion of its network from a centralized network operations center in San
Diego, which operates 24 hours a day.
Overseas operations. Currently, each of the foreign WorldxChange operating
subsidiaries monitors its own domestic switching and network functions.
WorldxChange's San Diego network operation center monitors the intercontinental,
intercountry and intracountry portions of the WorldxChange network.
Information systems. WorldxChange's information systems provide vital
operating information and statistics. These information systems are relied upon
to monitor carrier traffic volumes and patterns and price schedules and are used
to respond quickly to changes in these traffic volumes, patterns and prices and
assist in routing calls to their destination in the least expensive manner.
WorldxChange has installed a wide area network linking all its switch sites,
which coordinates the use of WorldxChange's systems.
North American network
WorldxChange has switches in each of the ten cities listed below that are
connected with the WorldxChange network.
<TABLE>
<S> <C> <C>
Chicago Montreal Vancouver
Dallas New York City Washington D.C.
Los Angeles San Francisco
Miami Toronto
</TABLE>
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WorldxChange connects the North American portion of its network with other
regions of the world through interests on the Americas-I, Atlantic Crossing,
Canus 1, Columbus II, HAW-5, Taino-Caribe and TPC-5 undersea cables.
U.S. network. Prior to March 1999, WorldxChange leased most of its on-land
cables from MCI WorldCom. As those leases expired, they were converted to
long-term rights of use covering the same capacity. These new arrangements also
allow additional capacity to be added in the future.
In February 1999, WorldxChange entered into a five-year lease with Level 3
Communications providing additional capacity to carry calls, which is commonly
referred to as transmission capacity. This lease is convertible into a long-term
right of use at the end of the lease.
European network
WorldxChange connects the European portion of its network with other
regions of the world through interests on the Atlantic Crossing, Cantat 3,
Columbus-II, F.L.A.G., PTAT, TAT-12/TAT-13, UK-Belgium 6, UK-Germany 6 and
UK-Netherlands 12 undersea cables.
ACC Acquisition. In November 1999, WorldxChange acquired the operations of
ACC Corp. in France, Germany and the United Kingdom, and a switch in Italy. This
acquisition expanded WorldxChange's presence in these key European markets.
WorldxChange is in the process of integrating the operations and network
equipment into its existing operations and network. No assurance can be given
that this integration can or will be successful.
Pacific Rim network
WorldxChange has a total of nine switches in Australia. WorldxChange
connects the Asia Pacific portion of its network with other regions of the world
through interests on the APCN, Jasuraus, F.L.A.G., Guam-Philippines, PacRim
East, Tasman 2, TPC-5 and US-Japan undersea cables.
Latin America network
WorldxChange has a switch in Guatemala City, Guatemala and Santiago, Chile.
WorldxChange connects the Latin American portion of its network through an
ownership interest in the Pan American undersea cable, as well as via satellite
services.
Network hardware and software
North America. WorldxChange uses switches throughout its North American
network. These switches enable WorldxChange to handle large, simultaneous call
volumes, provide high quality service to customers and connect with local
carriers.
During the fourth quarter of 1998, WorldxChange experienced technical
problems with a new switch that it installed in New York. The problems included
the failure of the switch to record billing information for calls. WorldxChange
worked with the vendor of the switch to fix the problems and has implemented new
procedures to detect any similar problems that may arise with this switch or
similar switches in the future. However, there can be no assurance that
WorldxChange will not experience additional problems with its switching
equipment in the future.
Overseas operations. WorldxChange uses both switches assembled by
WorldxChange and purchased from outside vendors in markets outside of North
America. The switches assembled by WorldxChange are personal computer-based
devices designed to route calls and provide customer service and billing
functions. Shortly before WorldxChange acquired ACC Corp.'s U.K. operations, ACC
introduced a new billing system in the United Kingdom that has not performed
properly, resulting in delaying billing and billing inaccuracies. WorldxChange
has installed its own billing system in place of the faulty ACC system in the
United Kingdom. However, there can be no assurance that this replacement billing
system will not also experience problems.
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Least cost routing. WorldxChange uses a combination of hardware and
software to route a call over the most cost-efficient route available at the
time the call is placed. Prices for various destinations fluctuate daily.
WorldxChange uses routing software to frequently revise routing tables,
including accounting for fluctuations in currency exchange rates, as the cost of
routes changes. WorldxChange employs a group of employees based in San Diego who
focus on monitoring the routing of calls and seeking to minimize transmission
costs. In addition to the monitoring performed by WorldxChange's San Diego-based
team, a limited amount of the monitoring is performed in each of the countries
in which WorldxChange operates.
Internet network
WorldxChange provides Internet access from its network. Internet customers
dial an access number, which connects the customer over the WorldxChange network
to WorldxChange's server in Los Angeles, which ultimately connects the customer
to the Internet. WorldxChange monitors its Internet network from its San Diego
network operations center.
Termination arrangements
WorldxChange terminates calling traffic through a number of routing
alternatives. These alternatives include resale arrangements, operating
agreements and other termination arrangements as described below.
Resale arrangements provide WorldxChange with multiple options to route
traffic through switches in various destination countries. These arrangements
generally involve terminating traffic through a third party. For example,
WorldxChange does not have operations in Afghanistan. If one of its customers
wishes to place a call to Afghanistan, WorldxChange can pass the call on to a
third party carrier by purchasing some of the excess capacity on that carrier's
network. The carrier would then terminate the call in Afghanistan either
directly or through another carrier with which it has a relationship.
During a typical month, WorldxChange may purchase capacity from more than
80 vendors. WorldxChange pays per-minute charges to use much of this capacity,
which subjects WorldxChange to potential price increases. In addition, since
WorldxChange generally obtains this capacity on a short-term basis, it may
experience service cancellations. WorldxChange's vendor contracts provide that
rates are subject to change after notice periods varying from one to 30 days.
The pricing of termination services depends on such factors as the volume of
call traffic and the time of day.
The Federal Communications Commission or foreign regulatory agencies may
assert that some of WorldxChange's call termination practices do not comply with
current international settlement rules and policies, such as current
international simple resale rules. WorldxChange could face sanctions, including
forfeitures, if the Federal Communications Commission were to find that some of
WorldxChange's termination arrangements violate Federal Communications
Commission rules.
Sales and marketing
WorldxChange uses a number of marketing channels to reach customers. These
channels include direct mail, independent sales agents, multilevel marketing, a
direct sales force, affinity groups, the Internet and media advertising. This
multi-faceted approach allows WorldxChange to customize its marketing for
specific geographic markets and services.
United States
WorldxChange uses several channels to market its services to U.S.
customers, including direct mail, its recently introduced "xPectations ML"
multi-level marketing program, direct sales and other channels such as affinity
programs, the Internet and media advertising. These channels are described
below.
Direct mail. WorldxChange has developed a number of different direct mail
programs, each designed to appeal to a particular market segment. Direct mail is
used principally to market services to residential and commercial customers who
have not pre-subscribed to WorldxChange's service.
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Multilevel marketing. In October 1998, WorldxChange introduced its
xPectations ML marketing program in the United States. This program involves the
marketing by independent representatives of WorldxChange long distance service,
as well as Internet access and prepaid calling card services, to potential
customers. These representatives also seek to recruit additional xPectations ML
representatives who will in turn market WorldxChange services to their contacts.
Program representatives earn commissions based on revenues collected by
WorldxChange from new customers that they sign up, as well as based on revenues
collected from customers signed up by other representatives that they recruit to
the program.
WorldxChange also uses the Internet to enhance the xPectations ML program.
xPectations ML representatives can obtain their own Web site, which WorldxChange
hosts. This allows representatives to use a professionally-designed Web site to
market the xPectations ML program to potential customers while allowing
WorldxChange to retain control over the advertising content on the site.
Direct sales. WorldxChange employs a direct sales force in the United
States. This direct sales force primarily markets WorldxChange prepaid calling
cards to residential and commercial customers. They also sell excess
transmission capacity to carrier and other wholesale customers. The direct sales
approach is used for these services because they are more complex and usually
have a longer sales cycle.
Other channels. WorldxChange also uses affinity programs, the Internet and
media advertising to market its services in the United States. Under the
affinity programs, WorldxChange partners with other companies and organizations
to introduce and sell WorldxChange services. WorldxChange's Internet marketing
strategy includes the recent introduction of the "Virtual PIN" program under
which customers are able to purchase and recharge prepaid calling cards
exclusively through the WorldxChange website, which may be accessed at
www.worldxchange.com.
Europe
WorldxChange's marketing activities vary from country to country and are
based on aspects of WorldxChange's marketing programs used throughout the world.
For example, WorldxChange is in the process of beginning the process of
implementing the xPectations ML program in Europe, and WorldxChange has
commenced direct mailing campaigns modeled after its U.S. direct mail programs.
Marketing activities vary by the kind of service WorldxChange is selling
and the kind of customer WorldxChange is targeting within a particular country.
For example, in the United Kingdom, WorldxChange markets its residential long
distance services through affinity programs and direct mail programs. Direct
sales and independent agents are used to generate commercial long distance
business in the United Kingdom, direct sales are used to generate resale and
carrier and other business there, and independent agents are used to market
WorldxChange's calling card services there.
In The Netherlands WorldxChange uses direct mail, affinity programs, direct
sales and independent agents to market its residential and commercial long
distance services. WorldxChange also uses direct sales, independent agents and
limited media advertising to market other services in The Netherlands, including
its resale and carrier services.
In Belgium, WorldxChange relies on direct mail and independent agents to
market its residential long distance services and direct sales to market its
long distance service to commercial customers as well as sales of excess
capacity to carrier and other wholesale customers there. In addition,
independent agents also market WorldxChange's long distance services to Belgian
commercial customers.
WorldxChange is in the process of establishing a sales and marketing
program in France and Germany. In France, WorldxChange is promoting its
residential long distance service, which currently requires customers to dial a
prefix, through independent agents and direct mail. WorldxChange uses direct
sales to market calling card services and direct sales and independent agents to
market commercial long distance services, which require the use of a four-digit
access code, in France. WorldxChange is marketing its calling card services in
Germany primarily through independent agents and, to a lesser extent, through
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affinity programs. WorldxChange also has conducted direct mailing campaigns in
both France and Germany.
The Pacific Rim
WorldxChange's marketing strategy in Australia and New Zealand uses direct
mailing, independent agents, affinity programs and media advertising to reach
potential residential long distance customers. WorldxChange relies on direct
sales and independent agents to market its long distance service to commercial
customers and direct sales to reach calling card and carrier and other wholesale
customers.
Worldwide operations
U.S. headquarters operations
WorldxChange's senior management directs WorldxChange's operations and
those of its foreign operating subsidiaries and develops and oversees the
implementation of its overall business strategy from WorldxChange's San Diego
headquarters. Headquarters personnel currently perform centralized financial
services for WorldxChange's foreign operating subsidiaries, including financial
planning and analysis and cost control. WorldxChange's San Diego-based senior
management also coordinate the acquisition of additional transmission capacity,
either leased or purchased, based on the growth of traffic volumes in each
market and helps arrange financing and vendor discounts on behalf of
WorldxChange's foreign operating subsidiaries. In addition, headquarters
personnel perform worldwide treasury functions for WorldxChange's foreign
operating subsidiaries, including managing cash flows between the foreign
operating subsidiaries for the transmission of traffic between them as well as
the allocation of working capital.
Headquarters personnel also manage the expansion of the WorldxChange
network, which includes determining whether to acquire additional capacity for
existing operations and integrating foreign operating subsidiaries into
WorldxChange's network. Headquarters personnel also coordinate traffic routing
over the network, which involves the programming of WorldxChange's switches to
transport international calls over the route which is most likely to result in
the lowest-cost transmission without sacrificing quality.
Non-U.S. operations
Each of WorldxChange's foreign operating subsidiaries is a limited
liability company that is directly or indirectly wholly- or majority-owned by
WorldxChange. WorldxChange's significant operating subsidiaries are briefly
discussed below. WorldxChange has additional subsidiaries in other countries,
but the operations of these subsidiaries are not significant.
Australian operations
WorldxChange's Australian operating subsidiary provides local service and
international and domestic long distance service to residential and commercial
customers and sells excess transmission capacity to other carrier customers.
Calling card services are also provided. Current commercial customers in
Australia include multinational corporations, large national companies, as well
as small and medium-sized businesses.
Belgian operations
WorldxChange's Belgian operating subsidiary provides domestic and
international long distance and calling card services to residential and
commercial customers. It also sells excess transmission capacity to other
telecommunications carriers.
Dutch operations
WorldxChange's Dutch operating subsidiary provides local service and
domestic and international long distance service to residential and commercial
customers and call shops. Commercial customers include
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small and medium-sized businesses. This operating subsidiary also has reseller,
carrier and other wholesale customers.
French operations
WorldxChange's French operating subsidiary provides local service, domestic
and international long distance and calling card services to residential and
commercial customers. It also sells excess transmission capacity to other
telecommunications carriers.
German operations
WorldxChange's German operating subsidiary provides local service, domestic
and international long distance and calling card services to residential and
commercial customers. It also sells excess transmission capacity to other
telecommunications carriers.
New Zealand operations
WorldxChange's New Zealand operating subsidiary provides domestic and
international long distance services to residential and commercial customers, as
well as toll-free services.
U.K. operations
WorldxChange's U.K. operating subsidiary provides local service and
domestic and international long distance service to residential and commercial
customers and other carriers in the United Kingdom, as well as calling card
services. Current commercial customers include small and medium-sized
businesses.
Employees
As of October 1, 2000, WorldxChange employed approximately 876 people,
including officers, administrative and sales personnel, of which 786 were
full-time employees and 90 were part-time employees.
Properties
WorldxChange's principal offices are located at 9999 Willow Creek Road, San
Diego, California, where WorldxChange occupies approximately 36,100 square feet
under a lease that expires on August 31, 2002.
WorldxChange also maintains a 24,300 square-foot office at 9775
Businesspark Avenue, San Diego, California, which houses WorldxChange's human
resources, technical and certain other corporate functions. This lease expires
on July 31, 2002.
WorldxChange leases all of the facilities in which its switches are
installed. These leases are generally multi-year leases. In addition, our
foreign operating subsidiaries lease facilities for their respective corporate
offices and switch sites.
Legal proceedings
In May 1997, the California Public Utilities Commission issued an order
revoking WorldxChange's authority to provide intrastate calling service in
California and imposing other fines and penalties, including, among other
things, a $19.6 million fine, against WorldxChange based on the California
Public Utilities Commission's finding that WorldxChange had violated California
laws and regulations requiring WorldxChange to obtain prior consumer
authorization before switching consumers' long distance carriers. WorldxChange
has paid $2.0 million of the $19.6 million fine, with the balance suspended so
long as WorldxChange is not found to have committed any future violations of
statutes or California Public Utilities Commission directives. Under the
California Public Utilities Commission's order, the sanctions and fines are
binding on any successor to WorldxChange, unless the California Public Utilities
Commission orders otherwise. WorldxChange has requested that, in connection with
its approval of the
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WorldxChange merger, the California Public Utilities Commission agree that the
prohibition on intrastate calling service in California currently imposed on
WorldxChange not be extended to apply to World Access or any of its subsidiaries
other than WorldxChange. The California Public Utilities Commission has not yet
responded to this request. WorldxChange has implemented a number of policies and
procedures designed to help reduce the likelihood of future allegations of the
kind leading to the California Public Utilities Commission's order. However,
there can be no assurance that additional allegations of wrongdoing will not be
brought against WorldxChange in the future or that, if such allegations are
made, that they would not result in substantial expense and/or liability to
WorldxChange. For example, if such allegations were to be made in California and
WorldxChange were found to have violated statutes or any California Public
Utilities Commission directives, WorldxChange would be subject to paying the
$17.6 million portion of the California Public Utilities Commission fine that is
currently suspended, as well as potentially other fines and penalties, which
could be substantial. If WorldxChange were required to pay the suspended portion
of the California Public Utilities Commission fine and/or any such additional
fines or penalties, WorldxChange's business would be harmed. In September 1995,
the California Attorney General notified WorldxChange that it was investigating
alleged violations by WorldxChange of certain consumer protection laws.
WorldxChange commenced negotiations for a settlement with the California
Attorney General, but these negotiations were terminated in 1997 in connection
with the California Public Utilities Commission proceedings described above
without any settlement agreement. It is possible that the California Attorney
General could reopen its investigation of WorldxChange or commence a lawsuit
against WorldxChange based on the same or new or additional allegations of
wrongdoing by WorldxChange. If an investigation were to be reopened or a lawsuit
were to be commenced, WorldxChange would be forced to respond and defend itself,
which could result in significant expense and diversion of WorldxChange's
management's time and resources. In addition, WorldxChange could incur
significant liability pursuant to a settlement or adverse judicial ruling in
connection with any proceedings.
WorldxChange was also notified in September 1995 by the attorneys general
of five other states that they were investigating alleged violations by
WorldxChange of certain consumer protection laws. WorldxChange settled these
allegations by paying an aggregate amount of $475,000 and, without admitting
liability, consenting to civil injunctions.
WorldxChange is a party, from time to time, to legal and administrative
proceedings, claims and inquiries that arise in the ordinary course of its
business, as well as to other litigation, some of which proceedings, claims and
inquiries involve claims for substantial amounts of damages. Although the
ultimate outcome of these proceedings, claims and inquiries is uncertain,
WorldxChange does not believe that any of these proceedings, claims or inquiries
will materially harm WorldxChange's business.
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WORLDXCHANGE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with WorldxChange's
financial statements, the notes thereto and the other financial data included
elsewhere in this joint proxy statement/prospectus.
Overview
General
WorldxChange is a global telecommunications company that specializes in
providing high-quality, low-cost domestic and international telecommunications
services. WorldxChange has established operations in North America, Europe and
the Pacific Rim. WorldxChange's global facilities include switches located in
major metropolitan areas in ten countries.
Revenues
WorldxChange obtains its revenues from providing international and domestic
telecommunication services to retail and wholesale customers. WorldxChange's
retail revenues are derived from usage generated by residential and commercial
customers. WorldxChange's wholesale revenues are composed of revenues generated
from sales to other U.S. and foreign telecommunications carriers and resellers.
Revenues are derived mainly from the number of minutes, or fractions of
minutes, used by WorldxChange's customers and billed by WorldxChange and are
recognized upon completion of the calls, as well as, to a lesser extent, from
recurring monthly fees that WorldxChange recognizes when services are provided.
Prices for long distance calls have decreased substantially in many of the
markets that WorldxChange serves due to increased competition and to cost
reductions associated with technological advancements. As a consequence,
WorldxChange has experienced and expects to continue to experience declining
revenues per minute in these markets.
WorldxChange's revenues have increased from $331.7 million in fiscal 1997
to $421.6 million in fiscal 1999. WorldxChange's total retail revenues have
grown from $139.7 million in fiscal 1997 to $212.0 million in fiscal 1999.
WorldxChange's foreign retail revenues have increased from $28.1 million in
fiscal 1997 to $69.4 million in fiscal 1999. WorldxChange has achieved its
retail growth primarily through the use of direct mail marketing campaigns in
Europe, the U.S. and Australia, as well as through agent sales.
The following table reflects percentages of total revenue from
WorldxChange's North American and non-North American operations and by type of
customer for fiscal 1997, 1998, and 1999 and the nine months ended June 30, 1999
and 2000:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
-------------------- ------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Retail:
North America................................... 34% 31% 34% 31% 28%
Outside North America........................... 8 17 16 18 29
--- --- --- --- ---
Total Retail................................. 42 48 50 49 57
Carrier:
North America................................... 46 40 41 41 28
Outside North America........................... 3 2 3 4 13
--- --- --- --- ---
Total Carrier................................ 49 42 44 45 41
Operator Services................................. 9 10 6 6 2
--- --- --- --- ---
Total Revenues............................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
In November 1999, WorldxChange purchased the European operations of ACC
Corp, which is referred to in this discussion as ACC Europe. The acquisition of
ACC Europe has been accounted for
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using the purchase method of accounting. Accordingly, the results of ACC
Europe's operations have been included from the date of acquisition, November 4,
1999. The increase in revenues outside North America during the nine months
ended June 30, 2000 has been primarily attributable to this purchase.
Cost of services (exclusive of depreciation and amortization)
Cost of services, exclusive of depreciation and amortization, referred to
as "cost of services", is WorldxChange's largest expense and consists of both
variable and fixed costs. Variable costs include costs associated with the
origination and termination of calls. Virtually all calls WorldxChange carries
must be originated and terminated by a local carrier. Variable costs also
include the cost of transmitting calls using the long distance facilities of
other carriers, which WorldxChange uses if it cannot carry the traffic over its
own network. These local and long distance carriers charge on a per minute
basis. WorldxChange's fixed costs consist of leased point-to-point cable
capacity, which typically requires fixed monthly payments regardless of usage.
Because the cost of leased lines is fixed, transmitting a greater portion of
WorldxChange's traffic over the leased lines reduces its incremental marginal
transmission costs. Accordingly, once certain volume levels are reached, leased
line capacity can be more cost-effective than capacity acquired from other long
distance carriers.
Capitalized costs associated with WorldxChange's ownership interests in
cables and long-term rights of use in cables or other facilities are expensed in
depreciation and amortization and are therefore not accounted for as part of
cost of services. To the extent WorldxChange's expanded use of its interests in
cables or long-term rights of use in cables or other facilities reduces its
utilization of leased lines and the facilities of other long distance carriers,
WorldxChange believes the increase in depreciation expense associated with its
interests in cables or long-term rights of use in cables or other facilities
will be offset by a decrease in its variable and fixed cost of services.
Selling, general and administrative expenses
WorldxChange's selling, general and administrative expenses consist of
commissions paid to its independent agents and direct sales force, advertising
and promotional costs, direct mail expenses, employee compensation, occupancy,
insurance, professional fees, bad debt expense, expenses relating to customer
service operations and the costs related to maintaining and supporting its
systems. As WorldxChange starts operations in new markets, it incurs significant
start-up costs associated with establishing a supporting infrastructure,
particularly for hiring and training of personnel, leasing office space and
paying various fees in conjunction with its business. As WorldxChange increases
its sales and marketing efforts and commences operations in new markets,
WorldxChange expects that its sales and marketing expenses will increase.
Depreciation and amortization expenses
Depreciation and amortization expenses consist of depreciation of all fixed
assets and computer equipment, as well as amortization of the fixed costs
associated with WorldxChange's:
- owned and leased switching platforms, which have been capitalized and are
being amortized over their estimated useful lives or the term of the
lease, which is typically five to seven years; and
- Interests in cables or long-term rights of use in cables or other
facilities interests in international undersea and on-land fiber-optic
cable systems, which are being amortized over their estimated useful
lives, which is typically 20 years.
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WorldxChange expects depreciation and amortization expenses to increase
significantly as a result of the amortization of the $70.2 million of goodwill
and $17.0 million of customer list recorded in association with its purchase of
ACC Europe. Customer list is amortized over five years and goodwill is amortized
over 20 years.
Interest expense
Interest expense principally consists of interest payable on WorldxChange's
revolving credit agreement, subordinated notes, notes payable and capital
leases. As WorldxChange incurs additional indebtedness to expand its operations,
it expects interest expense to increase.
Income taxes
As of September 30, 1999, WorldxChange has net operating loss carryforwards
available for federal, state, and foreign tax purposes of approximately $74.2
million, $45.0 million and $55.0 million, respectively. The federal net
operating loss carryforwards will begin expiring in 2007, and the state net
operating loss carryforwards began to expire in 1999 and will continue to expire
through 2003, unless previously utilized. The Canadian and Netherlands net
operating loss carryforwards, in the amounts of $6.2 million and $5.5 million,
respectively, will begin expiring in 2003. WorldxChange's other foreign net
operating loss carryforwards carry forward indefinitely. The realization of
future domestic benefits from net operating loss carryforwards may be limited
under Section 382 of the Internal Revenue Code if certain cumulative changes
occur in its equity ownership. WorldxChange has not recognized any income tax
benefit in its historical financial statements because it believes the
realization of the deferred tax asset is uncertain. See Note 7 to Consolidated
Financial Statements.
Results of operations
Nine months ended June 30, 2000 compared to nine months ended June 30, 1999
Revenues. Total revenues increased by 39.3% to $423.9 million in the first
nine months of fiscal 2000 from $304.3 million for the first nine months of
fiscal 1999. The increase in revenues was primarily attributable to revenues
from ACC Europe, which WorldxChange acquired in November 1999, and continued
internal growth in WorldxChange's retail and carrier revenues, offset by a
decrease in operator services revenues in North America.
In North America, revenues increased by 3.4% to $246.1 million for the
first nine months of fiscal 2000 from $238.0 million for the first nine months
of fiscal 1999. The increase was primarily attributable to an increase in
WorldxChange's retail revenue from $93.8 million in the first nine months of
fiscal 1999 to $120.8 million for the same period of fiscal 2000. This increase
in revenue is attributable to WorldxChange's multilevel marketing program which
was initiated in October 1998 and its expanded sales and marketing efforts for
its calling card products. The multilevel marketing program was initiated to
augment WorldxChange's direct mail marketing efforts and provide an additional
retail sales distribution channel. Operator services revenue declined 58.2% to
$7.4 million for the first nine months of fiscal 2000 from $17.7 million for the
first nine months of fiscal 1999. WorldxChange made a strategic decision during
the latter part of fiscal 1999 to reduce both marketing and sales effort in the
operator services market. WorldxChange's North American carrier revenues
declined 6.8% to $117.9 million for the first nine months of fiscal 2000 from
$126.5 million for the first nine months of fiscal 1999.
In the Pacific Rim, revenues decreased by 11.2%, to $38.2 million for the
first nine months of fiscal 2000 from $43.0 million for the first nine months of
fiscal 1999. This decline was primarily attributable to the loss of
WorldxChange's largest reseller customer, which accounted for approximately 9.0%
of this region's revenues. This reseller was acquired by a competitor and the
competitor began to migrate the reseller's customer traffic off WorldxChange's
network in October 1998. The balance of the reduction was due to decreases in
pricing resulting from competitive pricing pressures and declining costs.
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In Europe, revenues increased by 499.6% for the first nine months of fiscal
2000 to $139.7 million from $23.3 million for the same period of fiscal 1999,
primarily due to the acquisition of ACC Europe.
Cost of services. Cost of services increased by 41.6% to $337.8 million
for the first nine months of fiscal 2000 from $238.6 million for the same nine
months in fiscal 1999 and, as a percentage of revenue, increased to 79.7% from
78.4%, respectively. Cost of services as a percentage of revenue increased
primarily as a result of higher costs associated with North American carrier
revenues and increased leased network capacity in Europe. Retail revenues have
lower costs than those associated with carrier revenues. ACC Europe's costs are
lower because the percentage of its revenues that are retail revenues is greater
than the comparable percentage for WorldxChange excluding ACC Europe. North
America cost of services as a percentage of revenues increased from 83.3% in the
first nine months of fiscal 1999 to 85.8% in the first nine months of fiscal
2000. The increase was associated with a increase in carrier revenue costs,
partially offset by a higher revenue mix of retail revenues. Cost of services as
a percentage of revenues remained constant in the Pacific Rim. In Europe,
excluding ACC Europe, cost of services as a percentage of revenues increased
from 78.3% for the first nine months of fiscal 1999 to 90.3% for the same period
of fiscal 2000. This increase was due to additional costs associated with
obtaining interconnection with the telecommunications networks of dominant local
carriers in various countries and meeting their minimum capacity level
requirements, as well as expansion of WorldxChange's European network
infrastructure.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 40.3% to $124.0 million for the first nine
months of fiscal 2000 from $88.4 million for the same period in fiscal 1999 and,
as a percentage of revenues, increased from 29.1% to 29.3%. The increase in
selling, general and administrative expenses was due to the purchase of ACC
Europe, increased spending in Europe and direct costs associated with increases
in revenues. These expenses in Europe, excluding ACC Europe, increased from
$13.8 million for the first nine months of fiscal 1999 to $20.2 million for the
first nine months of fiscal 2000. This increase was due to increased sales,
operations and back office infrastructure to support sales growth and the
expansion into new markets in Europe. Selling, general and administrative
expenses in the Pacific Rim remained relatively flat. Selling, general and
administrative expenses in North America decreased to $56.6 million for the
first nine months of fiscal 2000 from $57.5 million for the same period of
fiscal 1999. The decrease in these expenses in North America was due to a
decrease in promotional spending. As a percentage of revenue, North America
selling, general and administrative expenses decreased to 20.7% in the first
nine months of fiscal 2000, from 21.0% in the first nine months of fiscal 1999.
Included in selling, general and administrative expenses was bad debt expense of
$15.2 million for the first nine months of fiscal 2000 and $11.0 million for the
same period in fiscal 1999. The increase in bad debt expense was attributable to
an increase in revenue. Bad debt expense as a percentage of revenue remained
consistent at 3.6% in the first nine months of fiscal 2000 as compared to the
first nine months of fiscal 1999. Management has enhanced its account monitoring
and reporting systems designed to reduce bad debt exposure and allow for timely
identification, follow-up and mitigation of potential risk customers.
WorldxChange expects selling, general and administrative expenses to continue to
grow as revenues increase and as it continues to expand into new markets and
build infrastructure.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased to $35.1 million for the first nine months of fiscal 2000
from $12.4 million in the first nine months of fiscal 1999. The increase in
depreciation and amortization was due to the amortization relating to $87.2
million of intangible assets recorded in association with the purchase of ACC
Europe and $12.2 million of goodwill recorded in association with the purchase
of a minority interest in WorldxChange's Australian operations and increased
depreciation associated with the build-out of network and supporting
infrastructure.
Interest expense. Interest expense increased by 81.6% to $22.7 million for
the first nine months of fiscal 2000 from $12.5 million in the first nine months
of fiscal 1999. The increase was primarily due to the debt associated with the
purchase of ACC Europe and the on-land fiber optic capacity.
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Fiscal 1999 compared to fiscal 1998
Revenues. Total revenues for fiscal 1999 increased by 5.7% to $421.6
million from $398.9 million for fiscal 1998. The increase in revenues was
primarily associated with an increase in European and North American retail
revenues, which was partially offset by a decrease in operator services revenues
in North America.
In North America, revenues increased for fiscal 1999 by 4.9% to $337.5
million from $321.8 million in fiscal 1998. The increase in revenue was
primarily attributable to increased retail and carrier revenues offset by a
decline in operator services revenue. Retail revenues increased 15.3% from
$123.5 million in fiscal 1998 to $142.4 in fiscal 1999. This increase in retail
revenue is attributable to increased promotional spending and the introduction
of WorldxChange's multilevel marketing program. In October 1998, WorldxChange
initiated a multilevel marketing program to augment its direct mail marketing
efforts and provide an added retail sales distribution channel. Also
contributing to the increase in retail revenue was WorldxChange's expanded sales
and marketing efforts for its calling card products. Revenue derived from
operator services decreased 43.5% from $40.5 million for fiscal 1998 to $22.9
million for fiscal 1999. The decline in operator services revenues was due to
WorldxChange's strategic decision to reduce marketing efforts in the operator
services market. WorldxChange's North American carrier revenues increased 9.1%
to $172.0 million for fiscal 1999 from $157.7 million for fiscal 1998.
In the Pacific Rim, revenues decreased by 4.8%, to $55.6 million for fiscal
1999 from $58.4 million for fiscal 1998. This decline was primarily attributable
to the loss of WorldxChange's largest reseller customer, which accounted for
approximately 23% of this region's revenues. This reseller was acquired by a
competitor, and the competitor began to migrate the reseller's customer traffic
off WorldxChange's network in October 1998. A substantial portion of the
reduction in revenues attributable to the reseller was offset by increased
retail revenue generated through direct mail and agent sales.
In Europe, revenues increased by 52.4% for fiscal 1999 to $28.5 million
from $18.7 million for the same period of fiscal 1998, primarily due to
increases in retail revenues. Retail revenues increased due to geographic
expansion in the region and increased direct mail campaigns in the region.
Cost of services. Cost of services increased by 14.3% to $328.3 million
fiscal 1999 from $287.3 million for fiscal 1998 and, as a percentage of revenue,
increased to 77.9% from 72.0%. Cost of services as a percentage of revenue
increased primarily as a result of increasing costs associated with carrier
revenues. Carrier revenues as a percentage of total revenues increased for
fiscal 1999 compared to fiscal 1998. These revenues have higher costs than those
from retail and operator services revenues. Cost of services as a percentage of
revenues increased in North America from 75.7% for fiscal 1998 to 81.6% for
fiscal 1999. Cost of services as a percentage of revenues decreased in the
Pacific Rim from 77.0% for fiscal 1998 to 72.8% for fiscal 1999. Cost of
services as a percentage of revenues increased in Europe from 84.5% for fiscal
1998 to 88.1% for fiscal 1999. This increase was due to additional costs
associated with the expansion of WorldxChange's European network infrastructure.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 8.0% to $124.1 million for 1999 from $115.0
million for fiscal 1998 and, as a percentage of revenues, increased from 28.8%
to 29.4%. The increase was primarily due to increased spending in Europe and the
Pacific Rim, offset in part by reduced general and administrative spending in
North America. These expenses in Europe increased from $10.8 million for fiscal
1998 to $21.2 million for fiscal 1999. This increase was due to increased sales,
operations and back office infrastructure to support sales growth and the
expansion into new markets in Europe. Selling, general and administrative
expenses in the Pacific Rim increased by 6.0% to $21.3 million for fiscal 1999
from $20.1 million for fiscal 1998. This increase was due to growth in the
supporting infrastructure and increased staffing levels in customer service in
WorldxChange's Pacific Rim markets. Selling, general and administrative expenses
in North America decreased to $81.5 million for fiscal 1999 from $84.1 million
for fiscal 1998. The decline in these expenses in North America was due to
WorldxChange's efforts to streamline its North American operations by reducing
personnel costs and overall spending. Included in selling, general and
administrative expenses was bad debt expense of $15.2 million for fiscal 1999
and fiscal 1998. Bad debt expense as a percentage of
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revenue decreased to 3.6% in fiscal 1999 from 3.8% in fiscal 1998. Bad debt
expense as a percentage of revenue has improved as management has enhanced its
account monitoring and reporting systems designed to reduce bad debt exposure
and allow for timely identification, follow-up and mitigation of potential risk
customers.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased by 43.6% to $17.7 million for fiscal 1999 from $12.3 million
of fiscal 1998. The increase in depreciation and amortization was due to the
continued build-out of WorldxChange's network and supporting infrastructure.
Interest expense. Interest expense increased by 41.3% to $16.9 million for
fiscal 1999 from $11.9 million in fiscal 1998. The increase was primarily due to
interest associated with the subordinated promissory notes issued between May
and August of 1998.
Fiscal 1998 compared to fiscal 1997
Revenues. Total revenues for fiscal 1998 increased by 20.3% to $398.9
million from $331.7 million for fiscal 1997. Growth in revenues during 1998 was
attributable primarily to an increase in traffic volume, offset in part by a
decline in average carrier prices. Total revenues for fiscal 1998 were also
negatively impacted by WorldxChange's inability to bill for certain calls during
the period due to technical difficulties with a newly installed switch.
In North America, WorldxChange's revenues for fiscal 1998 increased by
10.3% to $321.8 million, primarily as a result of substantial increases in sales
of residential and operator services. Revenues from residential customers
increased by 13.5% to $116.1 million for fiscal 1998 from $102.3 million for
fiscal 1997. The increase in residential revenues was due to increased
promotional spending in late fiscal 1997, which stimulated growth in the first
half of fiscal 1998. Revenues from operator services increased by 51.7% to $40.5
million for fiscal 1998 from $26.7 million for fiscal 1997. Revenues from
carrier and commercial customers were relatively stable.
In the Pacific Rim, revenues increased by 139.3% to $58.4 million for
fiscal 1998 from $24.4 million for fiscal 1997, reflecting significant increases
in the usage of WorldxChange's services by residential and commercial customers.
In Europe, revenues increased by 19.9% to $18.7 million for fiscal 1998
from $15.6 million for fiscal 1997, reflecting significant increases in the
usage of WorldxChange's services by residential and commercial customers.
Cost of services. Cost of services increased by 22.2% to $287.3 million
for fiscal 1998 from $235.0 million for fiscal 1997 and, as a percentage of
revenues, increased to 72.0% for fiscal 1998 from 70.9% for fiscal 1997. Cost of
services increased as a percentage of revenues as a result of higher costs
associated with carrier revenues. In addition, during the fourth quarter of
fiscal 1998, WorldxChange experienced technical problems with a newly installed
switch. The problems included the failure of the switch to record billing
information for certain calls. As a result, WorldxChange was unable to bill for
all of its calls. This resulted in WorldxChange's incurring costs for calls with
no corresponding revenues, which increased overall costs.
Selling, general and administrative expenses. In fiscal 1998, selling,
general and administrative expenses increased by 1.3% to $115.0 million from
$113.5 million for fiscal 1997 and, as a percentage of revenue, decreased to
28.8% for fiscal 1998 from 34.2% for fiscal 1997. A significant portion of the
increase in spending was directly related to the increase in revenues, as
marketing and sales expenses increased due to increases in commissions,
marketing, and other related expenses. Selling, general and administrative
expenses, as a percentage of revenue, declined primarily due to a reduction in
bad debt expense. Bad debt expense was $15.2 million in fiscal 1998 compared to
$22.3 million for fiscal 1997. Bad debt expense as a percentage of revenue
decreased to 3.8% for fiscal 1998 from 6.7% in fiscal 1997. The reduction in bad
debt expense was due to WorldxChange increasing its efforts in the initial
review for credit approval for new customers and has enhanced its
account-monitoring and reporting systems designed to reduce its bad
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debt exposure and allow for timely recognition of risk customers. Furthermore,
WorldxChange increased the number and quality of its credit and collection staff
worldwide.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased by 41.4% to $12.3 million for fiscal 1998 from $8.7 million
for fiscal 1997. This increase was due to the expansion of WorldxChange's
network and capital deployed as it entered new markets.
Interest expense. Interest expense increased by 36.8% to $11.9 million in
fiscal 1998 from $8.7 million in fiscal 1997. The increase in interest was due
to the increase in the level of debt and capital lease obligations WorldxChange
incurred in order to fund its network expansion.
Liquidity and capital resources
As a consequence of the rapid expansion of WorldxChange's business and its
historical capital constraints, WorldxChange has incurred cumulative net losses
from inception in 1991 through June 30, 2000. These losses and associated
negative cash flows resulted primarily from start-up costs, marketing expenses
and capital expenditures required to build and deploy its network. WorldxChange
has utilized cash provided from financing activities to fund losses and capital
expenditures. The sources of this cash have primarily been private placement
equity offerings, the issuance of subordinated debt, capital lease and vendor
financing and WorldxChange's revolving credit facility.
For the nine-month period ending June 30, 2000, WorldxChange's net cash
used in operating activities was $37.9 million, primarily consisting of a net
loss of $96.6 million, offset by an increase in operating working capital
deficit of $12.1 million and $50.3 million of non-cash charges consisting of the
provision for bad debts and depreciation and amortization. Cash used in
investing activities totaled $60.9 million, which was primarily for the purchase
of ACC Europe. Cash provided by financing activities consisted primarily of the
net private placement equity offering totaling $48.7 million and increased net
borrowings of $40.8 million, offset by debt and capital lease payments of $21.8
million. As of June 30, 2000 WorldxChange had approximately $6.9 million in cash
and cash equivalents.
For fiscal 1999, cash used in operating activities was $31.5 million,
primarily composed of a net loss of $63.9 million, offset by an increase in
operating working capital and non-cash charges relating to the provision for bad
debt and depreciation and amortization. Cash used in investing activities,
primarily capital expenditures, totaled $27.6 million in fiscal 1999. Cash
provided by financing activities amounted to $76.3 million, primarily consisting
of the receipt of $101.6 million in private placement equity offerings, offset
by repayments of subordinated debt, certain notes payable and capital lease
obligations. As of September 30, 1999, WorldxChange had $38.0 million in cash
and cash equivalents.
As of September 30, 1998, WorldxChange had approximately $20.9 million in
cash and cash equivalents. WorldxChange's net cash used in operating activities
was $31.7 million in fiscal 1998, primarily caused by a net loss of $27.5
million and a decrease in operating working capital of $28.0 million, offset by
$27.5 million of non-cash charges consisting of the provision for bad debts and
depreciation and amortization. Cash used for investing activities totaled $12.0
million in fiscal 1998, which was for capital expenditures. The capital
expenditures primarily consisted of purchases associated with the expansion of
WorldxChange's network, computers, and general equipment. Net cash provided by
financing activities totaled $60.5 million for fiscal 1998, which consisted of
$55.2 million in proceeds from the issuance of subordinated debt, $10.0 million
from a private placement equity offering and a $0.7 million increase in
WorldxChange's revolving credit facility, offset by $5.3 million in the
repayment of debt and capital lease obligations. Net cash used in operating
activities for fiscal 1997 was $7.2 million and net cash used in investing
activities, principally capital expenditures, was $10.9 million for fiscal 1997.
WorldxChange financed these capital expenditures primarily with long-term debt.
Net cash provided by financing activities for fiscal 1997 was $18.8 million.
In October 1997, the California Public Utilities Commission issued its
final order which imposed a $19.6 million fine against WorldxChange, $2.0
million of which was charged against earnings in fiscal 1997 and was paid in
April 1998 and the remainder of which is suspended by the California Public
Utilities
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Commission subject to WorldxChange's refraining from committing any violations
of statutes or California Public Utilities Commission directives. See
"Information Regarding WorldxChange -- Legal Proceedings".
Capital expenditures, including assets acquired by incurring capital lease
obligations, for fiscal 1997, 1998 and 1999 totaled $19.4 million, $22.4
million, and $81.0 million, respectively. Capital expenditures, including assets
acquired by incurring capital lease obligations, for the nine-month period ended
June 30, 2000 totaled approximately $32.5 million. The following table lists
capital expenditures by type (in $ millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
----------------------- -----------
1997 1998 1999 2000
----- ----- ----- -----------
<S> <C> <C> <C> <C>
Telecommunications equipment and cables.............. $13.7 $15.4 $62.0 $26.0
Computer equipment and software...................... 3.0 2.7 7.6 4.0
Office furniture, equipment and vehicles............. 2.5 2.6 4.8 1.6
Leasehold improvements............................... .2 1.7 6.6 .9
----- ----- ----- -----
Total...................................... $19.4 $22.4 $81.0 $32.5
===== ===== ===== =====
</TABLE>
Pursuant to the WorldxChange merger agreement, WorldxChange is subject to
restrictions in making capital expenditures and other investments until the
completion of the merger. WorldxChange expects to incur an additional $7.0
million in capital expenditures prior to the completion of the WorldxChange
merger. WorldxChange expects to fund these expenditures through vendor or other
third party financing.
WorldxChange has utilized capital lease and vendor financing to assist in
financing the building of its network, systems and infrastructure. As of June
30, 2000, the balance of capital lease financing obligations totaled $47.2
million, primarily relating to the lease of its switching platforms in North
America. In addition, as of June 30, 2000 WorldxChange had outstanding $41.0
million vendor financed note payables relating to various fiber optic cable
acquisitions.
WorldxChange has a billing and collection services agreement with Zero Plus
Dialing Incorporated. Under this services agreement, WorldxChange has the
ability to sell receivables, subject to full recourse provisions, to Zero Plus
Dialing. At June 30, 2000 WorldxChange was not contingently liable for any
amounts under the recourse provisions of the services agreement.
In March 1997, WorldxChange entered into its credit facility, which
consists of an accounts receivable-based revolving credit facility and a term
loan. In February 2000, the credit facility was amended to increase the maximum
borrowing capacity, add a bridge loan, extend the maturity date of the revolving
credit agreement and term loan and reduce the interest rate charge. The credit
facility allows WorldxChange to borrow up to a maximum of $65.0 million, subject
to restrictions and borrowing base limitations. The maximum available borrowing
base under the revolving credit agreement is $30.0 million and is determined as
a specified percentage of eligible accounts receivable. The balance outstanding
on the revolving credit agreement is reduced by the application of payments
received on collections of accounts receivable. The accounts receivable
revolving credit facility had an outstanding balance of approximately $27.8
million at June 30, 2000, and $2.2 million available for borrowing pursuant to
the borrowing base limitations. This facility bears interest at the prime rate
plus 1.75% and is repaid through collections of accounts receivable. The term
loan was issued in the amount of $5.0 million, which at June 30, 2000 had an
outstanding balance of approximately $3.8 million, bears interest at the prime
rate plus 5.00% and requires monthly reductions of principal of $300,000 plus
interest. The bridge loan has a maximum borrowing availability of $30.0 million,
bears interest at 11% and matures on February 11, 2001. The maturity date may be
extended until October 1, 2003 by the bridge loan participant. As part of the
amended agreement and the WorldxChange merger agreement, World Access agreed to
participate in the bridge loan and agreed to fund the $30.0 million under the
agreements. As of June 30, 2000, the outstanding balance on the bridge loan was
$35.7 million and $9.3 million was available for borrowing. In total as of June
30, 2000, WorldxChange had $67.3 million borrowed under the credit facility and
$11.5 million available for borrowing.
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In May 2000, the credit facility was amended to increase the maximum
borrowing capacity to $80.0 million. The $15.0 million increase in the borrowing
capacity consists of an additional $15.0 million under the bridge loan, under
the same terms and conditions.
The revolving credit agreement and the term loan with Foothill totaling $67
million on June 30, 2000 matures on October 1, 2000, unless both the $55 million
of subordinated promissory notes due November 30, 2000 and the $53 million of
ACC Europe acquisition notes due December 28, 2000 are retired prior to October
1, 2000, in which case the revolving credit agreement and the term loans with
Foothill mature October 1, 2003. As of June 30, 2000, WorldxChange was in
compliance with the restrictive covenants under the credit facility.
WorldxChange's obligations under the credit facility are secured by a first
position in substantially all of its assets.
In January 2000, WorldxChange secured a $15 million loan commitment from
Gold & Appel, which is an affiliate of Walter Anderson, a WorldxChange director.
Any borrowings under this loan commitment will bear interest at 15% and is
payable on December 31, 2000. As of June 30, 2000, WorldxChange had no
borrowings outstanding associated with this commitment.
In fiscal 1997, WorldxChange sold a 40% interest in WorldxChange Pty. Ltd.,
its Australian operating subsidiary, to an affiliate of the Asian Infrastructure
Fund. The proceeds of approximately $9.0 million from this sale were used to
finance working capital requirements and the expansion of this operating
subsidiary. In September 1999, WorldxChange issued 1,554,763 shares of its
common stock to the Asian Infrastructure Fund in exchange for the 40% interest
in WorldxChange Pty. Ltd. The acquisition was accounted for under the purchase
method of accounting at a value of $17.1 million or $11.00 per share.
From May through August 1998, WorldxChange issued and sold subordinated
promissory notes in the aggregate principal amount of $55.0 million. These notes
bear interest at the rate of 12.5% per annum, provide for quarterly payments of
interest only and mature on November 30, 2000. These notes provide the lender
the right to require WorldxChange to use 35% of the net proceeds from any
private placement or public offering of its common stock to repay the notes. The
balance of these notes at September 30, 1999 and June 30, 2000 was $45.2
million.
In September 1998, WorldxChange sold 788,127 shares of its common stock in
a private placement at a price of $12.69 per share for total proceeds of $10.0
million. In December 1998, WorldxChange sold 871,087 shares of its common stock
in a private placement at a price of $11.48 per share for total proceeds of
$10.0 million. In March 1999, WorldxChange sold 3,000,000 shares of its common
stock in a private placement at a price of $10.00 per share for total proceeds
of $30.0 million. In June 1999, WorldxChange sold 2,727,270 shares of its common
stock in a private placement at a price of $11.00 per share for total proceeds
of $30.0 million. The offerings raised a total of $80.0 million. The proceeds
from these private placements were used for network expansion, to pay for direct
mail campaigns and other marketing activities, to repay subordinated debentures,
and to prepay a portion of WorldxChange's subordinated promissory notes and for
other corporate purposes.
In August 1999, WorldxChange entered into an agreement to sell 30,000
shares of its Series A Convertible Preferred Stock in a private placement for
total proceeds of $30.0 million. These shares are convertible into 2,727,270
shares of WorldxChange's common stock. Prior to the conversion of these shares,
WorldxChange is obligated to pay the holder of these shares an annual dividend
equal to 4% of the face amount of these shares. These dividends are declared and
accrued monthly.
WorldxChange entered into two agreements during fiscal 1999 for the
acquisition of the right to use land-based fiber optic cable systems for a total
price of $45.0 million. The vendors have agreed to finance 90% of the commitment
at 12% interest, with monthly principal and interest payments over a five year
amortization period. As of June 30, 2000, WorldxChange had acquired
approximately $37.8 million from Level 3, leaving $7.2 million to be ordered.
On November 4, 1999, WorldxChange acquired the outstanding shares of
certain European subsidiaries of ACC Corp, a subsidiary of AT&T. The operations
of these subsidiaries are located in the United Kingdom, Germany, France and
Italy. As part of this transaction, WorldxChange also acquired
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from ACC Corp a switch located in the United States and certain long-term rights
of use in a transatlantic telecommunications cable system. The $113 million
purchase price for this transaction was composed of $60 million cash and a $53
million, 12% per annum interest rate note due on or before December 28, 2000.
WorldxChange financed $50 million of the cash payment through the issuance in
November 1999 of 50,000 shares of Series B Convertible Preferred Stock to two
existing shareholders for $50 million. These shares are convertible into
5,555,550 shares of WorldxChange's common stock. Prior to the conversion of
these shares, WorldxChange is obligated to pay the holder of these shares an
annual dividend equal to 4% of the face amount of these shares. These dividends
are declared and accrued monthly.
Prior to WorldxChange acquiring ACC Corp.'s U.K. operations, ACC
implemented a new billing system in the United Kingdom that did not function
properly, resulting in delayed billings and billings containing errors which had
to be manually corrected. The billing has been delayed as much as 75 days. This
has resulted in up to approximately $20.0 million in receivables being collected
up to 75 days later than under normal terms. Due to this delay in collections,
WorldxChange was forced to pay vendors late, negatively impacting the
relationships and requiring WorldxChange to incur late payment fees and interest
charges of approximately $500,000 with vendors. WorldxChange was able to
accurately estimate billing amounts and reflect these amounts in the applicable
quarterly operating results.
WorldxChange believes that it will be able to satisfy its operating cash
requirements through the maturity date of its credit facility from a combination
of cash and cash equivalents on hand, the proceeds of equity offerings,
availability under WorldxChange's vendor financing arrangements, its secured
credit facility, outstanding loan commitment, financing of WorldxChange's
European receivables and from cash advances from World Access. Under the
WorldxChange merger agreement, WorldxChange will need World Access' consent to
incur debt or raise additional proceeds from equity offerings, and there can be
no assurance that any additional debt or equity proceeds can or will be raised.
If the WorldxChange merger is not completed by the maturity of the credit
facility, WorldxChange will need to raise additional capital to pay, or will
need to restructure, its obligations in connection with the ACC Europe
acquisition and the subordinated promissory notes described above. No assurance
can be given that additional capital will be raised or that the obligations can
or will be restructured. The table below summarizes WorldxChange's financial
commitments as they relate to capital expenditures, secured and unsecured loans
and notes, and the credit facility.
Below is a table summarizing capital expenditures, commitments, and debt
obligations, which were discussed in detail above, as of June 30, 2000 (in
thousands):
<TABLE>
<CAPTION>
DUE DUE
WITHIN AFTER
1 YEAR 1 YEAR
---------- ---------
<S> <C> <C>
Commitments to acquire capital assets
Land based fiber optic cable from Level 3................. $ 7,200 $ --
Other estimated capital expenditures
Telecommunication equipment and cables................. 5,600 --
Computer equipment and software........................ 900 --
Other.................................................. 500 --
-------- -------
14,200 --
Existing debt obligations
Unsecured subordinated note due December 2000............. 53,000 --
Secured subordinated note................................. 45,200 --
Other secured notes....................................... 21,532 38,447
Credit facility........................................... 67,288 --
Capital leases............................................ 14,805 32,382
-------- -------
$201,825 $70,829
======== =======
</TABLE>
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Market risk
The carrying value of cash and cash equivalents approximates fair value due
to the short-term, highly liquid nature of the cash equivalents, which have
maturities of three months or less. Interest rate fluctuations would not have a
significant effect on the fair market value of cash equivalents held by
WorldxChange.
At June 30, 2000 WorldxChange had outstanding debt, excluding capital lease
obligations, in the amount of $225.5 million, of which $193.9 million is fixed
interest debt. Variable rate debt of $27.8 million carries adjustable interest
rates at the prime rate plus 1.75%, and the remaining $3.8 million carries an
adjustable rate at prime plus 5.0%. A one percentage point change in the
interest rate would change interest payments by approximately $29,100 per month.
Foreign currency exposure
While an increasing amount of WorldxChange's revenues will be denominated
in non-U.S. currencies, a disproportionate portion of its expenditures,
including interest, will be denominated in U.S. dollars. In addition, the assets
and liabilities of WorldxChange's non-U.S. subsidiaries are generally
denominated in local currencies. Accordingly, WorldxChange may be subject to
significant foreign currency exchange risks. In addition, WorldxChange may in
the future acquire interests in entities that operate in countries where the
expatriation or conversion of currency is restricted. WorldxChange currently
does not hedge against foreign currency exchange risks, but may in the future.
WorldxChange's exposure is diversified among a broad basket of currencies. At
September 30, 1999 WorldxChange's largest net asset exposures, which is defined
as foreign currency assets less foreign currency liabilities, were as follows:
FOREIGN CURRENCY EXPOSURES IN MILLIONS OF U.S. DOLLARS
<TABLE>
<S> <C>
Euro-based currencies......................... $3,749
British Pounds Sterling....................... 1,056
Australian Dollars............................ 920
Canadian Dollars.............................. 503
Other......................................... 61
</TABLE>
WorldxChange prepared sensitivity analyses to determine the impact of
hypothetical changes in foreign currency exchange rates on WorldxChange's
results of operations and cash flows. The foreign currency rate analysis assumed
that each foreign currency rate would change by 10% in the same direction
relative to the U.S. Dollar. However, these analyses did not include the
potential impact on sales levels or local currency prices. Based on the result
of these analyses, a 10% adverse change in foreign currency rates from September
30, 1999 levels would not materially affect WorldxChange's results of operations
or cash flows.
Euro conversion
On January 1, 1999, several member countries of the European Union
established fixed conversion rates and adopted the euro as their new common
legal currency. Since that date, the euro has traded on currency exchanges,
although the legacy currencies will remain legal tender in the participating
countries for a transition period between January 1, 1999 and January 1, 2002.
During the transition period, parties can elect to pay for goods and services
and transact business using either the euro or a legacy currency. Between
January 1, 2002 and July 1, 2002, the participating countries will introduce
euro currency coins and withdraw all legacy currencies.
The euro conversion may affect cross-border competition by creating
cross-border price transparency. WorldxChange is assessing its pricing and
marketing strategy in order to insure that it remains competitive in a broader
European market. In addition, WorldxChange is reviewing whether certain existing
contracts will need to be modified. WorldxChange's currency risks and risk
management for operations in participating countries may be reduced as the
legacy currencies now trade at a fixed exchange rate against
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the euro. WorldxChange will continue to evaluate issues involving introduction
of the euro. However, based on current information and assessments, WorldxChange
does not expect that the euro conversion will have a material adverse effect on
its results of operations or financial condition.
Seasonality
WorldxChange's European and Australian operations experience seasonality
during the summer seasons of those regions, which results in decreased customer
calling volumes.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
In June 1999, SFAS No. 133 was amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of SFAS 133. As a result of this amendment, SFAS No. 133 shall be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. In
accordance with SFAS No. 133, an entity is required to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gain and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. WorldxChange does not expect the adoption of this standard to have a
material effect on its consolidated financial position or results of operations.
On December 3, 1999, the Securities and Exchange Commission staff issued
SAB No. 101, Revenue Recognition in Financial Statements. The SAB spells out
four basic criteria that must be met before companies can record revenue. These
are: (i) persuasive evidence that an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the seller's price to the buyer
is fixed or determinable; and (iv) collectibility is reasonably assured. Many of
the examples in the SAB address situations that give rise to the potential for
recording revenue prematurely. They include transactions subject to
uncertainties regarding customer acceptance, including rights to refunds and
extended payment terms, and require continuing involvement by the seller.
In March 2000, the SEC issued SAB 101A -- Amendment: Revenue Recognition in
Financial Statements, that delays the implementation date of certain provisions
of SAB 101. Management does not believe the adoption of SAB 101 would have a
material impact on WorldxChange's operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Interpretation poses
and answers 20 separate questions dealing with APB 25 implementation practice
issues.
The Interpretation will be applied prospectively to new awards,
modifications to outstanding awards, and changes in employee status on or after
July 1, 2000, except as follows: (i) requirements related to the definition of
an employee apply to new awards granted after December 15, 1998; (ii)
modifications that directly or indirectly reduce the exercise price of an award
apply to modifications made after December 15, 1998; and (iii) modifications to
add a reload feature to an award apply to modifications made after January 12,
2000. Financial statements for periods prior to July 1, 2000 will not be
affected. Management does not expect the adoption of Interpretation No. 44 to
have a material effect on its consolidated financial position or results of
operations.
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WORLDXCHANGE SELECTED CONSOLIDATED FINANCIAL DATA
In the table below, WorldxChange provides you with selected consolidated
financial data of WorldxChange. The selected consolidated financial data as of
September 30, 1998 and 1999 and for each of the three years in the period ended
September 30, 1999 are derived from WorldxChange's audited consolidated
financial statements included elsewhere in this joint proxy
statement/prospectus. The selected consolidated financial data as of September
30, 1995, 1996 and 1997 and for the years ended September 30, 1995 and 1996 are
derived from WorldxChange's audited consolidated financial statements that are
not contained herein. The selected consolidated financial data as of June 30,
2000 and for the nine-month periods ended June 30, 1999 and 2000 are derived
from WorldxChange's unaudited consolidated financial statements included
elsewhere in this joint proxy statement/prospectus, which, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of such information. When you read this
selected consolidated financial data, it is important that you also read the
section titled "WorldxChange Management's Discussion and Analysis of Financial
Condition and Results of Operations" and WorldxChange's consolidated financial
statements and the related notes thereto included elsewhere in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------- -------
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $101.7 $183.9 $331.7 $398.9 $421.6 $304.3 $423.9
Cost of services (exclusive
of depreciation and
amortization)............ 64.5 127.9 235.0 287.3 328.3 238.6 337.8
------ ------ ------ ------ ------ ------ ------
Gross profit............... 37.2 56.0 96.7 111.6 93.3 65.7 86.1
Selling, general &
administrative........... 38.6 64.5 113.5 115.0 124.1 88.4 124.0
Depreciation and
amortization............. 3.1 7.0 8.7 12.3 17.7 12.4 35.1
------ ------ ------ ------ ------ ------ ------
Operating loss............. (4.5) (15.5) (25.5) (15.7) (48.5) (35.1) (73.0)
Interest expense........... 3.3 5.7 8.7 11.9 16.9 12.5 22.8
Other expense, net......... (0.2) 0.6 3.4 1.4 0.6 0.2 0.8
Minority interest.......... (0.2) (0.2) (0.5) (1.5) (2.3) (1.8) --
------ ------ ------ ------ ------ ------ ------
Net loss................... $ (7.4) $(21.6) $(37.1) $(27.5) $(63.7) $(46.0) $(96.6)
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
EBITDA(1).................. $ (1.4) $ (8.5) $(16.8) $ (3.3) $(30.9) $(22.7) $(37.9)
Cash provided by (used in)
operating activities..... 2.6 7.6 (7.2) (31.7) (31.5) (4.5) (37.9)
Cash used in investing
activities............... (4.9) (3.0) (10.9) (12.0) (27.6) (25.1) (60.9)
Cash provided by (used in)
financing activities..... 3.5 (2.3) 18.8 60.5 76.3 46.9 67.7
Capital expenditures....... 24.3 8.7 19.4 22.4 81.0 57.8 32.5
GEOGRAPHIC DATA:
Net revenues:
North America............ $100.9 $171.4 $291.7 $321.8 $337.5 $238.0 $246.0
Pacific Rim.............. 0.3 7.5 24.4 58.4 55.6 43.0 38.2
Europe................... 0.5 5.0 15.6 18.7 28.5 23.3 139.7
------ ------ ------ ------ ------ ------ ------
Total.................... $101.7 $183.9 $331.7 $398.9 $421.6 $304.3 $423.9
====== ====== ====== ====== ====== ====== ======
</TABLE>
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<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF JUNE 30,
---------------------------------------------- ---------------
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ---------------
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 1.4 $ 3.4 $ 4.3 $ 20.9 $ 38.0 $ 6.9
Working capital (deficit)...... (15.1) (35.4) (50.4) (37.0) (37.2) (307.3)
Total assets................... 55.2 62.8 103.7 120.1 235.0 430.4
Short-term debt and capital
lease obligations............ 13.5 15.7 9.5 20.3 20.4 201.8
Long-term debt, net of current
portion...................... 24.9 24.7 49.2 99.3 129.7 70.8
Minority interest.............. -- 0.3 8.8 7.3 -- --
Total shareholders' deficit.... (8.6) (32.0) (68.9) (89.6) (35.1) (95.9)
</TABLE>
---------------
(1) EBITDA as used in this joint proxy statement/prospectus is operating loss
plus depreciation and amortization expense and is presented because
WorldxChange believes that the information is commonly used in the
telecommunications industry as one measure of a company's operating
performance and historical ability to service debt. EBITDA from continuing
operations is not determined in accordance with generally accepted
accounting principles, is not indicative of cash provided by operating
activities, should not be used as a measure of operating income and cash
flows from operations as determined under generally accepted accounting
principles and should not be considered in isolation or as an alternative
to, or to be more meaningful than, measures of performance determined in
accordance with generally accepted accounting principles. EBITDA, as
calculated by WorldxChange, may not be comparable to similarly titled
measures reported by other companies and could be misleading unless all
companies and analysts calculate EBITDA in the same manner.
The following table reconciles WorldxChange's net loss to EBITDA:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------ ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net loss......................................... $(37.1) $(27.5) $(63.9) $(46.0) $(96.6)
Net interest expense............................. 8.7 12.0 16.9 12.5 22.7
Other expense, net............................... 3.4 1.4 .7 .2 .8
Minority interest................................ (.5) (1.5) (2.3) (1.8) --
Depreciation and amortization.................... 8.7 12.3 17.7 12.4 35.2
------ ------ ------ ------ ------
EBITDA........................................... $(16.8) $ (3.3) $(30.9) $(22.7) $(37.9)
====== ====== ====== ====== ======
</TABLE>
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COMPARISON OF THE RIGHTS OF HOLDERS OF WORLD ACCESS COMMON STOCK AND
WORLDXCHANGE COMMON STOCK
This section of the joint proxy statement/prospectus summarizes differences
between the World Access common stock and WorldxChange common stock. These
differences arise from differences between the Delaware law and the California
law, and between the corporate charters and bylaws of World Access and
WorldxChange. WorldxChange stockholders should read the full text of each
state's corporate statute and each companies' respective corporate charters and
bylaws for a more complete understanding of the differences between World Access
common stock and WorldxChange common stock. For information on how to obtain
these documents, see "Where You Can Find More Information" on the inside front
cover page of this joint proxy statement/prospectus.
The rights of World Access' stockholders are governed by its certificate of
incorporation, as amended, its bylaws and the laws of the State of Delaware. The
rights of WorldxChange's shareholders are currently governed by its articles of
incorporation, as amended and restated, its bylaws, as amended and restated, and
California law. Upon completion of the WorldxChange merger, the WorldxChange
shareholders will become World Access stockholders, and the WorldxChange
shareholders' rights will be governed by World Access' certificate of
incorporation, as amended, its bylaws and Delaware law.
Pursuant to the Voting and Share Transfer Restriction Agreements referred
to on page 112, the holders of WorldxChange's preferred stock have agreed to
vote in favor of the WorldxChange merger. Under the applicable certificates of
determination of preferences with respect to each series of preferred stock, if
the holder of shares of the series of preferred stock votes to approve a merger
or other business combination transaction involving WorldxChange, the holder is
deemed to have converted all of the holder's shares of the series into shares of
WorldxChange common stock immediately prior to consummation of the transaction.
Accordingly, no separate discussion of the rights of the holders of the
WorldxChange preferred stock is provided.
Comparison of authorized and outstanding capital stock
The authorized capital stock of World Access consists of 160,000,000
shares, of which 150,000,000 shares are common stock of $.01 par value per
share, and 10,000,000 shares of which are preferred stock of $.01 par value per
share. Note, however, that pursuant to this joint proxy statement/prospectus,
the World Access stockholders are being asked to approve an amendment to the
World Access certificate of incorporation which would increase the number of
shares of common stock World Access is authorized to issue to 290,000,000. As of
October 1, 2000, 73,254,336 shares of World Access common stock were
outstanding, and 613,905 shares of World Access preferred stock were
outstanding.
The authorized capital stock of WorldxChange currently consists of
110,000,000 shares, of which 100,000,000 shares shall be common stock of no par
value, and 10,000,000 shares of which shall be preferred stock of no par value.
As of October 1, 2000, 42,613,954 shares of WorldxChange common stock were
outstanding, and 30,000 shares of WorldxChange preferred stock were outstanding.
Comparison of classes of common stock
World Access and WorldxChange each have one class of common stock issued
and outstanding. Holders of World Access common stock and holders of
WorldxChange common stock are each entitled to one vote for each share held.
Comparison of requirements for special meeting of shareholders
Under Delaware law, special meetings of stockholders may be called by a
corporation's board of directors or such person or persons as may be authorized
by the corporation's certificate of incorporation or bylaws. World Access'
certificate of incorporation provides that special meetings of stockholders may
be called by the board of directors or by any officer instructed by the board of
directors.
Under California law, a special meeting of shareholders may be called by
the board of directors, the chairman of the board, the president or the holders
of shares entitled to cast not less than 10% of the votes
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<PAGE> 155
at the meeting or additional persons provided in the articles or bylaws.
WorldxChange's bylaws also provide that the Chief Executive Officer may call a
special meeting of shareholders.
Comparisons of requirements for action by written consent in lieu of
shareholders' meeting
Under both California and Delaware law, shareholders may execute an action
by written consent in lieu of a shareholder meeting. Both California and
Delaware law permit a corporation in its charter to eliminate such actions by
written consent. Pursuant to World Access' certificate of incorporation, World
Access stockholders may not take action without a meeting by written consent
except for preferred stockholders. WorldxChange's articles of incorporation do
not eliminate shareholder actions by written consent.
Elimination of the ability of stockholders to act by written consent could
lengthen the amount of time required to take stockholder actions, since certain
actions by written consent are not subject to the minimum notice requirement of
a stockholders' meeting. The elimination of stockholder actions by written
consents, however, could deter hostile takeover attempts. A holder or group of
holders controlling a majority interest of World Access' common stock would not
be able to amend World Access' certificate of incorporation, World Access'
bylaws or remove directors pursuant to a stockholder action by written consent,
but instead, would have to call a stockholders' meeting and observe the notice
periods determined by the World Access board pursuant to World Access' bylaws
prior to attempting to obtain approval of any such actions.
Comparison of record date for determining shareholders
The World Access bylaws provide that the World Access board of directors
may fix a record date that:
- in the case of determination of the stockholders entitled to vote at any
meeting of stockholders or adjournment of any meeting, may not be more
than 60 days or less than ten days before the date of the meeting; and
- in the case of any other action, may not be more than 60 days before the
action.
Furthermore, the World Access bylaws provide that if the World Access board of
directors does not fix a record date in the manner described above, then:
- the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders will be at the close of business on the
day next after the day that notice is given, or, if notice is waived, at
the close of business on the day after the day that the meeting is held;
and
- the record date for determining stockholders for any other purpose will
be at the close of business on the day the World Access board of
directors adopt the related resolution.
The WorldxChange bylaws provide that the board of directors may fix a time
in the future as a record date for the determination of the shareholders
entitled to notice of and to vote at any meeting of shareholders, to receive any
report, to receive any dividend or distribution, or any allotment of rights, or
to exercise rights in respect to any change, conversion or exchange of shares.
The record date will not be more than 60 days or less than ten days before the
date of any meeting, or more than 60 days before any other event for the
purposes of which it is fixed. When a record date is fixed, only shareholders of
record on that date are entitled to notice of and to vote at the meeting, to
receive any report, to receive a dividend, distribution or allotment of rights,
or to exercise the rights, as the case may be, notwithstanding any transfer of
any shares on the books of the corporation after the record date, except as
otherwise may be provided in the articles of incorporation or bylaws.
Comparison of procedures to nominate directors
The World Access bylaws require that board nominations be made by the board
of directors or a stockholder who gives timely notice to the secretary of the
company. To give timely notice, a stockholder's
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<PAGE> 156
nomination notice must be received by the secretary of World Access at least 120
days before the one-year anniversary of the date of the proxy statement in
connection with the previous year's annual meeting of stockholders. A nominating
stockholder's notice must be received by World Access no later than the close of
business on the tenth day following the earlier of:
- the day on which notice of the upcoming meeting was mailed or given to
the World Access stockholders; or
- the day on which public disclosure of the date of the upcoming meeting
was made by World Access if:
- no annual meeting was held in the previous year;
- the date of the upcoming annual meeting has changed by more than 30 days
from the date set forth in the previous year's proxy statement; or
- the upcoming meeting is not an annual meeting.
Under WorldxChange's bylaws, at any meeting of shareholders, a person may
be a candidate for election to WorldxChange's board only if the person is
nominated:
- by or at the direction of WorldxChange's board;
- by any nominating committee or person appointed by WorldxChange's board;
or
- by a shareholder of record entitled to vote at the meeting who complies
with the notice procedures and has given timely notice of the nomination
in writing to WorldxChange's secretary. To be timely, a shareholder's
notice must be delivered to the Secretary no later than the close of
business on the 60th day or earlier than the close of business on the
90th day before the meeting; provided, however, that if less than 70 days
notice of the date of the meeting is given by WorldxChange, notice by the
shareholder to be timely must be delivered no later than the 10th day
after the day on which public announcement of the date of the meeting is
first made by WorldxChange.
Comparison of number of directors
The World Access amended certificate of incorporation and bylaws provide
that the World Access board of directors may not have less than three nor more
than 12. The exact number of directors will be determined from time to time by
the World Access board of directors. Note, however, that in connection with
joint proxy statement/prospectus, World Access is seeking approval by its
stockholders of an amendment to its certificate of incorporation that would
increase the maximum number of directors to 15.
Under WorldxChange's articles of incorporation, the number of members of
the board of directors must be at least five, and not more than nine, unless
changed by an amendment to the articles of incorporation or by a bylaw duly
adopted by approval of the outstanding shares of WorldxChange. There are
currently seven members of WorldxChange's board of directors.
Comparison of classified board of directors
Delaware law provides that a corporation may divide its board of directors
into various classes with staggered terms of office under its certificate of
incorporation or bylaws. World Access' board of directors is currently divided
into three classes, as nearly equal in size as possible, with one class being
elected annually. Directors are elected to a term of three years and until their
successors are elected and qualified. You should note that, in connection with
this joint proxy statement/prospectus, World Access is seeking the approval of
its stockholders to an amendment to the certificate of incorporation of World
Access which would eliminate World Access' staggered board of directors. If this
amendment is approved, directors would be elected annually to a term of one
year. At an annual meeting in which a quorum is present, the persons receiving a
plurality of the votes cast would be elected as the directors.
WorldxChange's board of directors is not divided into classes.
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Comparison of procedures for the removal of directors
Under Delaware law a director may be removed, with or without cause, by the
holders of a majority of the outstanding shares then entitled to vote thereon
unless:
- the corporation has a classified board of directors, in which case a
director may be removed only with cause unless the certificate of
incorporation provides otherwise, or
- the corporation has cumulative voting, in which case, if less than the
entire board is to be removed, no director may be removed without cause
if the number of votes cast against the removal would be sufficient to
elect the director under cumulative voting.
World Access' bylaws provide for removal of directors only for cause.
Under California law, any director or the entire board of directors may be
removed without cause with the approval of a majority of the outstanding shares
entitled to vote thereon. However, no individual director may be removed, unless
the entire board is removed, if the number of votes cast against the removal
would be sufficient to elect the director under cumulative voting, whether or
not the corporation's articles of incorporation or bylaws do not otherwise
provide for cumulative voting. A corporation's board of directors may remove for
cause by declaring vacant the office of a director who has been:
- declared of unsound mind by an order of court or
- convicted of a felony.
Comparison of board of directors vacancies
Under Delaware law, vacancies and newly created directorships may be filled
by vote of a majority of the directors then in office, even though less than a
quorum, unless:
- otherwise provided in the corporation's certificate of incorporation or
bylaws, or
- the certificate of incorporation directs that a particular class is to
elect a director, in which case the majority of directors elected by the
class, or a sole remaining director elected by the class, will fill such
vacancy.
World Access' bylaws provide that vacancies on the World Access board of
directors and newly created directorships resulting from an increase in the
authorized number of members of the board of directors may be filled only by a
majority of the directors then in office, even if less than a quorum, or by a
sole remaining director.
Unless otherwise provided in a corporation's articles of incorporation or
bylaws, under California law, any vacancy on a board of directors, other than
one created by removal of a director, may be filled by approval of the remainder
of the corporation's board of directors. Even if the number of remaining
directors is less than a quorum, a vacancy may be filled by the unanimous
written consent of the directors then in office or by the affirmative vote of a
majority of the directors at a meeting held pursuant to notice or waivers of
notice or by a sole remaining director. Unless the articles of incorporation or
a bylaw adopted by the shareholders provide that the board may fill vacancies
occurring in the board by reason of the removal of directors, such vacancies may
be filled only with the approval of a majority of the outstanding shares
entitled to vote thereon. WorldxChange's bylaws provide that vacancies in the
WorldxChange board of directors, except for a vacancy created by the removal of
a director, may be filled by a majority of the remaining directors, even if less
than a quorum, or by a sole remaining director. A vacancy created by the removal
of a director by the shareholders or by court order may be filled only by a vote
of the shareholders at a duly held meeting at which a quorum is present.
Comparison of notice requirements of special meetings of the board of directors
The World Access bylaws provide that the chairman of the board, the
vice-chairman of the board, the president or a majority of directors then in
office may call special meetings of the board of directors. The
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<PAGE> 158
bylaws do not require a specific notice period, but only require that the notice
provide sufficient time for the convenient assembly of directors.
Special meetings of the WorldxChange board of directors for any purpose or
purposes may be called at any time by the chairman of the board, the president,
any vice president or the secretary, or by any two directors, or by one or more
shareholders holding not less than 25% of any series of preferred stock of the
corporation.
Written notice of the time and place of special meetings shall be delivered
personally to each director or communicated to each director by telephone or by
telegraph or mail, charges prepaid, addressed to him or her at his or her
address as it is shown upon the records of the corporation or, if it is not so
shown on the records or is not readily ascertainable, at the place at which
meetings of the directors are regularly held. In case the notice is mailed or
telegraphed, it should be deposited in the United States mail or delivered to
the telegraph company in the place in which the principal executive office of
the corporation is located at least forty-eight hours prior to the time of the
holding of the meeting. In case the notice is delivered, personally or by
telephone, it should be delivered at least twenty-four hours before the time of
the meeting. The mailing, telegraphing or delivery, personally or by telephone,
as above provided, should be due, legal and personal notice to each director.
Comparison of procedures for an amendment of certificate of incorporation and
bylaws
The World Access amended certificate of incorporation imposes a
super-majority voting requirement with respect to particular amendments. Any
amendment to the classified board provisions of the certificate of
incorporation, or any proposed change to the certificate or bylaws which is
inconsistent with the provision, requires the vote of holders of at least 75% of
the voting power of all shares entitled to vote in the election of directors,
voting as a single class. The World Access bylaws may be amended by the board of
directors or stockholders of World Access.
WorldxChange's articles of incorporation requires the approval of 66 2/3%
of the combined voting power of its shareholders to amend any provisions of
Article Eight, which deals with amendments, Article Four, which deals with
cumulative voting, or Article Five, which deals with the election and term of
directors.
Comparison of notice requirements of stockholder's meetings
World Access' bylaws provide that notice of a special meeting of
stockholders must be timely given in writing not less than ten days or more than
60 days before to the meeting. The notice must state the purposes for which the
meeting is called. The World Access bylaws require that board nominations be
made by the board of directors or a stockholder who gives timely notice to the
secretary of the company. To be timely, a stockholder's nomination notice must
be received by World Access at least 120 days before the one-year anniversary of
the date of the proxy statement in connection with the previous year's annual
meeting of stockholders. A nominating stockholder's notice must be received by
World Access no later than the close of business on the tenth day following the
earlier of:
- the day on which notice of the upcoming meeting was mailed or given to
the World Access stockholders; or
- the day on which public disclosure of the date of the upcoming meeting
was made by World Access if:
- no annual meeting was held in the previous year;
- the date of the upcoming annual meeting has changed by more than 30 days
from the date contemplated in the previous year's proxy statement; or
- the upcoming meeting is not an annual meeting.
The bylaws of WorldxChange provide that upon request in writing that a
special meeting of shareholders be called for any proper purpose, notice will be
given to shareholders entitled to vote that a
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<PAGE> 159
meeting will be held at a time requested by the person or persons calling the
meeting, not less than 35 or more than 60 days after receipt of the request. The
notice will specify the general nature of the business to be transacted at the
meeting, and no other business may be transacted at the meeting.
Comparison of stockholder approval of business combinations
World Access is subject to Section 203(a) of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the time that the stockholder became an interested stockholder, with
exceptions, unless:
- before such time, the board of directors of the corporation approved
either the business combination or the transactions that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transactions that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- at or after such time, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203(c)(3) defines "business combinations" to include:
- any merger or consolidation involving the corporation and (a) any
interested stockholder, or (b) any other corporation, partnership,
unincorporated association or other entity if the merger or consolidation
is caused by the interested stockholder and as a result of such merger or
consolidation, DGCL Section 203(a) is not applicable to the surviving
entity;
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets of the corporation involving the
interested stockholder, with exceptions;
- any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits, with
exceptions, provided by or through the corporation.
California law requires that holders of common stock receive common stock
of the surviving company or parent company in a merger of the corporation with
the holder of more than 50% but less than 90% of the target's or its affiliate's
common stock unless all of the target company's shareholders consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Although Delaware law does not parallel California law in this respect, under
some circumstances Section 203 provides similar protection to stockholders
against coercive two-tiered bids for a corporation in which the stockholders are
not treated equally.
Comparison of inspection of shareholder list
Both Delaware and California law allow any shareholder to inspect and copy
the shareholder list for a purpose reasonably related to the person's interest
as a shareholder. Delaware law provides for inspection rights as to a list of
stockholders entitled to vote at a meeting within a ten day period preceding a
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<PAGE> 160
stockholders' meeting for any purpose germane to the meeting. California law
provides, in addition, for an absolute right to inspect and copy the
corporation's shareholder list by persons holding an aggregate of 5% or more of
the corporation's voting shares, or shareholders holding an aggregate of 1% or
more of the shares who have made certain filings with the Securities and
Exchange Commission.
World Access' bylaws mirror the Delaware statutory provisions with respect
to inspection of shareholder lists. WorldxChange's bylaws mirror the California
statutory provisions with respect to inspection of shareholder lists.
Comparison of dividends and repurchases of shares
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if the capital of the
corporation is not impaired and the redemption or repurchase would not impair
the capital of the corporation.
Under California law, a corporation may not make any distribution to its
shareholders unless either:
- the corporation's retained earnings immediately prior to the proposed
distribution equal or exceed the amount of the proposed distribution; or
- immediately after giving effect to the distribution, the corporation's
assets exclusive of goodwill, capitalized research and development
expenses and deferred charges, would be at least equal to 1 1/4 times its
liabilities and the corporation's current assets would be at least equal
to its current liabilities or 1 1/4 times its current liabilities if the
average pre-tax and pre-interest expense earnings for the preceding two
fiscal years were less than the average interest expense for such years.
The tests are applied to California corporations on a consolidated basis.
Comparison of dissolution rights
Under Delaware law, unless the board of directors approves the proposal to
dissolve, the dissolution must be unanimously approved by all the shareholders
entitled to vote thereon. Only if the dissolution is initially approved by the
board of directors may the dissolution be approved by a simple majority of the
outstanding shares of the corporation's stock entitled to vote. In the event of
such a board-initiated dissolution, Delaware law allows a Delaware corporation
to include in its certificate of incorporation a supermajority (greater than a
simple majority) voting requirement in connection with dissolutions. World
Access' amended certificate of incorporation contains no supermajority voting
requirement.
Under California law, shareholders holding 50% or more of the total voting
power may authorize a corporation's dissolution, with or without the approval of
the corporation's board of directors, and this right may not be modified by the
articles of incorporation.
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COMPARATIVE PER SHARE MARKET PRICE DATA FOR WORLD ACCESS, STAR AND WORLDXCHANGE
The World Access common stock is traded on the Nasdaq National Market under
the symbol "WAXS," and the STAR common stock is traded on the Nasdaq National
Market under the symbol "STRX." WorldxChange's capital stock has no established
public trading market, and therefore has no public market price.
The following table sets forth, for the calendar quarters indicated, the
high and low sale prices per share of World Access common stock and STAR common
stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
WORLD ACCESS STAR
COMMON STOCK COMMON STOCK
-------------------- --------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
First Quarter............................. $33.500 $21.625 $28.047 $13.906
Second Quarter............................ 40.000 25.375 37.375 19.375
Third Quarter............................. 30.938 18.750 23.000 9.688
Fourth Quarter............................ 24.750 12.000 18.000 7.125
Year Ended December 31, 1999:
First Quarter............................. 22.750 6.375 15.750 9.625
Second Quarter............................ 14.375 7.500 11.875 7.438
Third Quarter............................. 16.188 10.313 8.438 5.250
Fourth Quarter............................ 22.250 10.313 8.797 4.688
Year Ending December 31, 2000:
First Quarter............................. 26.875 17.250 8.375 5.500
Second Quarter............................ 20.000 9.250 5.688 1.813
Third Quarter............................. 11.375 5.344 3.250 2.468
Fourth Quarter (through October 5)........ 5.690 5.190 1.880 1.660
</TABLE>
The following table sets forth the closing prices per share of World Access
common stock and STAR common stock as reported on the Nasdaq National Market on
(i) December 20, 1999, the business day preceding public announcement that World
Access and STAR had signed a letter of intent to merge and (ii) October 5, 2000,
the last full trading day for which closing prices were available at the time of
the printing of this joint proxy statement/prospectus. This table also sets
forth the equivalent price per share of STAR common stock on those dates. The
equivalent price per share is equal to the closing price of a share of World
Access common stock on that date multiplied by .386595, the number of shares of
World Access common stock to be issued in exchange for each share of STAR common
stock, assuming no adjustment to the exchange ratio as provided for in the STAR
merger agreement in connection with the PT-1 sale.
<TABLE>
<CAPTION>
WORLD ACCESS
STAR COMMON EQUIVALENT PER
COMMON STOCK STOCK SHARE PRICE
------------ ------------ --------------
<S> <C> <C> <C>
December 20, 1999.............................. $8.875 $20.500 $7.925
October 5, 2000................................ 1.656 5.250 2.030
</TABLE>
STAR and World Access believe that the STAR common stock presently trades
on the basis of the value of the World Access common stock expected to be issued
in exchange for the STAR common stock in the STAR merger, discounted primarily
for the uncertainties associated with the STAR merger. Apart from the publicly
disclosed information concerning World Access which is included in, or
incorporated by reference into, this joint proxy statement/prospectus, World
Access cannot state with certainty what factors account for changes in the
market price of the World Access common stock.
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<PAGE> 162
STAR stockholders are advised to obtain current market quotations for World
Access common stock and STAR common stock. No assurance can be given as to the
market prices of World Access common stock or STAR common stock at any time
before the completion of the STAR merger or as to the market price of World
Access common stock at any time after the completion of the STAR merger.
World Access and STAR have never paid cash dividends on their respective
shares of capital stock. Pursuant to the STAR merger agreement, STAR has agreed
not to pay cash dividends pending the consummation of the STAR merger without
the written consent of World Access.
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<PAGE> 163
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Financial Statements
of World Access give effect to several transactions, under seven different
scenarios, that World Access has completed or are currently contemplated as
follows:
<TABLE>
<S> <C>
Scenario 1: World Access acquires STAR, WorldxChange and TelDaFax.
Scenario 2: World Access acquires STAR and WorldxChange.
Scenario 3: World Access acquires STAR and TelDaFax.
Scenario 4: World Access acquires WorldxChange and TelDaFax.
Scenario 5: World Access acquires STAR.
Scenario 6: World Access acquires WorldxChange.
Scenario 7: World Access acquires TelDaFax.
</TABLE>
The Unaudited Pro Forma Condensed Combined Statements of Operations for the
year ended December 31, 1999 also give effect to:
- the FaciliCom acquisition;
- the Comm/Net acquisition;
- the LDI acquisition; and
- the acquisition of 33.03% of TelDaFax
as if each of the acquisitions had occurred on January 1, 1999. The Unaudited
Pro Forma Condensed Combined Balance Sheets as of June 30, 2000 under all seven
scenarios gives effect to the STAR, WorldxChange and TelDaFax acquisitions as if
each acquisition had occurred on June 30, 2000. The Unaudited Pro Forma
Condensed Combined Statements of Operations for the six months ended June 30,
2000 under all seven scenarios also give effect to the LDI acquisition and the
acquisition of 33.03% of TelDaFax as if the acquisitions had occurred on January
1, 1999.
On June 14, 2000, World Access entered into a definitive agreement pursuant
to which it agreed to acquire a majority share in TelDaFax in a series of
transactions. TelDaFax is a facilities-based provider of bundled fixed line,
wireless, Internet and e-Commerce services to business and residential customers
in Germany. World Access acquired a 33.03% interest in TelDaFax held by the Apax
funds by issuing World Access common stock at an exchange ratio of 1.025 shares
of World Access for each share of TelDaFax on September 21, 2000. World Access
intends to make a tender offer for all of the remaining shares of TelDaFax at
the same exchange ratio. World Access also will contribute certain of its German
businesses to TelDaFax in exchange for newly issued TelDaFax shares.
The completion of the tender offer and the contribution of the German
businesses is subject to acquisitions by World Access in the transactions of no
less than 50.1% of the fully diluted shares outstanding of TelDaFax on a pro
forma basis, regulatory approvals, including antitrust approval in Germany, and
the approval of the shareholders of World Access. The closing of the tender
offer and the contribution will occur simultaneously. The transactions are
anticipated to close around the end of the third quarter. Concurrent with the
transactions, World Access intends to apply for listing on one or more European
stock exchanges, including the Neuer Markt in Germany.
The pro forma adjustments are based upon currently available information
and upon assumptions that the management of World Access believes are
reasonable. Each of the acquisition transactions above has been accounted for
using the purchase method of accounting. The adjustments recorded in the
Unaudited Pro Forma Condensed Combined Financial Statements represent the
preliminary determination of these adjustments based upon available information.
The total estimated purchase price of the transaction has been allocated on a
preliminary basis to assets and liabilities based on management's estimate of
their fair values. There can be no assurance that the actual adjustments will
not differ significantly from the pro forma adjustments reflected in the
Unaudited Pro Forma Condensed Combined Financial Statements.
On a combined basis, the networks and operations of all three companies
contain redundant switching equipment, facilities and personnel. World Access
will eliminate these redundant assets and significantly
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<PAGE> 164
reduce the headcount of the combined company in an effort to realize cost
synergies. Implementing this process includes the write-down of switching and
transmission equipment taken out of service, the write-off of certain leasehold
improvements, establishing provisions for lease commitments remaining on certain
facilities with no future use, employee termination benefits and other related
costs. To the extent that these items relate to World Access facilities and
personnel, World Access will record a restructuring charge in accordance with
EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) and FAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of. All other costs relate to
facilities and personnel of the acquired enterprises, and, accordingly, will be
treated as purchase price in accordance with EITF 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination.
In connection with World Access' August 1, 2000 consolidation of
WorldxChange, management committed to such a consolidation plan. Although the
plan has been approved, management is still in the process of quantifying the
specific costs of the plan. Currently, management's best estimate of the costs
attributable to World Access facilities and personnel is in the range of $30.0
million to $50.0 million. This charge has been excluded from the pro-forma
financial statements. A range has not been established for costs associated with
WorldxChange facilities and personnel.
Consolidation plans remain under development for the STAR and TelDaFax
integrations. Such plans indicate that consolidation activities associated with
the STAR transactions will not materially involve World Access facilities or
personnel; however, consolidation plans related to TelDaFax transaction are too
preliminary to estimate an impact.
During the third quarter of 2000, World Access has incurred approximately
$35.0 million in additional selling, general and administrative expenses. The
major categories of such costs include costs associated with billing system
migration issues, re-branding efforts and increases in reserves for doubtful
accounts. The first two items relate to the WorldxChange integration. None of
these charges are reflected in the pro forma financial statements.
The Unaudited Pro Forma Condensed Combined Financial Statements are not
necessarily indicative of the financial position or the future results of
operations or results that might have been achieved if the foregoing acquisition
transactions had been consummated as of the indicated dates. The Unaudited Pro
Forma Condensed Combined Financial Statements should be read in conjunction with
the historical consolidated financial statements of World Access, LDI, STAR,
WorldxChange and TelDaFax and the related notes thereto. See "Incorporation of
Documents by Reference" and "Available Information."
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<PAGE> 165
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WORLD ACCESS
WORLD STAR AND STAR
ACCESS(28) STAR(1) ADJUSTMENTS COMBINED
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents(2(i)).................................. $ 172,479 $131,884 $ -- $ 304,363
Short-term investments...................................... 160,211 1,756 -- 161,967
Restricted cash............................................. 31,095 -- -- 31,095
Accounts and notes receivable............................... 264,678 99,810 -- 364,488
Prepaid expenses and other current assets................... 38,491 22,023 -- 60,514
Net assets held for sale.................................... 41,465 -- -- 41,465
---------- --------- --------- ----------
Total Current Assets................................... 708,419 255,473 -- 963,892
---------- --------- --------- ----------
Property and equipment...................................... 151,609 264,380 (94,000)(2) 321,989
Investment in TelDaFax...................................... 130,851 -- -- 130,851
Goodwill and other intangibles.............................. 1,080,797 3,968 (1,764)(4) 1,312,235
233,144(2)
11,900(2)
(15,810)(6)
Other assets................................................ 79,185 4,767 -- 83,952
---------- --------- --------- ----------
Total Assets........................................... $2,150,861 $ 528,588 $ 133,470 $2,812,919
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt............................................. $ 57,033 $ 86,680 $(55,685)(6) $ 88,028
Accounts payable............................................ 246,436 104,507 (21,789)(6) 329,154
Other accrued liabilities................................... 151,328 107,689 3,000(2) 260,794
(1,223)(6)
---------- --------- --------- ----------
Total Current Liabilities.............................. 454,797 298,876 (75,697) 677,976
---------- --------- --------- ----------
Long-term debt.............................................. 257,946 55,398 -- 313,344
Other long-term liabilities................................. 10,336 32,744 -- 43,080
---------- --------- --------- ----------
Total Liabilities...................................... 723,079 387,018 (75,697) 1,034,400
---------- --------- --------- ----------
Minority interests.......................................... -- -- -- --
Stockholders' Equity (Deficit):
Preferred stock............................................. 6 -- -- 6
Common stock................................................ 732 58 (58)(5) 1,027
227(2)
68(6)
Additional paid in capital.................................. 1,601,862 366,304 (366,304)(5) 1,952,304
279,484(2)
8,139(2)
62,819(6)
Deferred compensation....................................... -- (1,399) 1,399(5) --
Notes receivable from shareholders.......................... -- (3,856) 3,856(5) --
Accumulated other comprehensive loss........................ (12,239) (8,017) 8,017(5) (12,239)
Accumulated deficit......................................... (162,579) (211,520) 211,520(5) (162,579)
---------- --------- --------- ----------
Total Stockholders' Equity (Deficit)................... 1,427,782 141,570 209,167 1,778,519
---------- --------- --------- ----------
Total Liabilities and Stockholders' Equity............. $2,150,861 $ 528,588 $ 133,470 $2,812,919
========== ========= ========= ==========
<CAPTION>
PRO FORMA
WORLD ACCESS,
STAR AND
WORLDXCHANGE WORLDXCHANGE TELDAFAX
WORLDXCHANGE(10) ADJUSTMENTS COMBINED (20)
---------------- ------------ ------------- --------
<S> <C> <C> <C> <C>
ASSETS ASSETS
Cash and equivalents(2(i)).................................. $ 6,913 $ -- $ 311,276 $ 26,408
Short-term investments...................................... -- -- 161,967 --
Restricted cash............................................. -- -- 31,095 --
Accounts and notes receivable............................... 103,172 (2,201)(17) 465,459 42,427
Prepaid expenses and other current assets................... 32,566 -- 93,080 30,625
Net assets held for sale.................................... -- -- 41,465 --
--------- --------- ---------- -------
Total Current Assets................................... 142,651 (2,201) 1,104,342 99,460
--------- --------- ---------- -------
Property and equipment...................................... 193,494 (6,500)(11) 455,983 65,281
(68,000)(11)
15,000(11)
Investment in TelDaFax...................................... -- -- 130,851 --
Goodwill and other intangibles.............................. 90,162 (76,327)(13) 1,912,412 15,811
548,172(11)
41,300(11)
(3,130)(15)
Other assets................................................ 4,105 (38,192)(11) 49,865 13,027
--------- --------- ---------- --------
Total Assets........................................... $ 430,412 $ 410,122 $3,653,453 $193,579
========= ========= ========== ========
LIABILITIES AND STOCKH LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt............................................. $ 201,825 $ (2,201)(17) $ 246,247 $ 7,260
(38,192)(11)
(3,213)(15)
Accounts payable............................................ 23,682 (792)(15) 352,044 73,688
Other accrued liabilities................................... 224,478 3,000(11) 488,272 9,626
--------- --------- ---------- --------
Total Current Liabilities.............................. 449,985 (41,398) 1,086,563 90,574
--------- --------- ---------- --------
Long-term debt.............................................. 70,829 (11,596)(15) 372,577 19,320
Other long-term liabilities................................. 5,547 -- 48,627 347
--------- --------- ---------- --------
Total Liabilities...................................... 526,361 (52,994) 1,507,767 110,241
--------- --------- ---------- --------
Minority interests.......................................... -- -- -- 888
Stockholders' Equity (Deficit):
Preferred stock............................................. 30,000 (30,000)(14) 6 --
Common stock................................................ 148,056 (148,056)(14) 1,339 84,309
298(11)
14(15)
Additional paid in capital.................................. -- 336,686(11) 2,319,159 7,737
17,712(11)
12,457(15)
Deferred compensation....................................... -- -- -- --
Notes receivable from shareholders.......................... (1,937) 1,937(14) -- --
Accumulated other comprehensive loss........................ (12,900) 12,900(14) (12,239) 47
Accumulated deficit......................................... (259,168) 259,168(14) (162,579) (9,643)
--------- --------- ---------- --------
Total Stockholders' Equity (Deficit)................... (95,949) 463,116 2,145,686 82,450
--------- --------- ---------- --------
Total Liabilities and Stockholders' Equity............. $ 430,412 $ 410,122 $3,653,453 $193,579
========= ========= ========== ========
<CAPTION>
PRO FORMA
WORLD ACCESS,
STAR, WORLDXCHANGE
TELDAFAX AND TELDAFAX
ADJUSTMENTS COMBINED
----------- ------------------
<S> <C> <C>
ASSETS
Cash and equivalents(2(i)).................................. $ -- $ 337,684
Short-term investments...................................... -- 161,967
Restricted cash............................................. -- 31,095
Accounts and notes receivable............................... -- 507,886
Prepaid expenses and other current assets................... -- 123,705
Net assets held for sale.................................... -- 41,465
-------- ----------
Total Current Assets................................... -- 1,203,802
-------- ----------
Property and equipment...................................... (24,000)(21) 497,264
Investment in TelDaFax...................................... (130,851)(21) --
Goodwill and other intangibles.............................. (12,430)(23) 2,270,762
321,969(21)
33,000(21)
Other assets................................................ -- 62,892
-------- ----------
Total Assets........................................... $187,688 $4,034,720
======== ==========
LIABILITIES AND STOCKH
Short-term debt............................................. $ -- $ 253,507
Accounts payable............................................ -- 425,732
Other accrued liabilities................................... 5,000(21) 502,898
-------- ----------
Total Current Liabilities.............................. 5,000 1,182,137
-------- ----------
Long-term debt.............................................. -- 391,897
Other long-term liabilities................................. -- 48,974
-------- ----------
Total Liabilities...................................... 5,000 1,623,008
-------- ----------
Minority interests.......................................... -- 888
Stockholders' Equity (Deficit):
Preferred stock............................................. -- 6
Common stock................................................ (84,309)(24) 1,571
232(21)
Additional paid in capital.................................. (7,737)(24) 2,584,065
264,906(21)
Deferred compensation....................................... -- --
Notes receivable from shareholders.......................... -- --
Accumulated other comprehensive loss........................ (47)(24) (12,239)
Accumulated deficit......................................... 9,643(24) (162,579)
-------- ----------
Total Stockholders' Equity (Deficit)................... 182,688 2,410,824
-------- ----------
Total Liabilities and Stockholders' Equity............. $187,688 $4,034,720
======== ==========
</TABLE>
152
<PAGE> 166
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR WORLDXCHANGE
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS
---------------- -------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service revenues....................... $570,279 $236,915 $(25,683)(7) $781,511 $280,586 $(19,477)(16)
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)..................... 500,355 209,303 (25,683)(7) 683,975 225,269 (19,477)(16)
Selling, general and administrative.... 59,430 39,492 -- 98,922 80,584 --
Depreciation and amortization.......... 41,618 18,480 735(3) 55,308 25,756 11,046(12)
(6,715)(3) (3,306)(12)
1,190(3) 4,130(12)
Restructuring and other special
charges............................... (3,995) -- -- (3,995) -- --
-------- -------- -------- -------- -------- --------
Total operating expenses......... 597,408 267,275 (30,473) 834,210 331,609 (7,607)
-------- -------- -------- -------- -------- --------
Operating loss................... (27,129) (30,360) 4,790 (52,699) (51,023) (11,870)
Interest and other income.............. 12,996 7,687 -- 20,683 -- --
Interest and other expense............. (29,789) (7,154) 1,223(6) (35,720) (17,096) 901(15)
Loss on investment in TelDaFax......... (2,874) -- -- (2,874) -- --
Foreign exchange loss.................. 117 -- -- 117 -- --
-------- -------- -------- -------- -------- --------
Loss from continuing operations
before income taxes and minority
interests....................... (46,679) (29,827) 6,013 (70,493) (68,119) (10,969)
Provision (benefit) for income taxes... (754) (7,277) 2,767(8) (5,264) -- 32(18)
-------- -------- -------- -------- -------- --------
Loss from continuing operations
before minority interest........ (45,925) (22,550) 3,246 (65,229) (68,119) (11,001)
Minority interest...................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Loss from continuing
operations...................... (45,925) (22,550) 3,246 (65,229) (68,119) (11,001)
Preferred stock dividends.............. (1,163) -- -- (1,163) (1,600)
-------- -------- -------- -------- -------- --------
Loss from continuing operations
available to common
stockholders.................... $(47,088) $(22,550) $ 3,246 $(66,392) $(69,719) $(11,001)
======== ======== ======== ======== ======== ========
Loss per common share from continuing
operations:
Basic................................. $ (0.82)
========
Diluted............................... $ (0.82)
========
Weighted average shares outstanding:
Basic................................. 57,658
========
Diluted............................... 57,658
========
<CAPTION>
PRO FORMA
WORLD ACCESS, PRO FORMA
STAR AND WORLD ACCESS, STAR,
WORLDXCHANGE TELDAFAX WORLDXCHANGE AND
COMBINED TELDAFAX(20) ADJUSTMENTS TELDAFAX COMBINED
------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Service revenues....................... $1,042,620 $150,036 $(2,772)(25) $1,189,884
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)..................... 889,767 126,302 (2,772)(25) 1,013,297
Selling, general and administrative.... 179,506 27,807 -- 207,313
Depreciation and amortization.......... 92,934 12,253 7,359(22) 113,446
(2,400)(22)
3,300(22)
Restructuring and other special
charges............................... (3,995) -- -- (3,995)
---------- -------- ------- ----------
Total operating expenses......... 1,158,212 166,362 5,487 1,330,061
---------- -------- ------- ----------
Operating loss................... (115,592) (16,326) (8,259) (140,177)
Interest and other income.............. 20,683 885 -- 21,568
Interest and other expense............. (51,915) (788) -- (52,703)
Loss on investment in TelDaFax......... (2,874) -- 2,874 --
Foreign exchange loss.................. 117 -- -- 117
---------- -------- ------- ----------
Loss from continuing operations
before income taxes and minority
interests....................... (149,581) (16,229) (5,385) (171,195)
Provision (benefit) for income taxes... (5,232) (6,676) (369)(26) (12,277)
---------- -------- ------- ----------
Loss from continuing operations
before minority interest........ (144,349) (9,553) (5,016) (158,918)
Minority interest...................... -- 851 -- 851
---------- -------- ------- ----------
Loss from continuing
operations...................... (144,349) (8,702) (5,016) (158,067)
Preferred stock dividends.............. (2,763) -- -- (2,763)
---------- -------- ------- ----------
Loss from continuing operations
available to common
stockholders.................... $ (147,112) $ (8,702) $(5,016) $ (160,830)
========== ======== ======= ==========
Loss per common share from continuing
operations:
Basic................................. $ (1.04)(9)(19)(27)
==========
Diluted............................... $ (1.04)(9)(19)(27)
==========
Weighted average shares outstanding:
Basic................................. 154,858(9)(19)(27)
==========
Diluted............................... 154,858(9)(19)(27)
==========
</TABLE>
153
<PAGE> 167
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>
PRO FORMA
PRO FORMA WORLD ACCESS
WORLD ACCESS STAR STAR AND STAR WORLDXCHANGE WORLDXCHANGE
(28) (1) ADJUSTMENTS COMBINED (10) ADJUSTMENTS
---------------- -------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service revenues....................... $1,019,553 $616,469 $(17,949)(7) $1,618,073 $ 607,035 $(25,601)(16)
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)................... 903,325 537,895 (17,949)(7) 1,423,271 477,317 (25,601)(16)
Selling, general and administrative... 146,231 108,246 -- 254,477 193,070
Depreciation and amortization......... 97,517 29,635 3,122(3) 119,225 43,304 8,768(12)
(13,429)(3) (6,611)(12)
2,380(3) 8,260(12)
Merger expense........................ -- 1,867 -- 1,867 --
Restructuring and other special
charges............................. 44,187 -- -- 44,187 -- --
---------- -------- -------- ---------- --------- --------
Total operating expenses......... 1,191,260 677,643 (25,876) 1,843,027 713,691 (15,184)
---------- -------- -------- ---------- --------- --------
Operating loss................... (171,707) (61,174) 7,927 (224,954) (106,656) (10,417)
Interest and other income.............. 10,822 6,701 -- 17,523 -- --
Interest and other expense............. (58,208) (8,614) -- (66,822) (25,385) 1,230(15)
Loss on investment in TelDaFax......... (990) -- -- (990) -- --
Foreign exchange loss.................. (2,369) (3,471) -- (5,840) -- --
---------- -------- -------- ---------- --------- --------
Loss from continuing operations
before income taxes and minority
interests....................... (222,452) (66,558) 7,927 (281,083) (132,041) (9,187)
Provision (benefit) for income taxes... (6,999) (11,041) 4,530(8) (13,510) -- (172)(18)
---------- -------- -------- ---------- --------- --------
Loss from continuing operations
before minority interest........ (215,453) (55,517) 3,397 (267,573) (132,041) (9,015)
Minority interest...................... -- -- -- -- 1,614 --
---------- -------- -------- ---------- --------- --------
Loss from continuing
operations...................... (215,453) (55,517) 3,397 (267,573) (130,427) (9,015)
Preferred stock dividends.............. (2,461) -- -- (2,461) (784) --
---------- -------- -------- ---------- --------- --------
Loss from continuing operations
available to common
stockholders.................... $ (217,914) $(55,517) $ 3,397 $ (270,034) $(131,211) $ (9,015)
========== ======== ======== ========== ========= ========
Loss per common share from continuing
operations:
Basic................................. $ (4.30)
==========
Diluted............................... $ (4.30)
==========
Weighted average shares outstanding:
Basic................................. 50,634
==========
Diluted............................... 50,634
==========
<CAPTION>
PRO FORMA
WORLD ACCESS, PRO FORMA
STAR AND WORLD ACCESS, STAR,
WORLDXCHANGE TELDAFAX TELDAFAX WORLDXCHANGE AND
COMBINED (20) ADJUSTMENTS TELDAFAX COMBINED
------------- ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Service revenues....................... $2,199,507 $364,039 $ (8,914)(25) $2,554,632
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)................... 1,874,987 304,810 (8,914)(25) 2,170,883
Selling, general and administrative... 447,547 48,758 -- 496,305
Depreciation and amortization......... 172,946 18,369 15,493(22) 208,608
(4,800)(22)
6,600(22)
Merger expense........................ 1,867 -- 1,867
Restructuring and other special
charges............................. 44,187 -- -- 44,187
---------- -------- -------- ----------
Total operating expenses......... 2,541,534 371,937 8,379 2,921,850
---------- -------- -------- ----------
Operating loss................... (342,027) (7,898) (17,293) (367,218)
Interest and other income.............. 17,523 2,469 -- 19,992
Interest and other expense............. (90,977) (2,171) -- (93,148)
Loss on investment in TelDaFax......... (990) -- 990 --
Foreign exchange loss.................. (5,840) -- -- (5,840)
---------- -------- -------- ----------
Loss from continuing operations
before income taxes and minority
interests....................... (422,311) (7,600) (16,303) (446,214)
Provision (benefit) for income taxes... (13,682) (3,830) (738)(26) (18,250)
---------- -------- -------- ----------
Loss from continuing operations
before minority interest........ (408,629) (3,770) (15,565) (427,964)
Minority interest...................... 1,614 774 -- 2,388
---------- -------- -------- ----------
Loss from continuing
operations...................... (407,015) (2,996) (15,565) (425,576)
Preferred stock dividends.............. (3,245) -- -- (3,245)
---------- -------- -------- ----------
Loss from continuing operations
available to common
stockholders.................... $ (410,260) $ (2,996) $(15,565) $ (428,821)
========== ======== ======== ==========
Loss per common share from continuing
operations:
Basic................................. $ (2.90)(9)(19)(27)
==========
Diluted............................... $ (2.90)(9)(19)(27)
==========
Weighted average shares outstanding:
Basic................................. 147,824(9)(19)(27)
==========
Diluted............................... 147,824(9)(19)(27)
==========
</TABLE>
154
<PAGE> 168
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WORLD ACCESS
WORLD STAR AND STAR WORLDXCHANGE
ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS
------------- --------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and
equivalents(2(i))....... $ 172,479 $ 131,884 $ -- $ 304,363 $ 6,913 $ --
Short-term investments... 160,211 1,756 -- 161,967 -- --
Restricted cash.......... 31,095 -- -- 31,095 -- --
Accounts and notes
receivable.............. 264,678 99,810 -- 364,488 103,172 (2,201)(17)
Prepaid expenses and
other current assets.... 38,491 22,023 -- 60,514 32,566 --
Net assets held for
sale.................... 41,465 -- -- 41,465 -- --
---------- --------- --------- ---------- --------- ---------
Total Current
Assets........... 708,419 255,473 -- 963,892 142,651 (2,201)
---------- --------- --------- ---------- --------- ---------
Property and equipment... 151,609 264,380 (94,000)(2) 321,989 193,494 (6,500)(11)
(68,000)(11)
15,000(11)
Investment in TelDaFax... 130,851 -- -- 130,851 -- --
Goodwill and other
intangibles............. 1,080,797 3,968 (1,764)(4) 1,312,235 90,162 (76,327)(13)
233,144(2) 548,172(11)
11,900(2) 41,300(11)
(15,810)(6) (3,130)(15)
Other assets............. 79,185 4,767 -- 83,952 4,105 (38,192)(11)
---------- --------- --------- ---------- --------- ---------
Total Assets...... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $ 430,412 $ 410,122
========== ========= ========= ========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt.......... $ 57,033 $ 86,680 $ (55,685)(6) $ 88,028 $ 201,825 $ (2,201)(17)
(38,192)(11)
(3,213)(15)
Accounts payable......... 246,436 104,507 (21,789)(6) 329,154 23,682 (792)(15)
Other accrued
liabilities............. 151,328 107,689 3,000(2) 260,794 224,478 3,000(11)
(1,223)(6) --
---------- --------- --------- ---------- --------- ---------
Total Current
Liabilities...... 454,797 298,876 (75,697) 677,976 449,985 (41,398)
Long-term debt........... 257,946 55,398 -- 313,344 70,829 (11,596)(15)
Other long-term
liabilities............. 10,336 32,744 -- 43,080 5,547 --
---------- --------- --------- ---------- --------- ---------
Total
Liabilities...... 723,079 387,018 (75,697) 1,034,400 526,361 (52,994)
---------- --------- --------- ---------- --------- ---------
Stockholders' Equity (Deficit):
Preferred Stock.......... 6 -- -- 6 30,000 (30,000)(14)
Common stock............. 732 58 (58)(5) 1,027 148,056 (148,056)(14)
227(2) 298(11)
68(6) 14(15)
Additional paid in
capital................. 1,601,862 366,304 (366,304)(5) 1,952,304 -- 336,686(11)
279,484(2) 17,712(11)
8,139(2) 12,457(15)
62,819(6) --
Deferred compensation.... -- (1,399) 1,399(5) -- -- --
Notes receivable from
shareholders............ -- (3,856) 3,856(5) -- (1,937) 1,937(14)
Accumulated other
comprehensive loss...... (12,239) (8,017) 8,017(5) (12,239) (12,900) 12,900(14)
Accumulated deficit...... (162,579) (211,520) 211,520(5) (162,579) (259,168) 259,168(14)
---------- --------- --------- ---------- --------- ---------
Total
Stockholders'
Equity
(Deficit)........ 1,427,782 141,570 209,167 1,778,519 (95,949) 463,116
---------- --------- --------- ---------- --------- ---------
Total Liabilities
and Stockholders'
Equity........... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $ 430,412 $ 410,122
========== ========= ========= ========== ========= =========
<CAPTION>
PRO FORMA
WORLD ACCESS,
STAR AND
WORLDXCHANGE
COMBINED
-------------
<S> <C>
ASSETS
Cash and
equivalents(2(i))....... $ 311,276
Short-term investments... 161,967
Restricted cash.......... 31,095
Accounts and notes
receivable.............. 465,459
Prepaid expenses and
other current assets.... 93,080
Net assets held for
sale.................... 41,465
----------
Total Current
Assets........... 1,104,342
----------
Property and equipment... 455,983
Investment in TelDaFax... 130,851
Goodwill and other
intangibles............. 1,912,412
Other assets............. 49,865
----------
Total Assets...... $3,653,453
==========
LIABILITIES
AND
STOCKHOLDERS'
EQUITY
Short-term debt.......... $ 246,247
Accounts payable......... 352,044
Other accrued
liabilities............. 488,272
----------
Total Current
Liabilities...... 1,086,563
Long-term debt........... 372,577
Other long-term
liabilities............. 48,627
----------
Total
Liabilities...... 1,507,767
----------
Stockholders' Equity (Def
Preferred Stock.......... 6
Common stock............. 1,339
Additional paid in
capital................. 2,319,159
Deferred compensation.... --
Notes receivable from
shareholders............ --
Accumulated other
comprehensive loss...... (12,239)
Accumulated deficit...... (162,579)
----------
Total
Stockholders'
Equity
(Deficit)........ 2,145,686
----------
Total Liabilities
and Stockholders'
Equity........... $3,653,453
==========
</TABLE>
155
<PAGE> 169
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR WORLDXCHANGE
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS
---------------- -------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service revenues................... $570,279 $236,915 $ (25,683)(7) $781,511 $280,586 $ (19,477)(16)
Operating expenses:................
Cost of services (exclusive of
depreciation and amortization
shown separately below).......... 500,355 209,303 (25,683)(7) 683,975 225,269 (19,477)(16)
Selling, general and
administrative................... 59,430 39,492 -- 98,922 80,584 --
Depreciation and amortization...... 41,618 18,480 735(3) 55,308 25,756 11,046(12)
(6,715)(3) (3,306)(12)
1,190(3) 4,130(12)
Restructuring and other special
charges.......................... (3,995) -- -- (3,995) -- --
-------- -------- ----------- -------- -------- ------------
Total operating expenses... 597,408 267,275 (30,473) 834,210 331,609 (7,607)
-------- -------- ----------- -------- -------- ------------
Operating loss............. (27,129) (30,360) 4,790 (52,699) (51,023) (11,870)
Interest and other income.......... 12,996 7,687 -- 20,683 -- --
Interest and other expense......... (29,789) (7,154) 1,223(6) (35,720) (17,096) 901(15)
Loss on investment in TelDaFax..... (2,874) -- -- (2,874) -- --
Foreign exchange loss.............. 117 -- -- 117 -- --
-------- -------- ----------- -------- -------- ------------
Loss from continuing
operations before income
taxes and minority
interests................ (46,679) (29,827) 6,013 (70,493) (68,119) (10,969)
Provision (benefit) for income
taxes............................ (754) (7,277) 2,767(8) (5,264) -- 32(18)
-------- -------- ----------- -------- -------- ------------
Loss from continuing
operations............... (45,925) (22,550) 3,246 (65,229) (68,119) (11,001)
Preferred stock dividends.......... (1,163) -- -- (1,163) (1,600) --
-------- -------- ----------- -------- -------- ------------
Loss from continuing
operations available to
common stockholders...... $(47,088) $(22,550) $ 3,246 $(66,392) $(69,719) $ (11,001)
======== ======== =========== ======== ======== ============
Loss per common share from
continuing operations:
Basic............................ $ (0.82)
========
Diluted.......................... $ (0.82)
========
Weighted average shares
outstanding:
Basic............................ 57,658
========
Diluted.......................... 57,658
========
<CAPTION>
PRO FORMA
WORLD ACCESS,
STAR AND
WORLDXCHANGE
COMBINED
-------------
<S> <C>
Service revenues................... $ 1,042,620
Operating expenses:................
Cost of services (exclusive of
depreciation and amortization
shown separately below).......... 889,767
Selling, general and
administrative................... 179,506
Depreciation and amortization...... 92,934
Restructuring and other special
charges.......................... (3,995)
-------------
Total operating expenses... 1,158,212
-------------
Operating loss............. (115,592)
Interest and other income.......... 20,683
Interest and other expense......... (51,915)
Loss on investment in TelDaFax..... (2,874)
Foreign exchange loss.............. 117
-------------
Loss from continuing
operations before income
taxes and minority
interests................ (149,581)
Provision (benefit) for income
taxes............................ (5,232)
-------------
Loss from continuing
operations............... (144,349)
Preferred stock dividends.......... (2,763)
-------------
Loss from continuing
operations available to
common stockholders...... $ (147,112)
=============
Loss per common share from
continuing operations:
Basic............................ $ (1.22)(9)(19)
=============
Diluted.......................... $ (1.22)(9)(19)
=============
Weighted average shares
outstanding:
Basic............................ 120,173(9)(19)
=============
Diluted.......................... 120,173(9)(19)
=============
</TABLE>
156
<PAGE> 170
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>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR WORLDXCHANGE
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS
---------------- -------- ----------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Service revenues................. $1,019,553 $616,469 $(17,949)(7) $1,618,073 $ 607,035 $(25,601)(16)
Operating expenses:..............
Cost of services (exclusive of
depreciation and amortization
shown separately below)...... 903,325 537,895 (17,949)(7) 1,423,271 477,317 (25,601)(16)
Selling, general and
administrative............... 146,231 108,246 -- 254,477 193,070 --
Depreciation and
amortization................. 97,517 29,635 3,122(3) 119,225 43,304 8,768(12)
(13,429)(3) (6,611)(12)
2,380(3) 8,260(12)
Merger expense................. -- 1,867 -- 1,867 -- --
Restructuring and other special
charges...................... 44,187 -- -- 44,187 -- --
---------- -------- -------- ---------- --------- --------
Total operating
expenses............... 1,191,260 677,643 (25,876) 1,843,027 713,691 (15,184)
---------- -------- -------- ---------- --------- --------
Operating loss........... (171,707) (61,174) 7,927 (224,954) (106,656) (10,417)
Interest and other income........ 10,822 6,701 -- 17,523 -- --
Interest and other expense....... (58,208) (8,614) -- (66,822) (25,385) 1,230(15)
Loss on investment in TelDaFax... (990) -- -- (990) -- --
Foreign exchange loss............ (2,369) (3,471) -- (5,840) -- --
---------- -------- -------- ---------- --------- --------
Loss from continuing
operations before
income taxes and
minority interests..... (222,452) (66,558) 7,927 (281,083) (132,041) (9,187)
Provision (benefit) for income
taxes.......................... (6,999) (11,041) 4,530(8) (13,510) -- (172)(18)
---------- -------- -------- ---------- --------- --------
Loss from continuing
operations before
minority interest...... (215,453) (55,517) 3,397 (267,573) (132,041) (9,015)
Minority interest................ -- -- -- -- 1,614 --
---------- -------- -------- ---------- --------- --------
Loss from continuing
operations............. (215,453) (55,517) 3,397 (267,573) (130,427) (9,015)
Preferred stock dividends........ (2,461) -- -- (2,461) (784) --
---------- -------- -------- ---------- --------- --------
Loss from continuing
operations available to
common stockholders.... $ (217,914) $(55,517) $ 3,397 $ (270,034) $(131,211) $ (9,015)
========== ======== ======== ========== ========= ========
Loss per common share from
continuing operations:
Basic.......................... $ (4.30)
==========
Diluted...................... $ (4.30)
==========
Weighted average shares
outstanding:
Basic.......................... 50,634
==========
Diluted........................ 50,634
==========
<CAPTION>
PRO FORMA
WORLD ACCESS,
STAR AND
WORLDXCHANGE
COMBINED
-------------
<S> <C>
Service revenues................. $2,199,507
Operating expenses:..............
Cost of services (exclusive of
depreciation and amortization
shown separately below)...... 1,874,987
Selling, general and
administrative............... 447,547
Depreciation and
amortization................. 172,946
Merger expense................. 1,867
Restructuring and other special
charges...................... 44,187
----------
Total operating
expenses............... 2,541,534
----------
Operating loss........... (342,027)
Interest and other income........ 17,523
Interest and other expense....... (90,977)
Loss on investment in TelDaFax... (990)
Foreign exchange loss............ (5,840)
----------
Loss from continuing
operations before
income taxes and
minority interests..... (422,311)
Provision (benefit) for income
taxes.......................... (13,682)
----------
Loss from continuing
operations before
minority interest...... (408,629)
Minority interest................ 1,614
----------
Loss from continuing
operations............. (407,015)
Preferred stock dividends........ (3,245)
----------
Loss from continuing
operations available to
common stockholders.... $ (410,260)
==========
Loss per common share from
continuing operations:
Basic.......................... $ (3.63)(9)(19)
==========
Diluted...................... $ (3.63)(9)(19)
==========
Weighted average shares
outstanding:
Basic.......................... 113,149(9)(19)
==========
Diluted........................ 113,149(9)(19)
==========
</TABLE>
157
<PAGE> 171
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR TELDAFAX
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED TELDAFAX(20) ADJUSTMENTS
---------------- --------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents.............. $ 172,479 $ 131,884 $ -- $ 304,363 $ 26,408 $ --
Short-term investments............ 160,211 1,756 -- 161,967 -- --
Restricted cash................... 31,095 -- -- 31,095 -- --
Accounts and notes receivable..... 264,678 99,810 -- 364,488 42,427 --
Prepaid expenses and other current
assets........................... 38,491 22,023 -- 60,514 30,625 --
Net assets held for sale.......... 41,465 -- -- 41,465 -- --
---------- --------- --------- ---------- -------- --------
Total Current Assets....... 708,419 255,473 -- 963,892 99,460 --
---------- --------- --------- ---------- -------- --------
Property and equipment............ 151,609 264,380 (94,000)(2) 321,989 65,281 (24,000)(21)
Investment in TelDaFax............ 130,851 -- -- 130,851 -- (130,851)(21)
Goodwill and other intangibles.... 1,080,797 3,968 (1,764)(4) 1,312,235 15,811 (12,430)(23)
233,144(2) 321,969(21)
11,900(2) 33,000(21)
(15,810)(6)
Other assets...................... 79,185 4,767 -- 83,952 13,027 --
---------- --------- --------- ---------- -------- --------
Total Assets............... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $193,579 $187,688
========== ========= ========= ========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt................... $ 57,033 $ 86,680 $ (55,685)(6) $ 88,028 $ 7,260 $ --
Accounts payable.................. 246,436 104,507 (21,789)(6) 329,154 73,688 --
Other accrued liabilities......... 151,328 107,689 3,000(2) 260,794 9,626 5,000(21)
(1,223)(6)
---------- --------- --------- ---------- -------- --------
Total Current
Liabilities.............. 454,797 298,876 (75,697) 677,976 90,574 5,000
Long-term debt.................... 257,946 55,398 -- 313,344 19,320 --
Other long-term liabilities....... 10,336 32,744 -- 43,080 347 --
---------- --------- --------- ---------- -------- --------
Total Liabilities.......... 723,079 387,018 (75,697) 1,034,400 110,241 5,000
---------- --------- --------- ---------- -------- --------
Minority interests................ -- -- -- -- 888 --
Stockholders' Equity (Deficit):
Preferred Stock................... 6 -- -- 6 -- --
Common stock...................... 732 58 (58)(5) 1,027 84,309 (84,309)(24)
227(2) 232(21)
68(6)
Additional paid in capital........ 1,601,862 366,304 (366,304)(5) 1,952,304 7,737 (7,737)(24)
279,484(2) 264,906(21)
8,139(2)
62,819(6)
Deferred compensation............. -- (1,399) 1,399(5) -- -- --
Notes receivable from
shareholders..................... -- (3,856) 3,856(5) -- -- --
Accumulated other comprehensive
loss............................. (12,239) (8,017) 8,017(5) (12,239) 47 (47)(24)
Accumulated deficit............... (162,579) (211,520) 211,520(5) (162,579) (9,643) 9,643(24)
---------- --------- --------- ---------- -------- --------
Total Stockholders' Equity
(Deficit)................ 1,427,782 141,570 209,167 1,778,519 82,450 182,688
---------- --------- --------- ---------- -------- --------
Total Liabilities and
Stockholders' Equity..... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $193,579 $187,688
========== ========= ========= ========== ======== ========
<CAPTION>
PRO FORMA
WORLD ACCESS, STAR
AND TELDAFAX
COMBINED
------------------
<S> <C>
ASSETS
Cash and equivalents.............. $ 330,771
Short-term investments............ 161,967
Restricted cash................... 31,095
Accounts and notes receivable..... 406,915
Prepaid expenses and other current
assets........................... 91,139
Net assets held for sale.......... 41,465
----------
Total Current Assets....... 1,063,352
----------
Property and equipment............ 363,270
Investment in TelDaFax............ --
Goodwill and other intangibles.... 1,670,585
Other assets...................... 96,979
----------
Total Assets............... $3,194,186
==========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Short-term debt................... $ 95,288
Accounts payable.................. 402,842
Other accrued liabilities......... 275,420
----------
Total Current
Liabilities.............. 773,550
Long-term debt.................... 332,664
Other long-term liabilities....... 43,427
----------
Total Liabilities.......... 1,149,641
----------
Minority interests................ 888
Stockholders' Equity (Deficit):
Preferred Stock................... 6
Common stock...................... 1,259
Additional paid in capital........ 2,217,210
Deferred compensation............. --
Notes receivable from
shareholders..................... --
Accumulated other comprehensive
loss............................. (12,239)
Accumulated deficit............... (162,579)
----------
Total Stockholders' Equity
(Deficit)................ 2,043,657
----------
Total Liabilities and
Stockholders' Equity..... $3,194,186
==========
</TABLE>
158
<PAGE> 172
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED TELDAFAX(20)
---------------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Service revenues................................... $570,279 $236,915 $(25,683)(7) $781,511 $150,036
Operating expenses:................................
Cost of services (exclusive of depreciation and
amortization shown separately below)............. 500,355 209,303 (25,683)(7) 683,975 126,302
Selling, general and administrative................ 59,430 39,492 -- 98,922 27,807
Depreciation and amortization...................... 41,618 18,480 735(3) 55,308 12,253
(6,715)(3)
1,190(3)
Restructuring and other special charges............ (3,995) -- -- (3,995) --
-------- -------- -------- -------- --------
Total operating expenses.................. 597,408 267,275 (30,473) 834,210 166,362
-------- -------- -------- -------- --------
Operating loss............................ (27,129) (30,360) 4,790 (52,699) (16,326)
Interest and other income.......................... 12,996 7,687 -- 20,683 885
Interest and other expense......................... (29,789) (7,154) 1,223(6) (35,720) (788)
Loss on investment in TelDaFax..................... (2,874) -- -- (2,874) --
Foreign exchange loss.............................. 117 -- -- 117 --
-------- -------- -------- -------- --------
Loss from continuing operations before
income taxes and minority interests..... (46,679) (29,827) 6,013 (70,493) (16,229)
Provision (benefit) for income taxes............... (754) (7,277) 2,767(8) (5,264) (6,676)
-------- -------- -------- -------- --------
Loss from continuing operations before
minority interest....................... (45,925) (22,550) 3,246 (65,229) (9,553)
Minority interest.................................. -- -- -- -- 851
-------- -------- -------- -------- --------
Loss from continuing operations........... (45,925) (22,550) 3,246 (65,229) (8,702)
Preferred stock dividends.......................... (1,163) -- -- (1,163) --
-------- -------- -------- -------- --------
Loss from continuing operations available
to common stockholders.................. $(47,088) $(22,550) $ 3,246 $(66,392) $ (8,702)
======== ======== ======== ======== ========
Loss per common share from continuing operations:
Basic............................................ $ (0.82)
========
Diluted.......................................... $ (0.82)
========
Weighted average shares outstanding:
Basic............................................ 57,658
========
Diluted.......................................... 57,658
========
<CAPTION>
PRO FORMA
WORLD
ACCESS,
STAR AND
TELDAFAX TELDAFAX
ADJUSTMENTS COMBINED
----------- ------------
<S> <C> <C>
Service revenues................................... $(2,772)(25) $ 928,775
Operating expenses:................................
Cost of services (exclusive of depreciation and
amortization shown separately below)............. (2,772)(25) 807,505
Selling, general and administrative................ -- 126,729
Depreciation and amortization...................... 7,359(22) 75,820
(2,400)(22)
3,300(22)
Restructuring and other special charges............ -- (3,995)
------- ----------
Total operating expenses.................. 5,487 1,006,059
------- ----------
Operating loss............................ (8,259) (77,284)
Interest and other income.......................... -- 21,568
Interest and other expense......................... -- (36,508)
Loss on investment in TelDaFax..................... 2,874 --
Foreign exchange loss.............................. -- 117
------- ----------
Loss from continuing operations before
income taxes and minority interests..... (5,385) (92,107)
Provision (benefit) for income taxes............... (369)(26) (12,309)
------- ----------
Loss from continuing operations before
minority interest....................... (5,016) (79,798)
Minority interest.................................. -- 851
------- ----------
Loss from continuing operations........... (5,016) (78,947)
Preferred stock dividends.......................... -- (1,163)
------- ----------
Loss from continuing operations available
to common stockholders.................. $(5,016) $ (80,110)
======= ==========
Loss per common share from continuing operations:
Basic............................................ $ (0.65)(9)(27)
==========
Diluted.......................................... $ (0.65)(9)(27)
==========
Weighted average shares outstanding:
Basic............................................ 122,826(9)(27)
==========
Diluted.......................................... 122,826(9)(27)
==========
</TABLE>
159
<PAGE> 173
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>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR TELDAFAX
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED TELDAFAX(20) ADJUSTMENTS
---------------- -------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Service revenues................... $1,019,553 $616,469 $(17,949)(7) $1,618,073 $364,039 $ (8,914)(25)
Operating expenses:
Cost of services (exclusive of
depreciation and amortization
shown separately below)........ 903,325 537,895 (17,949)(7) 1,423,271 304,810 (8,914)(25)
Selling, general and
administrative................. 146,231 108,246 -- 254,477 48,758 --
Depreciation and amortization.... 97,517 29,635 3,122(3) 119,225 18,369 15,493(22)
(13,429)(3) (4,800)(22)
2,380(3) 6,600(22)
Merger expense................... -- 1,867 -- 1,867 -- --
Restructuring and other special
charges........................ 44,187 -- -- 44,187 -- --
---------- -------- -------- ---------- -------- --------
Total operating expenses... 1,191,260 677,643 (25,876) 1,843,027 371,937 8,379
---------- -------- -------- ---------- -------- --------
Operating loss............. (171,707) (61,174) 7,927 (224,954) (7,898) (17,293)
Interest and other income.......... 10,822 6,701 -- 17,523 2,469 --
Interest and other expense......... (58,208) (8,614) -- (66,822) (2,171) --
Loss on investment in TelDaFax..... (990) -- -- (990) -- 990
Foreign exchange loss.............. (2,369) (3,471) -- (5,840) -- --
---------- -------- -------- ---------- -------- --------
Loss from continuing
operations before income
taxes and minority
interests................ (222,452) (66,558) 7,927 (281,083) (7,600) (16,303)
Provision (benefit) for income
taxes............................ (6,999) (11,041) 4,530(8) (13,510) (3,830) (738)(26)
---------- -------- -------- ---------- -------- --------
Loss from continuing
operations before
minority interest........ (215,453) (55,517) 3,397 (267,573) (3,770) (15,565)
Minority interest.................. -- -- -- -- 774 --
---------- -------- -------- ---------- -------- --------
Loss from continuing
operations............... (215,453) (55,517) 3,397 (267,573) (2,996) (15,565)
Preferred stock dividends........ (2,461) -- -- (2,461) -- --
---------- -------- -------- ---------- -------- --------
Loss from continuing
operations available to
common stockholders...... $ (217,914) $(55,517) $ 3,397 $ (270,034) $ (2,996) $(15,565)
========== ======== ======== ========== ======== ========
Loss per common share from
continuing operations:
Basic............................ $ (4.30)
==========
Diluted.......................... $ (4.30)
==========
Weighted average shares
outstanding:
Basic............................ 50,634
==========
Diluted.......................... 50,634
==========
<CAPTION>
PRO FORMA
WORLD ACCESS,
STAR AND
TELDAFAX
COMBINED
-------------
<S> <C>
Service revenues................... $1,973,198
Operating expenses:
Cost of services (exclusive of
depreciation and amortization
shown separately below)........ 1,719,167
Selling, general and
administrative................. 303,235
Depreciation and amortization.... 154,887
Merger expense................... 1,867
Restructuring and other special
charges........................ 44,187
----------
Total operating expenses... 2,223,343
----------
Operating loss............. (250,145)
Interest and other income.......... 19,992
Interest and other expense......... (68,993)
Loss on investment in TelDaFax..... --
Foreign exchange loss.............. (5,840)
----------
Loss from continuing
operations before income
taxes and minority
interests................ (304,986)
Provision (benefit) for income
taxes............................ (18,078)
----------
Loss from continuing
operations before
minority interest........ (286,908)
Minority interest.................. 774
----------
Loss from continuing
operations............... (286,134)
Preferred stock dividends........ (2,461)
----------
Loss from continuing
operations available to
common stockholders...... $ (288,595)
==========
Loss per common share from
continuing operations:
Basic............................ $ (2.49)(9)(27)
==========
Diluted.......................... $ (2.49)(9)(27)
==========
Weighted average shares
outstanding:
Basic............................ 115,802(9)(27)
==========
Diluted.......................... 115,802(9)(27)
==========
</TABLE>
160
<PAGE> 174
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS
PRO FORMA AND
WORLD WORLDXCHANGE WORLDXCHANGE
ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED TELDAFAX(20)
---------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents(2(i))......... $ 172,479 $ 6,913 $ -- $ 179,392 $ 26,408
Short-term investments............. 160,211 -- -- 160,211 --
Restricted cash.................... 31,095 -- -- 31,095 --
Accounts and notes receivable...... 264,678 103,172 -- 367,850 42,427
Prepaid expenses and other current
assets............................ 38,491 32,566 -- 71,057 30,625
Net assets held for sale........... 41,465 -- -- 41,465 --
---------- --------- -------- ---------- --------
Total Current Assets........ 708,419 142,651 -- 851,070 99,460
---------- --------- -------- ---------- --------
Property and equipment............. 151,609 193,494 (6,500)(11) 285,603 65,281
(68,000)(11)
15,000(11)
Investment in TelDaFax............. 130,851 -- -- 130,851 --
Goodwill and other intangibles..... 1,080,797 90,162 (76,327)(13) 1,680,974 15,811
548,172(11)
41,300(11)
(3,130)(15)
Other assets....................... 79,185 4,105 (38,192)(11) 45,098 13,027
---------- --------- -------- ---------- --------
Total Assets................ $2,150,861 $ 430,412 $412,323 $2,993,596 $193,579
========== ========= ======== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt.................... $ 57,033 $ 201,825 $(38,192)(11) $ 217,453 $ 7,260
(3,213)(15)
Accounts payable................... 246,436 23,682 (792)(15) 269,326 73,688
Other accrued liabilities.......... 151,328 224,478 3,000(11) 378,806 9,626
---------- --------- -------- ---------- --------
Total Current Liabilities... 454,797 449,985 (39,197) 865,585 90,574
Long-term debt..................... 257,946 70,829 (11,596)(15) 317,179 19,320
Other long-term liabilities........ 10,336 5,547 -- 15,883 347
---------- --------- -------- ---------- --------
Total Liabilities........... 723,079 526,361 (50,793) 1,198,647 110,241
---------- --------- -------- ---------- --------
Minority interests................. 888
Stockholders' Equity (Deficit):
Preferred Stock.................... 6 30,000 (30,000)(14) 6 --
Common stock....................... 732 148,056 (148,056)(14) 1,044 84,309
298(11)
14(15)
Additional paid in capital......... 1,601,862 -- 336,686(11) 1,968,717 7,737
17,712(11)
12,457(15)
Notes receivable from
shareholders...................... -- (1,937) 1,937(14) -- --
Accumulated other comprehensive
loss.............................. (12,239) (12,900) 12,900(14) (12,239) 47
Accumulated deficit................ (162,579) (259,168) 259,168(14) (162,579) (9,643)
---------- --------- -------- ---------- --------
Total Stockholders' Equity
(Deficit).................. 1,427,782 (95,949) 463,116 1,794,949 82,450
---------- --------- -------- ---------- --------
Total Liabilities and
Stockholders' Equity....... $2,150,861 $ 430,412 $412,323 $2,993,596 $193,579
========== ========= ======== ========== ========
<CAPTION>
PRO FORMA
WORLD ACCESS,
WORLDXCHANGE AND
TELDAFAX TELDAFAX
ADJUSTMENTS COMBINED
----------- ----------------
<S> <C> <C>
ASSETS
Cash and equivalents(2(i))......... $ -- $ 205,800
Short-term investments............. -- 160,211
Restricted cash.................... -- 31,095
Accounts and notes receivable...... -- 410,277
Prepaid expenses and other current
assets............................ -- 101,682
Net assets held for sale........... -- 41,465
-------- ----------
Total Current Assets........ -- 950,530
-------- ----------
Property and equipment............. (24,000)(21) 326,884
Investment in TelDaFax............. (130,851)(21) --
Goodwill and other intangibles..... (12,430)(23) 2,039,324
321,969(21)
33,000(21)
Other assets....................... -- 58,125
-------- ----------
Total Assets................ $187,688 $3,374,863
======== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Short-term debt.................... $ -- $ 224,713
Accounts payable................... -- 343,014
Other accrued liabilities.......... 5,000(21) 393,432
-------- ----------
Total Current Liabilities... 5,000 961,159
Long-term debt..................... -- 336,499
Other long-term liabilities........ -- 16,230
-------- ----------
Total Liabilities........... 5,000 1,313,888
-------- ----------
Minority interests................. -- 888
Stockholders' Equity (Deficit):
Preferred Stock.................... -- 6
Common stock....................... (84,309)(24) 1,276
232(21)
Additional paid in capital......... (7,737)(24) 2,233,623
264,906(21)
Notes receivable from
shareholders...................... -- --
Accumulated other comprehensive
loss.............................. (47)(24) (12,239)
Accumulated deficit................ 9,643(24) (162,579)
-------- ----------
Total Stockholders' Equity
(Deficit).................. 182,688 2,060,087
-------- ----------
Total Liabilities and
Stockholders' Equity....... $187,688 $3,374,863
======== ==========
</TABLE>
161
<PAGE> 175
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS AND
PRO FORMA WORLDXCHANGE WORLDXCHANGE
WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED
---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Service revenues................................ $570,279 $280,586 $ (14,257)(16) $ 836,608
Operating expenses:.............................
Cost of services (exclusive of depreciation
and amortization shown separately below).... 500,355 225,269 (14,257)(16) 711,367
Selling, general and administrative........... 59,430 80,584 -- 140,014
Depreciation and amortization................. 41,618 25,756 11,046(12) 79,244
(3,306)(12)
4,130(12)
Restructuring and other special charges....... (3,995) -- -- (3,995)
-------- -------- ------------ ---------
Total operating expenses................ 597,408 331,609 (2,387) 926,630
-------- -------- ------------ ---------
Operating loss.......................... (27,129) (51,023) (11,870) (90,022)
Interest and other income..................... 12,996 -- -- 12,996
Interest and other expense.................... (29,789) (17,096) 901(15) (45,984)
Loss on investment in TelDaFax................ (2,874) -- -- (2,874)
Foreign exchange loss......................... 117 -- -- 117
-------- -------- ------------ ---------
Loss from continuing operations before
income taxes and minority interests... (46,679) (68,119) (10,969) (125,767)
Provision (benefit) for income taxes.......... (754) -- 32(18) (722)
-------- -------- ------------ ---------
Loss from continuing operations before
minority interest..................... (45,925) (68,119) (11,001) (125,045)
Minority interest............................. -- -- -- --
-------- -------- ------------ ---------
Loss from continuing operations......... (45,925) (68,119) (11,001) (125,045)
Preferred stock dividends..................... (1,163) (1,600) -- (2,763)
-------- -------- ------------ ---------
Loss from continuing operations
available to common stockholders...... $(47,088) $(69,719) $ (11,001) $(127,808)
======== ======== ============ =========
Loss per common share from continuing
operations:
Basic......................................... $ (0.82)
========
Diluted....................................... $ (0.82)
========
Weighted average shares outstanding:
Basic......................................... 57,658
========
Diluted....................................... 57,658
========
<CAPTION>
PRO FORMA
WORLD ACCESS,
WORLDXCHANGE
TELDAFAX AND TELDAFAX
TELDAFAX(20) ADJUSTMENTS COMBINED
------------ ----------- ----------------
<S> <C> <C> <C>
Service revenues................................ $150,036 $ (2,772)(25) $ 983,872
Operating expenses:.............................
Cost of services (exclusive of depreciation
and amortization shown separately below).... 126,302 (2,772)(25) 834,897
Selling, general and administrative........... 27,807 -- 167,821
Depreciation and amortization................. 12,253 7,359(22) 99,756
(2,400)(22)
3,300(22)
Restructuring and other special charges....... -- -- (3,995)
-------- ----------- -------------
Total operating expenses................ 166,362 5,487 1,098,479
-------- ----------- -------------
Operating loss.......................... (16,326) (8,259) (114,607)
Interest and other income..................... 885 -- 13,881
Interest and other expense.................... (788) -- (46,772)
Loss on investment in TelDaFax................ -- 2,874 --
Foreign exchange loss......................... -- -- 117
-------- ----------- -------------
Loss from continuing operations before
income taxes and minority interests... (16,229) (5,385) (147,381)
Provision (benefit) for income taxes.......... (6,676) (369)(26) (7,767)
-------- ----------- -------------
Loss from continuing operations before
minority interest..................... (9,553) (5,016) (139,614)
Minority interest............................. 851 -- 851
-------- ----------- -------------
Loss from continuing operations......... (8,702) (5,016) (138,763)
Preferred stock dividends..................... -- -- (2,763)
-------- ----------- -------------
Loss from continuing operations
available to common stockholders...... $ (8,702) $ (5,016) $ (141,526)
======== =========== =============
Loss per common share from continuing
operations:
Basic......................................... $ (1.14)(19)(27)
=============
Diluted....................................... $ (1.14)(19)(27)
=============
Weighted average shares outstanding:
Basic......................................... 124,355(19)(27)
=============
Diluted....................................... 124,355(19)(27)
=============
</TABLE>
162
<PAGE> 176
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>
PRO FORMA
WORLD ACCESS AND
PRO FORMA WORLDXCHANGE WORLDXCHANGE
WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED TELDAFAX(20)
---------------- ---------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Service revenues....................... $1,019,553 $ 607,035 $(25,601)(16) $1,600,987 $364,039
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below).................. 903,325 477,317 (25,601)(16) 1,355,041 304,810
Selling, general and
administrative..................... 146,231 193,070 -- 339,301 48,758
Depreciation and amortization........ 97,517 43,304 8,768(12) 151,238 18,369
(6,611)(12)
8,260(12)
Restructuring and other special
charges............................ 44,187 -- -- 44,187 --
---------- --------- -------- ---------- --------
Total operating expenses....... 1,191,260 713,691 (15,184) 1,889,767 371,937
---------- --------- -------- ---------- --------
Operating loss................. (171,707) (106,656) (10,417) (288,780) (7,898)
Interest and other income.............. 10,822 -- -- 10,822 2,469
Interest and other expense............. (58,208) (25,385) 1,230(15) (82,363) (2,171)
Loss on investment in TelDaFax......... (990) -- -- (990) --
Foreign exchange loss.................. (2,369) -- -- (2,369) --
---------- --------- -------- ---------- --------
Loss from continuing operations
before income taxes and
minority interests........... (222,452) (132,041) (9,187) (363,680) (7,600)
Provision (benefit) for income taxes... (6,999) -- (172)(18) (7,171) (3,830)
---------- --------- -------- ---------- --------
Loss from continuing operations
before minority interest..... (215,453) (132,041) (9,015) (356,509) (3,770)
Minority interest...................... -- 1,614 -- 1,614 774
---------- --------- -------- ---------- --------
Loss from continuing
operations................... (215,453) (130,427) (9,015) (354,895) (2,996)
Preferred stock dividends.............. (2,461) (784) -- (3,245) --
---------- --------- -------- ---------- --------
Loss from continuing operations
available to common
stockholders................. $ (217,914) $(131,211) $ (9,015) $ (358,140) $ (2,996)
========== ========= ======== ========== ========
Loss per common share from continuing
operations:
Basic................................ $ (4.30)
==========
Diluted.............................. $ (4.30)
==========
Weighted average shares outstanding:
Basic................................ 50,634
==========
Diluted.............................. 50,634
==========
<CAPTION>
PRO FORMA
WORLD ACCESS,
TELDAFAX WORLDXCHANGE AND
ADJUSTMENTS TELDAFAX COMBINED
----------- --------------------
<S> <C> <C>
Service revenues....................... $ (8,914)(25) $1,956,112
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below).................. (8,914)(25) 1,650,937
Selling, general and
administrative..................... -- 388,059
Depreciation and amortization........ 15,493(22) 186,900
(4,800)(22)
6,600(22)
Restructuring and other special
charges............................ -- 44,187
-------- ----------
Total operating expenses....... 8,379 2,270,083
-------- ----------
Operating loss................. (17,293) (313,971)
Interest and other income.............. -- 13,291
Interest and other expense............. -- (84,534)
Loss on investment in TelDaFax......... 990 --
Foreign exchange loss.................. -- (2,369)
-------- ----------
Loss from continuing operations
before income taxes and
minority interests........... (16,303) (387,583)
Provision (benefit) for income taxes... (738)(26) (11,739)
-------- ----------
Loss from continuing operations
before minority interest..... (15,565) (375,844)
Minority interest...................... -- 2,388
-------- ----------
Loss from continuing
operations................... (15,565) (373,456)
Preferred stock dividends.............. -- (3,245)
-------- ----------
Loss from continuing operations
available to common
stockholders................. $(15,565) $ (376,701)
======== ==========
Loss per common share from continuing
operations:
Basic................................ $ (3.21)(19)(27)
==========
Diluted.............................. $ (3.21)(19)(27)
==========
Weighted average shares outstanding:
Basic................................ 117,331(19)(27)
==========
Diluted.............................. 117,331(19)(27)
==========
</TABLE>
163
<PAGE> 177
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WORLD ACCESS
WORLD STAR AND STAR
ACCESS(28) STAR(1) ADJUSTMENTS COMBINED
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents(2(i))................ $ 172,479 $ 131,884 $ -- $ 304,363
Short-term investments.................... 160,211 1,756 -- 161,967
Restricted cash........................... 31,095 -- -- 31,095
Accounts and notes receivable............. 264,678 99,810 -- 364,488
Prepaid expenses and other current
assets.................................. 38,491 22,023 -- 60,514
Net assets held for sale.................. 41,465 -- -- 41,465
---------- --------- ------------ ----------
Total Current Assets............ 708,419 255,473 -- 963,892
---------- --------- ------------ ----------
Property and equipment.................... 151,609 264,380 (94,000)(2) 321,989
Investment in TelDaFax.................... 130,851 -- -- 130,851
Goodwill and other intangibles............ 1,080,797 3,968 (1,764)(4) 1,312,235
233,144(2)
11,900(2)
(15,810)(6)
Other assets.............................. 79,185 4,767 -- 83,952
---------- --------- ------------ ----------
Total Assets.................... $2,150,861 $ 528,588 $ 133,470 $2,812,919
========== ========= ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt........................... $ 57,033 $ 86,680 $ (55,685)(6) $ 88,028
Accounts payable.......................... 246,436 104,507 (21,789)(6) 329,154
Other accrued liabilities................. 151,328 107,689 3,000(2) 260,794
(1,223)(6)
---------- --------- ------------ ----------
Total Current Liabilities....... 454,797 298,876 (75,697) 677,976
Long-term debt............................ 257,946 55,398 -- 313,344
Other long-term liabilities............... 10,336 32,744 -- 43,080
---------- --------- ------------ ----------
Total Liabilities............... 723,079 387,018 (75,697) 1,034,400
---------- --------- ------------ ----------
Stockholders' Equity (Deficit):
Preferred Stock........................... 6 -- -- 6
Common stock.............................. 732 58 (58)(5) 1,027
227(2)
68(6)
Additional paid in capital................ 1,601,862 366,304 (366,304)(5) 1,952,304
279,484(2)
8,139(2)
62,819(6)
Deferred compensation..................... -- (1,399) 1,399(5) --
Notes receivable from shareholders........ -- (3,856) 3,856(5) --
Accumulated other comprehensive loss...... (12,239) (8,017) 8,017(5) (12,239)
Accumulated deficit....................... (162,579) (211,520) 211,520(5) (162,579)
---------- --------- ------------ ----------
Total Stockholders' Equity
(Deficit)..................... 1,427,782 141,570 209,167 1,778,519
---------- --------- ------------ ----------
Total Liabilities and
Stockholders' Equity.......... $2,150,861 $ 528,588 $ 133,470 $2,812,919
========== ========= ============ ==========
</TABLE>
164
<PAGE> 178
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED
---------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Service revenues........................... $570,279 $236,915 $(25,683)(7) $781,511
Operating expenses:........................
Cost of services (exclusive of depreciation
and amortization shown separately
below)................................... 500,355 209,303 (25,683)(7) 683,975
Selling, general and administrative........ 59,430 39,492 -- 98,922
Depreciation and amortization.............. 41,618 18,480 735(3) 55,308
(6,715)(3)
1,190(3)
Restructuring and other special charges.... (3,995) -- -- (3,995)
-------- -------- -------- --------
Total operating expenses......... 597,408 267,275 (30,473) 834,210
-------- -------- -------- --------
Operating loss................... (27,129) (30,360) 4,790 (52,699)
Interest and other income.................. 12,996 7,687 -- 20,683
Interest and other expense................. (29,789) (7,154) 1,223(6) (35,720)
Loss on investment in TelDaFax............. (2,874) -- -- (2,874)
Foreign exchange loss...................... 117 -- -- 117
-------- -------- -------- --------
Loss from continuing operations
before income taxes and minority
interests........................ (46,679) (29,827) 6,013 (70,493)
Provision (benefit) for income taxes....... (754) (7,277) 2,767(8) (5,264)
-------- -------- -------- --------
Loss from continuing operations
before minority interest....... (45,925) (22,550) 3,246 (65,229)
Minority interest.......................... -- -- -- --
-------- -------- -------- --------
Loss from continuing
operations..................... (45,925) (22,550) 3,246 (65,229)
Preferred stock dividends.................. (1,163) -- -- (1,163)
-------- -------- -------- --------
Loss from continuing operations
available to common
stockholders................... $(47,088) $(22,550) $ 3,246 $(66,392)
======== ======== ======== ========
Loss per common share from continuing
operations:
Basic.................................... $ (0.82) $ (0.75)(9)
======== ========
Diluted.................................. $ (0.82) $ (0.75)(9)
======== ========
Weighted average shares outstanding:
Basic.................................... 57,658 88,151(9)
======== ========
Diluted.................................. 57,658 88,151(9)
======== ========
</TABLE>
165
<PAGE> 179
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>
PRO FORMA
WORLD ACCESS
PRO FORMA STAR AND STAR
WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED
---------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Service revenues........................... $1,019,553 $616,469 $(17,949)(7) $1,618,073
Operating expenses:........................
Cost of services (exclusive of
depreciation and amortization shown
separately below)..................... 903,325 537,895 (17,949)(7) 1,423,271
Selling, general and administrative...... 146,231 108,246 -- 254,477
Depreciation and amortization............ 97,517 29,635 3,122(3) 119,225
(13,429)(3)
2,380(3)
Merger expense........................... -- 1,867 -- 1,867
Restructuring and other special
charges............................... 44,187 -- -- 44,187
---------- -------- -------- ----------
Total operating expenses......... 1,191,260 677,643 (25,876) 1,843,027
---------- -------- -------- ----------
Operating loss................... (171,707) (61,174) 7,927 (224,954)
Interest and other income.................. 10,822 6,701 -- 17,523
Interest and other expense................. (58,208) (8,614) -- (66,822)
Loss on investment in TelDaFax............. (990) -- -- (990)
Foreign exchange loss...................... (2,369) (3,471) -- (5,840)
---------- -------- -------- ----------
Loss from continuing operations
before income taxes and
minority interests............. (222,452) (66,558) 7,927 (281,083)
Provision (benefit) for income taxes....... (6,999) (11,041) 4,530(8) (13,510)
---------- -------- -------- ----------
Loss from continuing
operations..................... (215,453) (55,517) 3,397 (267,573)
Preferred stock dividends.................. (2,461) -- -- (2,461)
---------- -------- -------- ----------
Loss from continuing operations
available to common
stockholders................... $ (217,914) $(55,517) $ 3,397 $ (270,034)
========== ======== ======== ==========
Loss per common share from continuing
operations:
Basic.................................... $ (4.30) $ (3.33)(9)
========== ==========
Diluted.................................. $ (4.30) $ (3.33)(9)
========== ==========
Weighted average shares outstanding:
Basic.................................... 50,634 81,127(9)
========== ==========
Diluted.................................. 50,634 81,127(9)
========== ==========
</TABLE>
166
<PAGE> 180
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WORLD ACCESS AND
WORLD WORLDXCHANGE WORLDXCHANGE
ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED
---------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents(2(i))................. $ 172,479 $ 6,913 $ -- $ 179,392
Short-term investments..................... 160,211 -- -- 160,211
Restricted cash............................ 31,095 -- -- 31,095
Accounts and notes receivable.............. 264,678 103,172 -- 367,850
Prepaid expenses and other current
assets................................... 38,491 32,566 -- 71,057
Net assets held for sale................... 41,465 -- -- 41,465
---------- --------- --------- ----------
Total Current Assets.............. 708,419 142,651 -- 851,070
---------- --------- --------- ----------
Property and equipment..................... 151,609 193,494 (6,500)(11) 285,603
(68,000)(11)
15,000(11)
Investment in TelDaFax..................... 130,851 -- -- 130,851
Goodwill and other intangibles............. 1,080,797 90,162 (76,327)(13) 1,680,974
548,172(11)
41,300(11)
(3,130)(15)
Other assets............................... 79,185 4,105 (38,192)(11) 45,098
---------- --------- --------- ----------
Total Assets...................... $2,150,861 $ 430,412 $ 412,323 $2,993,596
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt............................ $ 57,033 $ 201,825 $ (38,192)(11) $ 217,453
(3,213)(15)
Accounts payable........................... 246,436 23,682 (792)(15) 269,326
Other accrued liabilities.................. 151,328 224,478 3,000(11) 378,806
---------- --------- --------- ----------
Total Current Liabilities......... 454,797 449,985 (39,197) 865,585
Long-term debt............................. 257,946 70,829 (11,596)(15) 317,179
Other long-term liabilities................ 10,336 5,547 -- 15,883
---------- --------- --------- ----------
Total Liabilities................. 723,079 526,361 (50,793) 1,198,647
---------- --------- --------- ----------
Stockholders' Equity (Deficit):
Preferred Stock............................ 6 30,000 (30,000)(14) 6
Common stock............................... 732 148,056 (148,056)(14) 1,044
298(11)
14(15)
Additional paid in capital................. 1,601,862 -- 336,686(11) 1,968,717
17,712(11)
12,457(15)
Notes receivable from shareholders......... -- (1,937) 1,937(14) --
Accumulated other comprehensive loss....... (12,239) (12,900) 12,900(14) (12,239)
Accumulated deficit........................ (162,579) (259,168) 259,168(14) (162,579)
---------- --------- --------- ----------
Total Stockholders' Equity
(Deficit)....................... 1,427,782 (95,949) 463,116 1,794,949
---------- --------- --------- ----------
Total Liabilities and
Stockholders' Equity............ $2,150,861 $ 430,412 $ 412,323 $2,993,596
========== ========= ========= ==========
</TABLE>
167
<PAGE> 181
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS AND
PRO FORMA WORLDXCHANGE WORLDXCHANGE
WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED
---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Service revenues................ $570,279 $280,586 $(14,257)(16) $ 836,608
Operating expenses:
Cost of services (exclusive of
depreciation and amortization
shown separately below)....... 500,355 225,269 (14,257)(16) 711,367
Selling, general and
administrative................ 59,430 80,584 -- 140,014
Depreciation and amortization... 41,618 25,756 11,046(12) 79,244
(3,306)(12)
4,130(12)
Restructuring and other special
charges....................... (3,995) -- -- (3,995)
-------- -------- -------- ---------
Total operating
expenses............. 597,408 331,609 (2,387) 926,630
-------- -------- -------- ---------
Operating loss......... (27,129) (51,023) (11,870) (90,022)
Interest and other income....... 12,996 -- -- 12,996
Interest and other expense...... (29,789) (17,096) 901(15) (45,984)
Loss on investment in
TelDaFax...................... (2,874) -- -- (2,874)
Foreign exchange loss........... 117 -- -- 117
-------- -------- -------- ---------
Loss from continuing
operations before
income taxes and
minority interests... (46,679) (68,119) (10,969) (125,767)
Provision (benefit) for income
taxes......................... (754) -- 32(18) (722)
-------- -------- -------- ---------
Loss from continuing
operations........... (45,925) (68,119) (11,001) (125,045)
Preferred stock dividends....... (1,163) (1,600) -- (2,763)
-------- -------- -------- ---------
Loss from continuing
operations available
to common
stockholders......... $(47,088) $(69,719) $(11,001) $(127,808)
======== ======== ======== =========
Loss per common share from
continuing operations:
Basic......................... $ (0.82) $ (1.43)(19)
======== =========
Diluted....................... $ (0.82) $ (1.43)(19)
======== =========
Weighted average shares
outstanding:
Basic......................... 57,658 89,680(19)
======== =========
Diluted....................... 57,658 89,680(19)
======== =========
</TABLE>
168
<PAGE> 182
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>
PRO FORMA
WORLD ACCESS AND
PRO FORMA WORLDXCHANGE WORLDXCHANGE
WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED
---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Service revenues............. $1,019,553 $ 607,035 $ (25,601)(16) $1,600,987
Operating expenses:..........
Cost of services (exclusive
of depreciation and
amortization shown
separately below)........ 903,325 477,317 (25,601)(16) 1,355,041
Selling, general and
administrative........... 146,231 193,070 -- 339,301
Depreciation and
amortization............. 97,517 43,304 8,768(12) 151,238
(6,611)(12)
8,260(12)
Restructuring and other
special charges.......... 44,187 -- -- 44,187
---------- --------- ------------ ----------
Total operating
expenses.......... 1,191,260 713,691 (15,184) 1,889,767
---------- --------- ------------ ----------
Operating loss...... (171,707) (106,656) (10,417) (288,780)
Interest and other income.... 10,822 -- -- 10,822
Interest and other expense... (58,208) (25,385) 1,230(15) (82,363)
Loss on investment in
TelDaFax................... (990) -- -- (990)
Foreign exchange loss........ (2,369) -- -- (2,369)
---------- --------- ------------ ----------
Loss from continuing
operations before
income taxes and
minority
interests......... (222,452) (132,041) (9,187) (363,680)
Provision (benefit) for
income taxes............... (6,999) -- (172)(18) (7,171)
---------- --------- ------------ ----------
Loss from continuing
operations before
minority
interest.......... (215,453) (132,041) (9,015) (356,509)
Minority interest............ -- 1,614 -- 1,614
---------- --------- ------------ ----------
Loss from continuing
operations........ (215,453) (130,427) (9,015) (354,895)
Preferred stock dividends.... (2,461) (784) -- (3,245)
---------- --------- ------------ ----------
Loss from continuing
operations
available to
common
stockholders...... $ (217,914) $(131,211) $ (9,015) $ (358,140)
========== ========= ============ ==========
Loss per common share from
continuing operations:
Basic...................... $ (4.30) $ (4.33)(19)
========== ==========
Diluted.................... $ (4.30) $ (4.33)(19)
========== ==========
Weighted average shares
outstanding:
Basic...................... 50,634 82,656(19)
========== ==========
Diluted.................... 50,634 82,656(19)
========== ==========
</TABLE>
169
<PAGE> 183
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA WORLD ACCESS
WORLD TELDAFAX AND TELDAFAX
ACCESS(28) TELDAFAX(20) ADJUSTMENTS COMBINED
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and equivalents(2(i))................ $ 172,479 $ 26,408 $ -- $ 198,887
Short-term investments.................... 160,211 -- -- 160,211
Restricted cash........................... 31,095 -- -- 31,095
Accounts and notes receivable............. 264,678 42,427 -- 307,105
Prepaid expenses and other current
assets.................................. 38,491 30,625 -- 69,116
Net assets held for sale.................. 41,465 -- -- 41,465
---------- -------- -------- ----------
Total Current Assets............ 708,419 99,460 -- 807,879
---------- -------- -------- ----------
Property and equipment.................... 151,609 65,281 (24,000)(21) 192,890
Investment in TelDaFax.................... 130,851 -- (130,851)(21) --
Goodwill and other intangibles............ 1,080,797 15,811 (12,430)(23) 1,439,147
321,969(21)
33,000(21)
Other assets.............................. 79,185 13,027 -- 92,212
---------- -------- -------- ----------
Total Assets.................... $2,150,861 $193,579 $187,688 $2,532,128
========== ======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt........................... $ 57,033 $ 7,260 $ -- $ 64,293
Accounts payable.......................... 246,436 73,688 -- 320,124
Other accrued liabilities................. 151,328 9,626 5,000(21) 165,954
---------- -------- -------- ----------
Total Current Liabilities....... 454,797 90,574 5,000 550,371
Long-term debt............................ 257,946 19,320 -- 277,266
Other long-term liabilities............... 10,336 347 -- 10,683
---------- -------- -------- ----------
Total Liabilities............... 723,079 110,241 5,000 838,320
---------- -------- -------- ----------
Minority interests........................ -- 888 -- 888
Stockholders' Equity (Deficit):
Preferred stock........................... 6 -- -- 6
Common stock.............................. 732 84,309 (84,309)(24) 964
232(21)
Additional paid in capital................ 1,601,862 7,737 (7,737)(24) 1,866,768
264,906(21)
Accumulated other comprehensive loss...... (12,239) 47 (47)(24) (12,239)
Accumulated deficit....................... (162,579) (9,643) 9,643(24) (162,579)
---------- -------- -------- ----------
Total Stockholders' Equity
(Deficit)..................... 1,427,782 82,450 182,688 1,692,920
---------- -------- -------- ----------
Total Liabilities and
Stockholders' Equity.......... $2,150,861 $193,579 $187,688 $2,532,128
========== ======== ======== ==========
</TABLE>
170
<PAGE> 184
WORLD ACCESS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
WORLD ACCESS,
STAR,
PRO FORMA TELDAFAX WORLDXCHANGE AND
WORLD ACCESS(28) TELDAFAX(20) ADJUSTMENTS TELDAFAX COMBINED
---------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Service revenues............................. $570,279 $150,036 $(2,772)(25) $717,543
Operating expenses:..........................
Cost of services (exclusive of depreciation
and amortization shown separately below)... 500,355 126,302 (2,772)(25) 623,885
Selling, general and administrative.......... 59,430 27,807 -- 87,237
Depreciation and amortization................ 41,618 12,253 7,359(22) 62,130
(2,400)(22)
3,300(22)
Restructuring and other special charges...... (3,995) -- -- (3,995)
-------- -------- ------- --------
Total operating expenses............ 597,408 166,362 5,487 769,257
-------- -------- ------- --------
Operating loss...................... (27,129) (16,326) (8,259) (51,714)
Interest and other income.................... 12,996 885 -- 13,881
Interest and other expense................... (29,789) (788) -- (30,577)
Loss on investment in TelDaFax............... (2,874) -- 2,874 --
Foreign exchange loss........................ 117 -- -- 117
-------- -------- ------- --------
Loss from continuing operations
before income taxes and minority
interests......................... (46,679) (16,229) (5,385) (68,293)
Provision (benefit) for income taxes......... (754) (6,676) (369)(26) (7,799)
-------- -------- ------- --------
Loss from continuing operations
before minority interest.......... (45,925) (9,553) (5,016) (60,494)
Minority interest............................ -- 851 -- 851
-------- -------- ------- --------
Loss from continuing operations..... (45,925) (8,702) (5,016) (59,643)
Preferred stock dividends.................... (1,163) -- -- (1,163)
-------- -------- ------- --------
Loss from continuing operations
available to common
stockholders...................... $(47,088) $ (8,702) $(5,016) $(60,806)
======== ======== ======= ========
Loss per common share from continuing
operations:
Basic...................................... $ (0.82) $ (0.66)(27)
======== ========
Diluted.................................... $ (0.82) $ (0.66)(27)
======== ========
Weighted average shares outstanding:
Basic...................................... 57,658 92,333(27)
======== ========
Diluted.................................... 57,658 92,333(27)
======== ========
</TABLE>
171
<PAGE> 185
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>
PRO FORMA
PRO FORMA TELDAFAX WORLD ACCESS AND
WORLD ACCESS(28) TELDAFAX(20) ADJUSTMENTS TELDAFAX COMBINED
---------------- ------------ ----------- -----------------
<S> <C> <C> <C> <C>
Service revenues........................... $1,019,553 $364,039 $ (8,914)(25) $1,374,678
Operating expenses:........................
Cost of services (exclusive of
depreciation and amortization shown
separately below)...................... 903,325 304,810 (8,914)(25) 1,199,221
Selling, general and administrative...... 146,231 48,758 -- 194,989
Depreciation and amortization............ 97,517 18,369 15,493(22) 133,179
(4,800)(22)
6,600(22)
Restructuring and other special
charges................................ 44,187 -- -- 44,187
---------- -------- ----------- ----------
Total operating expenses.......... 1,191,260 371,937 8,379 1,571,576
---------- -------- ----------- ----------
Operating loss.................... (171,707) (7,898) (17,293) (196,898)
Interest and other income.................. 10,822 2,469 -- 13,291
Interest and other expense................. (58,208) (2,171) -- (60,379)
Loss on investment in TelDaFax............. (990) -- 990 --
Foreign exchange loss...................... (2,369) -- -- (2,369)
---------- -------- ----------- ----------
Loss from continuing operations
before income taxes and minority
interests....................... (222,452) (7,600) (16,303) (246,355)
Provision (benefit) for income taxes....... (6,999) (3,830) (738)(26) (11,567)
---------- -------- ----------- ----------
Loss from continuing operations
before minority interest........ (215,453) (3,770) (15,565) (234,788)
Minority interest.......................... -- 774 -- 774
---------- -------- ----------- ----------
Loss from continuing operations... (215,453) (2,996) (15,565) (234,014)
Preferred stock dividends.................. (2,461) -- -- (2,461)
---------- -------- ----------- ----------
Loss from continuing operations
available to common
stockholders.................... $ (217,914) $ (2,996) $ (15,565) $ (236,475)
========== ======== =========== ==========
Loss per common share from continuing
operations:
Basic.................................... $ (4.30) $ (2.77)(27)
========== ==========
Diluted.................................. $ (4.30) $ (2.77)(27)
========== ==========
Weighted average shares outstanding:
Basic.................................... 50,634 85,309(27)
========== ==========
Diluted.................................. 50,634 85,309(27)
========== ==========
</TABLE>
172
<PAGE> 186
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
STAR ADJUSTMENTS
(1) These columns represent the historical financial position and results
of operations of STAR as of and for the six months ended June 30, 2000
and for the year ended December 31, 1999 and have been adjusted to
reflect the sale of PT-1, a required condition of the STAR merger. For
pro forma purposes, we have assumed that PT-1 will be sold to Counsel
and the net cash proceeds received from the sale will be approximately
$120.0 million.
<TABLE>
<CAPTION>
STAR
STAR EXCLUSION OF EXCLUDING PT-1
JUNE 30, 2000 PT-1 JUNE 30, 2000
-------------- ------------ --------------
<S> <C> <C> <C>
Cash and equivalents....................... $ 16,844 $ (4,960)(i) $131,884
120,000(ii)
Short-term investments..................... 1,756 --(i) 1,756
Accounts and notes receivable.............. 161,169 (61,359)(i) 99,810
Prepaid expenses and other current
assets................................... 46,552 (24,529)(i) 22,023
-------- --------- --------
Total Current Assets............. 226,321 29,152 255,473
-------- --------- --------
Property and equipment, net................ 304,314 (39,934)(i) 264,380
Goodwill and other intangibles............. 193,316 (189,348)(i) 3,968
Other assets............................... 5,838 (1,071)(i) 4,767
-------- --------- --------
Total Assets..................... $729,789 $(201,201) $528,588
======== ========= ========
Short-term debt............................ $ 88,709 $ (2,029)(i) $ 86,680
Accounts payable........................... 126,292 (21,785)(i) 104,507
Other accrued liabilities.................. 163,182 (55,493)(i) 107,689
-------- --------- --------
Total Current Liabilities........ 378,183 (79,307) 298,876
-------- --------- --------
Long-term debt............................. 59,403 (4,005)(i) 55,398
Other long-term liabilities................ 33,634 (890)(i) 32,744
-------- --------- --------
Total Liabilities................ 471,220 (84,202) 387,018
-------- --------- --------
Total Stockholders' Equity....... 258,569 (116,999)(iii) 141,570
-------- --------- --------
Total Liabilities and
Stockholders' Equity........... $729,789 $(201,201) $528,588
======== ========= ========
</TABLE>
(i) Represents the historical asset and liability amounts for PT-1,
including PT-1 goodwill recorded by STAR. It does not include
certain liabilities that Counsel will not assume in connection
with the PT-1 asset sale. These liabilities consist primarily of
income taxes, certain network operating costs and litigation
matters that have been managed on a consolidated basis and
historically accounted for on STAR's balance sheet. There are no
significant liabilities on PT-1's balance sheet that are not being
assumed by Counsel.
(ii) Represents the net cash proceeds expected to be received from the
PT-1 asset sale, estimated as follows:
<TABLE>
<S> <C>
Gross purchase price $150,000
Net assets adjustment (8,000)
Fees and expenses (2,100)
STAR income taxes (19,000)
Other costs (900)
--------
$120,000
========
</TABLE>
173
<PAGE> 187
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The gross purchase price will be adjusted upward or downward if
(a) the aging of PT-1's accounts receivable and accounts payable
at the closing date differs materially from the related aging as
of December 31, 1999, and (b) the net assets of PT-1 as of the
closing date differ from $37.2 million, the net assets of PT-1 as
of December 31, 1999. Net assets, as defined in the PT-1 asset
purchase agreement, excludes goodwill, deferred income taxes,
inter-company balances and other liabilities not included on
PT-1's December 31, 1999 balance sheet and therefore not assumed
by Counsel.
Based on an analysis prepared by STAR in September 2000, there has
been no material change in the aging of PT-1's accounts receivable
and accounts payable during 2000, and accordingly no adjustment in
purchase price is expected for this provision. Based on the net
assets of PT-1 as of June 30, 2000, we expect the purchase price
to be reduced by approximately $8.0 million.
The $19.0 million of income taxes represents the net cash
liability we expect STAR to incur as a result of the gain it will
realize on the PT-1 asset sale for federal and state income tax
purposes. This liability, which was calculated net of PT-1
operating loss carryforwards available to offset the tax gain,
will be assumed by World Access in connection with the STAR
merger.
The PT-1 asset purchase agreement requires 15% of the gross
purchase price, or $22.5 million, to be placed into escrow on the
closing date. This escrowed purchase price will be immediately
released to World Access upon (i) the completion of the STAR
merger and (ii) World Access' agreement to assume STAR and PT-1's
representations, warranties and other obligations under the PT-1
asset purchase agreement. World Access plans to assume these
obligations and accordingly expects to receive the $22.5 million
of cash immediately upon completion of the STAR merger.
(iii) Represents the assumed loss on the sale of PT-1. As the sale of
PT-1 by STAR is a required condition to the merger and which must
be completed before the merger is consummated, the assumed loss on
the sale of PT-1 of $116,999 is not reflected in the World Access
unaudited pro forma combined financial statements.
<TABLE>
<CAPTION>
STAR
STAR EXCLUDING PT-1
SIX MONTHS SIX MONTHS
ENDED EXCLUSION OF ENDED
JUNE 30, 2000 PT-1 JUNE 30, 2000
-------------- ------------ --------------
<S> <C> <C> <C>
Carrier service revenue....................... $ 497,400 $(260,485) $ 236,915
Cost of carrier services...................... (433,657) 224,354 (209,303)
Selling, general and administrative........... (61,555) 22,063 (39,492)
Depreciation and amortization................. (26,539) 8,059 (18,480)
Interest and other income..................... 7,819 (132) 7,687
Interest expense.............................. (7,742) 588 (7,154)
Benefit for income taxes...................... 5,706 1,571 7,277
--------- --------- ---------
Net loss............................ $ (18,568) $ (3,982) $ (22,550)
========= ========= =========
</TABLE>
174
<PAGE> 188
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
STAR
STAR EXCLUDING PT-1
YEAR ENDED EXCLUSION OF YEAR ENDED
DECEMBER 31, 1999 PT-1 DECEMBER 31, 1999
----------------- ------------ -----------------
<S> <C> <C> <C>
Carrier service revenues.................. $1,061,774 $(445,305) $ 616,469
Cost of carrier services.................. (925,206) 387,311 (537,895)
Selling, general and administrative....... (160,067) 51,821 (108,246)
Depreciation and amortization............. (44,236) 14,601 (29,635)
Merger expense............................ (1,878) 11 (1,867)
Interest and other income................. 7,036 (335) 6,701
Interest expense.......................... (9,895) 1,281 (8,614)
Foreign exchange loss..................... (3,471) -- (3,471)
Benefit for income taxes.................. 12,096 (1,055) 11,041
---------- --------- ---------
Net loss........................ $ (63,847) $ 8,330 $ (55,517)
========== ========= =========
</TABLE>
(2) The STAR merger will be accounted for under the purchase method of
accounting. The total cost to acquire STAR is subject to change, to
the extent that the number of shares of STAR common stock to be
acquired will not be fixed until the effective date of the merger. A
change in total cost will result in a corresponding change in goodwill
and related amortization expense. The excess of the purchase price
over the fair value of the net assets acquired has been allocated to
goodwill and other intangible assets. These allocations are subject to
change pending the completion of the final analysis of the total
purchase price and fair values of the assets acquired and the
liabilities assumed. The impact of these changes could be material.
<TABLE>
<S> <C>
Purchase price:
Issuance of World Access common stock(i).................. $ 279,711
Fair value of World Access options issued in exchange for
STAR options(ii)....................................... 8,139
Estimated fees and expenses............................... 3,000
---------
Total estimated purchase price.................... $ 290,850
Allocation to fair values:
Pro forma stockholders' equity as of June 30, 2000(iii)... $(141,570)
Intangible assets(v)...................................... (11,900)
Adjust assets and liabilities:
Eliminate historical goodwill as of June 30, 2000...... 1,764
Write-down of fixed assets to fair value............... 94,000
---------
Preliminary goodwill(iv).......................... $ 233,144
=========
</TABLE>
-----------------------
(i) In accordance with the STAR merger agreement, each share of STAR
common stock issued and outstanding shall be converted into the
right to receive 0.3866 shares of World Access common stock. At June
30, 2000, approximately 22,667,000 shares of World Access common
stock are assumed to have been issued in connection with the STAR
merger as follows (in thousands, except per share amounts):
<TABLE>
<S> <C>
STAR common shares outstanding at June 30, 2000............. 58,632
Multiplied by: Exchange ratio............................... 0.3866
--------
Shares of World Access Common Stock assumed to be
exchanged................................................. 22,667
Multiplied by: Average market price(a)...................... $ 12.34
--------
Value of World Access Common Stock exchanged................ $279,711
========
</TABLE>
175
<PAGE> 189
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with the STAR merger agreement, World Access, at its
option, may pay up to 40% of the purchase price in the form of cash.
Currently, World Access has no intention of paying any portion of
the STAR purchase price with cash other than an immaterial amount to
be paid for fractional shares and any cash to be paid for
Dissenters' Shares. However, should World Access decide to pay a
portion of the STAR purchase price in cash, assuming the maximum of
40% and based upon the average closing price of World Access Common
Stock on the Nasdaq National Market for the 10 trading day period
ended July 17, 2000 of $10.83, World Access would be required to pay
STAR shareholders approximately $98.2 million in cash and issue
approximately 13.6 million shares of World Access Common Stock
having an approximate value of $171.5 million in connection with the
merger. Since the option to pay a portion of the STAR purchase price
in cash is solely at the option of the World Access and World Access
has no intention of paying any portion of the STAR purchase price
with the cash option, the pro forma balance sheets have been
prepared excluding the cash option.
---------------------------
(a) The average market price represents the average market price of
World Access Common Stock for the three trading days prior to
and after June 7, 2000, the date economic terms of the merger
were amended.
(ii) As the consummation of the merger is expected to occur after July
1, 2000, we have valued the World Access options using the guidance
in FIN 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25. Under FIN 44,
the fair value of vested options issued will be included as part of
the purchase price. The fair value of unvested options issued will
also be included as part of the purchase price; however, a portion
of the intrinsic value (if any) of the unvested options will be
allocated to unearned compensation and recognized as compensation
cost over the remaining future vesting period. The intrinsic value
to be allocated to unearned compensation is not significant and has
not been reflected in these pro forma financial statements.
In accordance with the merger agreement, each STAR option is to be
converted into an option to purchase 0.3866 shares of World Access
Common Stock. At June 30, 2000, STAR had approximately 3.7 million
options outstanding; 1.8 million of which were vested and 1.9
million were unvested. The vested and unvested options are
convertible to approximately 686,000 and 751,000 World Access
options, respectively, totaling 1.4 million.
The fair value of the 686,000 vested options is $4.4 million
computed using the Black-Scholes Option Pricing Model and is
included in the purchase price. The fair value of the 751,000
unvested options is $3.7 million computed using the Black-Scholes
Option Pricing Model. The assumptions used in the Black-Scholes
model are: dividend yield 0%, volatility 70%, risk free interest
rate of 6.43%, and an expected life of 3 years.
(iii) STAR pro forma stockholders' equity as of June 30, 2000 assumes
the sale of PT-1 for net cash proceeds of $120.0 million.
(iv) The pro forma goodwill is preliminary and subject to change based
on a final review of the fair values of STAR's net assets as of the
actual merger date. Upon a final review of the fair value of STAR's
assets and liabilities, it is likely that certain tangible and
intangible assets such as international licenses, foreign carrier
operating agreements and property and equipment may be recognized
at amounts which differ from the amounts estimated in these
unaudited pro forma financial statements. Although we do not expect
these final
176
<PAGE> 190
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
adjustments to be significant, they could increase or decrease the
depreciation and amortization expense reflected in the unaudited
pro forma financial statements. In addition, certain liabilities
related to exiting STAR activities or terminating STAR employees
may be recorded as part of the purchase price allocation in
accordance with ETIF 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination. This would increase goodwill
and related amortization expense. World Access has not finalized a
plan to exit any activities of STAR or terminate any STAR
employees, and will not have a final plan until a detailed analysis
of the combined operations is performed shortly after the STAR
merger is consummated.
(v) Intangible assets consist of wholesale and retail customer base,
licenses and interconnection, management and workforce expertise.
Amortization is provided using the straight-line method over a
5-year period.
(3) Amortization of additional goodwill over an estimated life of 20
years. The pro forma adjustment to goodwill was computed as follows
(in thousands):
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA GOODWILL PRO FORMA
GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
STAR -- for the six months ended June 30,
2000................................... $233,144 $ 5,829 $(5,094) $ 735
STAR -- for the year ended December 31,
1999................................... $233,144 $11,657 $(8,535) $3,122
</TABLE>
Depreciation benefit as a result of write-down of fixed assets to fair
value is arrived at using an estimated life of 7 years. The pro forma
adjustment to property and equipment was computed as follows (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
PROPERTY AND DEPRECIATION
EQUIPMENT ADJUSTMENT
------------ ------------
<S> <C> <C>
STAR -- for the six months ended June 30, 2000.............. $94,000 $ (6,715)
STAR -- for the year ended December 31, 1999................ $94,000 $(13,429)
</TABLE>
Amortization of additional intangible assets over an estimated life of 5
years. The pro forma adjustment to intangible assets was computed as
follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
INTANGIBLE AMORTIZATION
ASSETS ADJUSTMENT
------------ ------------
<S> <C> <C>
STAR -- for the six months ended June 30, 2000.............. $11,900 $ 1,190
STAR -- for the year ended December 31, 1999................ $11,900 $ 2,380
</TABLE>
(4) Elimination of STAR's historical goodwill.
(5) Elimination of STAR's historical stockholders' equity accounts.
(6) In connection with the consummation of the STAR merger, a vendor of
STAR has agreed to convert up to approximately $90.0 million of STAR
indebtedness into approximately 7,826,000 shares of World Access
Common Stock based upon a conversion rate of $11.50 per share. As of
September 6, 2000, the closing price per share of World Access Common
Stock was $9.19. Since the fair value of the World Access Common Stock
is less than $11.50 per share, World Access is paying consideration
less than the carrying amount of the accounts payable and debt. This
difference is recorded as a decrease to goodwill. These shares are
assumed to be issued for
177
<PAGE> 191
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
purposes of the calculation of basic and diluted earnings per share in
the pro forma condensed combined statement of operations. The balance
sheet adjustment reflects the conversion of approximately $78.7 million
from accounts payable and debt to common stock, paid-in capital and
goodwill for the amount of indebtedness outstanding as of June 30, 2000.
The adjustment to the pro forma statement of operations is to eliminate
the interest expense recorded on the debt included in the historical
results.
(7) Elimination of intercompany revenues and related costs.
(8) Adjustment for the additional tax benefit derived from pro forma
adjustments. World Access has not recorded any tax benefit on a pro
forma basis that may be derived from STAR's net operating losses.
(9) Represents pro forma weighted average shares for basic and diluted
earnings from continuing operations per share. The weighted average
shares are computed assuming the issuance of approximately 22,667,000
shares of common stock to complete the STAR merger and 7,826,000
shares upon the conversion of STAR indebtedness into World Access
Common Stock, see Note 6. 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.
WORLDXCHANGE ADJUSTMENTS
(10) These columns represent the historical financial position and results
of operations of WorldxChange as of and for the six months ended June
30, 2000 and for the year ended December 31, 1999. As WorldxChange's
fiscal year end is September 30 the following table represents a
reconciliation of WorldxChange's results of operations for its fiscal
year ended on September 30, 1999 to the year ended December 31, 1999:
<TABLE>
<CAPTION>
HISTORICAL
RESULTS FOR
FISCAL YEAR EXCLUSION OF INCLUSION OF
ENDED OPERATIONS OPERATIONS YEAR ENDED
SEPTEMBER 30, FROM 10/1/98- FROM 10/1/99- DECEMBER 31,
1999 12/31/98 12/31/99 1999
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues............................ $ 421,580 $(89,927) $ 143,327 $ 474,980
Cost of services.................... (328,334) 70,922 (112,545) (369,957)
Selling, general and
administrative.................... (124,112) 27,952 (43,430) (139,590)
Depreciation and amortization....... (17,705) 3,564 (9,375) (23,516)
Interest and other expense.......... (17,531) 4,234 (6,420) (19,717)
Minority interest................... 2,251 (637) -- 1,614
Preferred stock dividends........... (2) 2 (784) (784)
--------- -------- --------- ---------
Net loss.................. $ (63,853) $ 16,110 $ (29,227) $ (76,970)
========= ======== ========= =========
</TABLE>
178
<PAGE> 192
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On November 4, 1999, WorldxChange acquired the outstanding shares
of certain European subsidiaries of ACC Corp. ("ACC"), a subsidiary of
AT&T. The historical results of operations of WorldxChange includes
ACC's results for the two months ended December 31, 1999. The results of
ACC for the period from January 1, 1999 to October 31, 1999 have been
added to the WorldxChange historical results of operations as follows:
<TABLE>
<CAPTION>
WXC WXC
YEAR ENDED ACC FOR YEAR ENDED
DECEMBER 31, 1999 THE PERIOD DECEMBER 31, 1999
INCLUDING 1/1/99 TO INCLUDING
2 MONTHS OF ACC 10/31/99 12 MONTHS OF ACC
----------------- ---------- -----------------
<S> <C> <C> <C>
Revenues................................ $ 474,980 $ 132,055 $ 607,035
Cost of services........................ (369,957) (107,360) (477,317)
Selling, general and administrative..... (139,590) (53,480) (193,070)
Depreciation and amortization........... (23,516) (19,788) (43,304)
Interest and other expense.............. (19,717) (5,668) (25,385)
Minority interest....................... 1,614 -- 1,614
Preferred stock dividends............... (784) -- (784)
--------- --------- ---------
Net loss...................... $ (76,970) $ (54,241) $(131,211)
========= ========= =========
</TABLE>
The following table represents a reconciliation of WorldxChange's
results of operations for the nine months ended June 30, 2000 (as shown
in the WorldxChange financial statements included in this registration
statement) to the results of operations for the six months ended June
30, 2000:
<TABLE>
<CAPTION>
EXCLUSION OF
RESULTS FOR THE RESULTS FOR THE RESULTS FOR THE
NINE MONTHS THREE MONTHS ENDED SIX MONTHS ENDED
ENDED JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 2000
------------------- ------------------ ----------------
<S> <C> <C> <C>
Revenues................... $ 423,913 $(143,327) $ 280,586
Cost of services........... (337,814) 112,545 (225,269)
Selling, general and
administrative........... (124,014) 43,430 (80,584)
Depreciation and
amortization............. (35,131) 9,375 (25,756)
Interest and other
expense.................. (23,516) 6,420 (17,096)
Preferred stock
dividends................ (2,384) 784 (1,600)
--------- --------- ---------
Net loss................... $ (98,946) $ 29,227 $ (69,719)
========= ========= =========
</TABLE>
(11) The WorldxChange merger will be accounted for under the purchase
method of accounting. The total cost to acquire WorldxChange is
subject to change, to the extent that the number of shares of
WorldxChange capital stock to be acquired will not be fixed until the
effective date of the merger. A change in total cost will result in a
corresponding change in goodwill and related amortization expense. The
excess of the purchase price over the fair value of the net assets
acquired has been allocated to goodwill and other intangible assets.
These allocations are subject to change pending the completion of the
final analysis of the total purchase price and fair values of the
assets acquired and the liabilities assumed. The impact of these
changes could be
179
<PAGE> 193
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
material. The preliminary purchase price and goodwill is currently
estimated as follows (in thousands):
<TABLE>
<S> <C>
Purchase price:
Issuance of World Access Common Stock(i).................. $336,984
Fair value of World Access options issued in exchange for
WorldxChange options(ii)............................... 17,712
Bridge financing(iii)..................................... 38,192
Estimated fees and expenses............................... 3,000
--------
Total estimated purchase price.................... $395,888
Allocation to fair values:
Historical shareholders' deficit as of June 30, 2000...... $ 95,949
Intangible assets (vi).................................... (41,300)
Eliminate payable to World Access......................... (38,192)
Adjust assets and liabilities:
Eliminate historical goodwill as of June 30, 2000...... 76,327
Write-off of impaired assets(iv)....................... 6,500
Write-down of fixed assets to fair value............... 68,000
Write-up of management information systems to fair
value................................................. (15,000)
--------
Preliminary goodwill(v)................................... $548,172
========
</TABLE>
-----------------------
(i) In accordance with the merger agreement, each share of WorldxChange
common stock issued and outstanding shall be converted into the
right to receive 0.6583 shares of World Access Common Stock. At June
30, 2000, a total of 29,848,000 shares of World Access Common Stock
are assumed to have been issued in connection with the WorldxChange
merger as follows (in thousands, except per share amounts):
<TABLE>
<S> <C>
WorldxChange common shares outstanding upon the conversion
of preferred shares outstanding at June 30, 2000.......... 2,727
WorldxChange common shares outstanding at June 30, 2000..... 42,614
--------
Total WorldxChange common shares outstanding...... 45,341
Multiplied by: Exchange ratio............................... 0.6583
--------
Shares of World Access Common Stock assumed to be
exchanged................................................. 29,848
Multiplied by: Average market price (a)..................... $ 11.29
--------
Value of World Access Common Stock exchanged................ $336,984
========
</TABLE>
---------------
(a) The average price represents the average market price of World
Access Common Stock for the three trading days prior to and
after May 23, 2000, the date economic terms of the merger were
amended.
(ii) As the consummation of the merger is expected to occur after July
1, 2000, we have valued the World Access options using the guidance
in FIN 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB opinion No. 25. Under FIN
44, the fair value of vested options issued will be included as
part of the purchase price. The fair value of unvested options
issued will also be included as part of the purchase price;
however, a portion of the intrinsic value (if any) of the unvested
options will be allocated to unearned compensation and recognized
as compensation cost over the remaining future vesting period. The
intrinsic value to be allocated to unearned compensation is not
significant and has not been reflected in these pro forma financial
statements.
180
<PAGE> 194
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with the merger agreement, each WorldxChange option is
to be converted into an option to purchase 0.6583 shares of World
Access Common Stock. At June 30, 2000, WorldxChange had
approximately 4.0 million options outstanding; 2.5 million of which
were vested and 1.5 million were unvested. The vested and unvested
options are convertible to approximately 1.6 million and 1.0 million
World Access options respectively, totaling 2.6 million. The fair
value of the 1.6 million vested options is $12.7 million computed
using the Black-Scholes Option Pricing Model and is included in the
purchase price. The fair value of the 1.0 million unvested options
is $5.0 million computed using the Black-Scholes Option Pricing
Model. The assumptions used in the Black-Scholes model are: dividend
yield 0%, volatility 70%, risk free interest rate of 6.43%, and an
expected life of three years.
(iii) As an integral component of the merger agreement, World Access
agreed to provide WorldxChange up to $45.0 million in bridge
funds, $38.2 million of which had been advanced as of June 30,
2000. These funds are being used to finance operating losses
expected to be incurred by WorldxChange prior to the merger date
and to make permanent investments in working capital that are
required to support WorldxChange growth. World Access expects that
the remaining balance of $6.8 million to be advanced subsequent to
the merger date and intends to fully forgive this loan in
connection with the consummation of the merger. As a result, the
bridge financing already funded is being accounted for as
additional purchase price.
(iv) At June 30, 2000, WorldxChange has PC based switches with net book
value of approximately $6.5 million. The merger with World Access
would result in an impairment of these assets, hence, the
adjustment to write-off impaired assets from the acquisition.
Consequently, depreciation expense is decreased by $722,000 and
$361,000 for the year ended December 31, 1999 and the six months
ended June 30, 2000, respectively. See note 12 for adjustment to
depreciation expense.
(v) The pro forma goodwill is preliminary and subject to change based
on a final review of the fair values of WorldxChange's net assets
as of the actual merger date. Upon a final review of the fair value
of WorldxChange's assets and liabilities, it is likely that certain
tangible and intangible assets such as international licenses,
foreign carrier operating agreements and property and equipment may
be recognized at amounts which differ from the amounts estimated in
these unaudited pro forma financial statements. Although we do not
expect these final adjustments to be significant, they could
increase or decrease the depreciation and amortization expense
reflected in the unaudited pro forma financial statements.
(vi) Intangible assets consist of wholesale and retail customer base,
management information systems, licenses and interconnection,
management and workforce expertise. Amortization is provided using
the straight-line method over a 5-year period.
(12) Amortization of goodwill over an estimated life of 20 years. The pro
forma adjustment to goodwill was computed as follows (in thousands):
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA GOODWILL PRO FORMA
GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
WorldxChange -- For the six months ended
June 30, 2000.......................... $548,172 $13,704 $ (2,658) $11,046
WorldxChange -- For the year ended
December 31, 1999...................... $548,172 $27,409 $(18,641) $ 8,768
</TABLE>
181
<PAGE> 195
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation benefit as a result of write-off of impaired assets,
write-down of fixed assets to fair value and write-up of management
information systems to fair value is arrived at using an estimated
life of nine years. The pro forma adjustment to property and
equipment was computed as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
PROPERTY AND DEPRECIATION
EQUIPMENT ADJUSTMENT
------------ ------------
<S> <C> <C>
WorldxChange -- for the six months ended June 30, 2000...... $ 59,500 $(3,306)
WorldxChange -- for the year ended December 31, 1999........ $ 59,500 $(6,611)
</TABLE>
Amortization of additional intangible assets over an estimated life
of 5 years. The pro forma adjustment to intangible assets was
computed as follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
INTANGIBLE AMORTIZATION
ASSETS ADJUSTMENT
----------- -------------
<S> <C> <C>
WorldxChange -- for the six months ended June 30, 2000...... $41,300 $4,130
WorldxChange -- for the year ended December 31, 1999........ $41,300 $8,260
</TABLE>
(13) Elimination of WorldxChange's historical goodwill.
(14) Elimination of WorldxChange's historical shareholders' deficit
accounts.
(15) In connection with the consummation of the WorldxChange merger, a
vendor of WorldxChange has agreed to convert up to approximately $25.0
million of WorldxChange indebtedness into approximately 2,174,000
shares of World Access Common Stock based upon a conversion rate of
$11.50 per share. As of September 6, 2000, the closing price per share
of World Access Common Stock was $9.19. Since the fair value of the
World Access Common Stock is less than $11.50 per share, World Access
is paying consideration less than the carrying amount of the accounts
payable and debt. This difference is recorded as a decrease to
goodwill. These shares are assumed to be issued for purposes of the
calculation of basic and diluted earnings per share in the pro forma
condensed combined statement of operations. The balance sheet
adjustment reflects the conversion of approximately $15.6 million
accounts payable and debt to common stock, paid-in-capital and
goodwill for the amount of indebtedness outstanding as of June 30,
2000. The adjustment to the pro forma statement of operations is to
eliminate the interest expense recorded on the debt included in the
historical results.
(16) Elimination of intercompany carrier service revenues and related
costs.
(17) At June 30, 2000, WorldxChange had a $2.2 million note payable to
STAR. Assuming the mergers of WorldxChange and STAR with World Access
are consummated, this adjustment is necessary to eliminate the
intercompany debt.
(18) Adjustment for the additional income tax provision derived from pro
forma adjustments. World Access has not recorded any tax benefit on a
pro forma basis that may be derived from WorldxChange's net operating
losses.
(19) Represents pro forma weighted average shares for basic and diluted
earnings from continuing operations per share. The weighted average
shares are computed assuming the issuance of an aggregate of
29,848,000 shares issued to complete the WorldxChange merger and
2,174,000 shares upon the conversion of WorldxChange indebtedness into
World Access Common Stock, see Note 15. 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.
182
<PAGE> 196
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
TELDAFAX ADJUSTMENTS
(20) These columns represent the historical financial position and results of
operations of TelDaFax as of and for the six months ended June 30, 2000 and
for the year ended December 31, 1999.
The following tables represent the conversion of TelDaFax's balance sheet
as of June 30, 2000 and statements of operations for the three months and
year ended June 30, 2000 and December 31, 1999, respectively, from local
currency (DM) into U.S. dollars. The U.S. dollar equivalent was computed by
multiplying the deutsche mark balance by 0.4901, the exchange rate as of
June 30, 2000 for the balance sheet and by 0.4876 and 0.5435 which
represent the average exchange rates for the six month period and year
ended June 30, 2000 and December 31, 1999, respectively.
<TABLE>
<CAPTION>
TELDAFAX TELDAFAX
JUNE 30, EXCHANGE JUNE 30,
2000 RATE 2000
------------------- -------- --------------------
(IN THOUSANDS - DM) (IN THOUSANDS - USD)
<S> <C> <C> <C>
Cash and equivalents...................... 53,882 0.4901 $ 26,408
Accounts receivable....................... 86,569 0.4901 42,427
Prepaid expenses and other current
assets.................................. 62,487 0.4901 30,625
------- --------
Total current assets.................. 202,938 99,460
------- --------
Property and equipment, net............... 133,199 0.4901 65,281
Goodwill.................................. 32,261 0.4901 15,811
Other assets............................... 26,580 0.4901 13,027
------- --------
Total assets.......................... 394,978 $193,579
======= ========
Short-term debt........................... 14,814 0.4901 7,260
Accounts payable.......................... 150,353 0.4901 73,688
Other accrued liabilities................. 19,640 0.4901 9,626
------- --------
Total current liabilities............. 184,807 90,574
------- --------
Long-term debt............................ 39,422 0.4901 19,320
Other long-term liabilities............... 707 0.4901 347
------- --------
Total liabilities..................... 224,936 110,241
------- --------
Minority interests........................ 1,811 0.4901 888
Stockholders' Equity (Deficit):
Common stock.............................. 172,024 0.4901 84,309
Additional paid in capital................ 15,787 0.4901 7,737
Accumulated other comprehensive loss...... -- 47
Accumulated deficit....................... (19,580) 0.4925 (9,643)
------- --------
Total stockholders' equity............ 168,231 82,450
------- --------
Total liabilities and stockholders'
equity.............................. 394,978 $193,579
======= ========
</TABLE>
183
<PAGE> 197
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TELDAFAX TELDAFAX
SIX MONTHS ENDED EXCHANGE SIX MONTHS ENDED
JUNE 30, 2000 RATE JUNE 30, 2000
------------------- -------- --------------------
(IN THOUSANDS - DM) (IN THOUSANDS - USD)
<S> <C> <C> <C>
Service revenues......................... 307,704 0.4876 $150,036
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)................... 259,028 0.4876 126,302
Selling, general and administrative... 57,029 0.4876 27,807
Depreciation and amortization......... 25,129 0.4876 12,253
------- --------
Total operating expenses.............. 341,186 166,362
------- --------
Operating loss................... (33,482) (16,326)
Interest and other income............. 1,814 0.4876 885
Interest expense...................... (1,617) 0.4876 (788)
------- --------
Loss from continuing operations
before income taxes and
minority interests............. (33,285) (16,229)
Provision (benefit) for income
taxes............................... (13,691) 0.4876 (6,676)
------- --------
Loss from continuing operations
before minority interests...... (19,594) (9,553)
Minority interests.................... 1,746 0.4876 851
------- --------
Loss from continuing
operations..................... (17,848) $ (8,702)
======= ========
</TABLE>
184
<PAGE> 198
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Effective October 1, 1999, TelDaFax acquired a majority interest in the
telecommunications equipment distributor Demuth & Dietl Co.
Kommunikationselektronik GmbH (D & D). The historical results of operations
of TelDaFax for the year ended December 31, 1999 includes D & D results for
the three months ended December 31, 1999. The results of D & D for the
period from January 1, 1999 to September 30, 1999 have been added to the
TelDaFax historical results of operations as follows:
<TABLE>
<CAPTION>
TELDAFAX TELDAFAX TELDAFAX
YEAR ENDED D&D FOR YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 THE PERIOD DECEMBER 31, 1999 DECEMBER 31, 1999
INCLUDING 3 MONTHS JANUARY 1, 1999 TO INCLUDING 12 MONTHS EXCHANGE INCLUDING 12 MONTHS
OF D&D SEPTEMBER 30, 1999 OF D&D RATE OF D&D
------------------ ------------------- ------------------- -------- --------------------
(IN THOUSANDS - DM) (IN THOUSANDS - USD)
<S> <C> <C> <C> <C> <C>
Service revenues...... 611,018 58,787 669,805 0.5435 $364,039
Operating expenses:
Cost of services
(exclusive of
depreciation and
amortization shown
separately
below)............. 507,745 53,083 560,828 0.5435 304,810
Selling, general and
administrative..... 84,008 5,703 89,711 0.5435 48,758
Depreciation and
amortization....... 33,630 168 33,798 0.5435 18,369
-------- ------- -------- --------
Total operating
expenses........... 625,383 58,954 684,337 371,937
-------- ------- -------- --------
Operating loss.... (14,365) (167) (14,532) (7,898)
Interest and other
income............. 4,456 86 4,542 0.5435 2,469
Interest expense..... (3,692) (302) (3,994) 0.5435 (2,171)
-------- ------- -------- --------
Loss from
continuing
operations
before income
taxes and
minority
interests....... (13,601) (383) (13,984) (7,600)
Provision (benefit)
for income taxes... (7,009) (37) (7,046) 0.5435 (3,830)
-------- ------- -------- --------
Loss from
continuing
operations
before minority
interest........ (6,592) (346) (6,938) (3,770)
Minority interest.... 1,336 89 1,425 0.5435 774
-------- ------- -------- --------
Loss from
continuing
operations...... (5,256) (257) (5,513) $ (2,996)
======== ======= ======== ========
</TABLE>
(21) The board of directors of World Access has approved a Purchase and Transfer
Agreement, dated as of June 14, 2000, under which World Access will acquire
shares of TelDaFax stock. Pursuant to the TelDaFax Purchase Agreement,
World Access will attempt to acquire 100% of the outstanding shares of
TelDaFax in five transactions (collectively referred to as the TelDaFax
Purchase):
Purchase of the TelDaFax Shares Owned by the Apax Funds. On September 21,
2000 World Access acquired 11,178,176 shares of TelDaFax held by the funds
advised by Apax, except the A+M fund, in exchange for 11,457,631 shares of
World Access common stock. The shares held by the Apax funds, excluding
the A+M fund represented 33.03% of the outstanding capital stock of
TelDaFax. As of October 1, 2000, there were 33,828,600 shares of TelDaFax
stock outstanding.
185
<PAGE> 199
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A+M is a fund advised by Apax; however, because World Access intends to
purchase the TelDaFax shares of A+M separately pursuant to a put/call
arrangement, all references to "Apax funds" exclude A+M unless otherwise
noted.
Put/Call Option for Shares of Dr. Klose and A+M. From June 14, 2000 until
December 31, 2001, Dr. Klose has the right to sell to World Access all of
the outstanding shares of TelDaFax he owns in up to three installments.
From July 1, 2002 until December 31, 2002, World Access has the right to
buy from Dr. Klose all of the outstanding shares of TelDaFax owned by Dr.
Klose at the time World Access exercises its right to purchase. As of
October 1, 2000, Dr. Klose owned 2,756,200 shares of TelDaFax stock, equal
to 8.15% of the outstanding capital stock of TelDaFax.
From September 21, 2000 until April 30, 2001, A+M has the right to sell to
World Access all of the outstanding shares of TelDaFax owned by A+M in one
installment. From July 1, 2001 until December 31, 2001, World Access has
the right to buy from A+M all of the outstanding shares owned by A+M. As
of October 1, 2000, A+M owned 143,492 shares of TelDaFax stock, equal to
0.42% of the outstanding capital stock of TelDaFax.
The Consideration for the Purchase of TelDaFax Shares of the Apax Funds
and Dr. Klose. In exchange for each share of TelDaFax common stock
purchased by World Access from A+M and Dr. Klose, World Access will issue
a number of shares of World Access common stock determined using the same
exchange ratio as that used in the TelDaFax tender offer.
Tender Offer. World Access will launch a tender offer for all of the
shares of TelDaFax pursuant to which each share of TelDaFax would receive
1.025 shares of World Access common stock.
Combination of German Businesses of World Access and Business of
TelDaFax. Under the TelDaFax contribution agreement, World Access agreed
to contribute the German operations of two of its subsidiaries, NETnet
Telekommunications, or NETnet Germany and NewTel Communications, to
TelDaFax. In exchange, TelDaFax agreed to issue 1,620,334 of its shares to
NETnet Germany and 925,905 shares to Newtel. The total TelDaFax shares
received for these World Access subsidiaries would represent 7.0% of the
outstanding capital stock of TelDaFax.
The TelDaFax Purchase will be accounted for under the purchase method of
accounting. The contribution of NETnet Germany and NewTel and the tender
offer are all contractually required to close on the same day and the
consummation of these transactions is conditioned on World Access obtaining
at least 50.1% ownership of the outstanding capital stock of TelDaFax.
Although the shares to be acquired from Dr. Klose and A+M may not happen on
the same date as the contribution of NETnet Germany and NewTel and the
tender offer, it is World Access' intent to acquire 100% of the outstanding
stock of TelDaFax and as such, for purposes of the pro forma financial
information, we have assumed World Access acquired 100% of the TelDaFax
outstanding stock.
In accordance with EITF 90-13, Accounting for Simultaneous Common Control
Mergers, the transfer of NETnet Germany and NewTel to TelDaFax should be
accounted for by World Access as a purchase of TelDaFax under APB Opinion
16, Business Combinations. World Access will fair value TelDaFax assets and
liabilities to the extent acquired by World Access. World Access will fair
value NETnet Germany and NewTel assets and liabilities to the extent NETnet
Germany and NewTel are sold to minority shareholders. As the pro forma
financial information assumes World Access will acquire 100% of the
outstanding capital stock of TelDaFax, all of TelDaFax assets and
liabilities will be recorded at fair value and the NETnet Germany and
NewTel assets and liabilities will remain at historical cost. Consequently,
under this scenario, World Assess would not recognize any gain or loss on
the contribution of NETnet Germany and NewTel to TelDaFax.
186
<PAGE> 200
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The total cost to acquire TelDaFax is subject to change, to the extent
that the number of shares of TelDaFax capital stock to be acquired will not
be fixed until the effective date of the merger. A change in total cost
will result in a corresponding change in goodwill and related amortization
expense. The excess of the purchase price over the fair value of the net
assets acquired has been allocated to goodwill and other intangible assets.
These allocations are subject to change pending the completion of the final
analysis of the total purchase price and fair values of the assets acquired
and the liabilities assumed. The impact of these changes could be material.
The preliminary purchase price and goodwill is currently estimated as
follows (in thousands):
<TABLE>
<S> <C>
Purchase price:
Acquisition of 33.03% of TelDaFax common stock(i)......... $130,851
Issuance of World Access Common Stock (ii)................ 265,138
Estimated fees and expenses............................... 5,000
--------
Total estimated purchase price.................... $400,989
Allocation to fair values:
Historical shareholders' equity as of June 30, 2000....... (82,450)
Intangible assets (iv).................................... (33,000)
Adjust assets and liabilities:
Eliminate historical goodwill.......................... 12,430
Write down of fixed assets to fair value............... 24,000
--------
Preliminary goodwill (iii).................................. $321,969
========
</TABLE>
---------------
(i) On September 21, 2000, World Access purchased all of the outstanding
shares of TelDaFax held by the funds advised by Apax, except the A+M
fund, in exchange for shares of World Access common stock. The Apax
funds, excluding the A+M fund, owned 11,178,176 shares of TelDaFax
stock, equal to 33.03% of the outstanding capital stock of TelDaFax. In
accordance with the purchase agreement, each share of TelDaFax common
stock shall be converted into the right to receive 1.025 shares of
World Access Common Stock. The fair value of the World Access common
stock is determined as follows (in thousands, except per share
amounts):
<TABLE>
<S> <C>
TelDaFax common shares acquired by World Access............. 11,178
Multiplied by: Exchange ratio............................... 1.025
--------
Shares of World Access common stock exchanged............... 11,458
Multiplied by: Average market price(a)...................... $ 11.42
--------
Value of World Access common stock exchanged................ $130,851
========
</TABLE>
(a) The average price represents the average market price of World
Access common stock for the three trading days prior and the three
trading days subsequent to June 14, 2000, the date the economic
terms of the purchase were announced.
(ii) In accordance with the purchase agreement, each share of TelDaFax
common stock held by Dr. Klose and A+M and all TelDaFax common stock
subject to the tender offer shall be converted into the right to
receive 1.025 shares of World Access common stock and this World
187
<PAGE> 201
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Access common stock is assumed to have been issued in connection with
the TelDaFax purchase as follows (in thousands, except per share
amounts):
TelDaFax common shares held by:
<TABLE>
<S> <C>
Dr. Klose and A+M........................................... 2,900
Remaining shares subject to the tender offer................ 19,751
--------
Total TelDaFax shares purchased................... 22,651
Multiplied by: Exchange ratio............................... 1.025
--------
Shares of World Access common stock to be exchanged 23,217
Multiplied by: Average market price (a)..................... $ 11.42
--------
Value of World Access common stock exchanged................ $265,138
========
</TABLE>
---------------
(a) The average price represents the average market price of World
Access common stock for the three trading days prior and the three
trading days subsequent to June 14, 2000, the date economic terms of
the purchase were announced.
(iii) The pro forma goodwill is preliminary and subject to change based on
a final review of the fair values of TelDaFax's net assets as of the
actual purchase date. Upon a final review of the fair value of
TelDaFax's assets and liabilities, it is likely that certain tangible
and intangible assets such as customer lists, trademarks and property
and equipment may be recognized at amounts which differ from the
amounts estimated in these unaudited pro forma financial statements.
Although we do not expect these final adjustments to be significant,
they could increase or decrease the amortization and depreciation
expense reflected in the unaudited pro forma financial statements.
(iv) Intangible assets consist of wholesale and retail customer base,
licenses and interconnection, management and workforce expertise.
Amortization is provided using the straight-line method over a 5-year
period.
(22) Amortization of goodwill over an estimated life of 20 years. The pro forma
adjustment to goodwill was computed as follows (in thousands):
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA GOODWILL PRO FORMA
GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
TelDaFax -- For the six months ended
June 30, 2000........................ $321,969 $ 8,049 $ (690) $ 7,359
TelDaFax -- For the year ended December
31, 1999............................. $321,969 $16,098 $ (605) $15,493
</TABLE>
Depreciation benefit as a result of write-down of fixed assets to fair
value is arrived at using an estimated life of 5 years. The pro forma
adjustment to property and equipment was computed as follows (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
PROPERTY AND DEPRECIATION
EQUIPMENT ADJUSTMENT
------------ ------------
<S> <C> <C>
TelDaFax -- For the six months ended June 30, 2000.... $24,000 $(2,400)
TelDaFax -- For the year ended December 31, 1999...... $24,000 $(4,800)
</TABLE>
188
<PAGE> 202
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization of additional intangible assets over an estimated life of 5
years. The pro forma adjustment to intangible assets was computed as
follows (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
INTANGIBLE AMORTIZATION
ASSETS ADJUSTMENT
------------ ------------
<S> <C> <C>
TelDaFax -- For the six months ended June 30, 2000.... $33,000 $ 3,300
TelDaFax -- For the year ended December 31, 1999...... $33,000 $ 6,600
</TABLE>
(23) Elimination of historical goodwill.
(24) Elimination of historical shareholders' equity accounts.
(25) Elimination of intercompany service revenues and related costs.
(26) Adjustment to record additional tax provision (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 TelDaFax's net
operating losses.
(27) Represents pro forma weighted average shares for basic and diluted earnings
from continuing operations per share. The weighted average shares are
computed assuming the issuance of an aggregate of 34,675,000 shares issued
to complete the TelDaFax purchase. 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.
The following represents the pro forma net loss and net loss per share
assuming World Access acquires a 50.1% majority interest in TelDaFax for
the various scenarios listed below:
<TABLE>
<CAPTION>
OPERATING NET LOSS
SCENARIO LOSS NET LOSS PER SHARE
-------- --------- --------- ---------
<S> <C> <C> <C>
World Access acquires STAR, WorldxChange and TelDaFax:
Year ended December 31, 1999.............................. $(358,799) $(419,276) $(3.24)
Six months ended June 30, 2000............................ $(136,355) $(152,850) $(1.12)
World Access acquires STAR and TelDaFax:
Year ended December 31, 1999.............................. $(241,726) $(279,050) $(2.87)
Six months ended June 30, 2000............................ $ (73,462) $ (72,130) $(0.69)
World Access acquires WorldxChange and TelDaFax:
Year ended December 31, 1999.............................. $(305,552) $(367,156) $(3.72)
Six months ended June 30, 2000............................ $(110,785) $(133,546) $(1.26)
World Access acquires TelDaFax:
Year ended December 31, 1999.............................. $(188,479) $(226,930) $(3.40)
Six months ended June 30, 2000............................ $ (47,892) $ (52,826) $(0.72)
</TABLE>
PRO FORMA WORLD ACCESS
(28) 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
189
<PAGE> 203
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Unaudited Pro Forma World Access Condensed Combined Statement of
Operations for the year ended December 31, 1999 give effect to our February
2000 acquisition of LDI, our December 1999 merger with FaciliCom and
related transactions, and our May 1999 acquisition of Comm/Net as if the
acquisitions had been completed on January 1, 1999. The Unaudited Pro Forma
World Access Condensed Combined Statement of Operations for the six months
ended June 30, 2000 gives effect to our February 2000 acquisition of LDI as
if the acquisition had been completed on January 1, 1999. The unaudited pro
forma condensed combined statements 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.
As a result of the FaciliCom merger and the restructuring program initiated
by World Access in the fourth quarter of 1999, 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 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 statements of operations are
presented for comparative purposes only and are not intended to be
indicative of the actual results had these transactions occurred as of the
beginning of the period nor does it purport to indicate results which may
be attained in the future.
190
<PAGE> 204
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA WORLD ACCESS
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS(A) ADJUSTMENTS WORLD ACCESS
---------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash and equivalents(2(i))............................. $ 329,279 $(156,800)(B) $ 172,479
Short-term investments................................. 160,211 -- 160,211
Restricted cash........................................ 31,095 -- 31,095
Accounts and notes receivable.......................... 264,678 -- 264,678
Prepaid expenses and other current assets.............. 38,491 -- 38,491
Net assets held for sale............................... 41,465 -- 41,465
---------- --------- -----------
Total Current Assets......................... 865,219 (156,800) 708,419
---------- --------- -----------
Property and equipment................................. 151,609 -- 151,609
Investment in TelDaFax................................. -- 130,851(C) 130,851
Goodwill and other intangibles......................... 1,080,797 -- 1,080,797
Other assets........................................... 79,185 -- 79,185
---------- --------- -----------
Total Assets................................. $2,176,810 $ (25,949) $ 2,150,861
========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt........................................ $ 57,033 $ -- $ 57,033
Accounts payable....................................... 246,436 -- 246,436
Other accrued liabilities.............................. 151,328 -- 151,328
---------- --------- -----------
Total Current Liabilities.................... 454,797 -- 454,797
Long-term debt......................................... 417,946 (160,000)(B) 257,946
Other long-term liabilities............................ 10,336 -- 10,336
---------- --------- -----------
Total Liabilities............................ 883,079 (160,000) 723,079
---------- --------- -----------
Stockholders' Equity (Deficit):
Preferred Stock........................................ 6 -- 6
Common stock........................................... 617 115(C) 732
Additional paid in capital............................. 1,471,126 130,736(C) 1,601,862
Accumulated other comprehensive loss................... (12,239) -- (12,239)
Accumulated deficit.................................... (165,779) 3,200(B) (162,579)
---------- --------- -----------
Total Stockholders' Equity (Deficit)......... 1,293,731 134,051 1,427,782
---------- --------- -----------
Total Liabilities and Stockholders' Equity... $2,176,810 $ (25,949) $ 2,150,861
========== ========= ===========
</TABLE>
191
<PAGE> 205
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA WORLD ACCESS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS(A) LDI(F) ADJUSTMENTS WORLD ACCESS
--------- -------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Service revenues................................ $561,600 $ 8,679 $ -- $570,279
Operating expenses:
Cost of carrier services (exclusive of
depreciation and amortization shown separately
below)........................................ 490,330 10,025 -- 500,355
Selling, general and administrative............. 51,338 8,092 -- 59,430
Depreciation and amortization................... 36,512 2,595 812(I) 41,618
1,699(I)
Restructuring credit............................ (3,995) -- -- (3,995)
-------- -------- ------- --------
Total operating expenses.............. 574,185 20,712 2,511 597,408
-------- -------- ------- --------
Operating income (loss)............... (12,585) (12,033) (2,511) (27,129)
Interest and other income....................... 9,254 3,742 -- 12,996
Interest expense................................ (28,572) (6,235) 5,018(L) (29,789)
Loss on investment in TelDaFax.................. -- -- (2,874)(Q) (2,874)
Foreign exchange gain (loss).................... 211 (94) -- 117
-------- -------- ------- --------
Income (loss) from continuing
operations before income taxes...... (31,692) (14,620) (367) (46,679)
Provision (benefit) for income taxes............ (2,115) -- 1,361(M) (754)
-------- -------- ------- --------
Income (loss) from continuing
operations.......................... (29,577) (14,620) (1,728) (45,925)
Preferred stock dividends....................... (1,163) -- -- (1,163)
-------- -------- ------- --------
Income (loss) from continuing
operations available to common
stockholders........................ $(30,740) $(14,620) $(1,728) $(47,088)
======== ======== ======= ========
Loss per common share from continuing
operations:
Basic......................................... $ (0.53) $ (0.82)(P)
======== ========
Diluted....................................... $ (0.53) $ (0.82)(P)
======== ========
Weighted average shares outstanding:
Basic......................................... 57,658 57,658(P)
======== ========
Diluted....................................... 57,658 57,658(P)
======== ========
</TABLE>
192
<PAGE> 206
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA WORLD ACCESS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
WORLD PRO FORMA PRO FORMA
ACCESS(A) FACILICOM(D) COMM/NET(E) LDI(F) ADJUSTMENTS WORLD ACCESS
--------- ------------ ----------- -------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Carrier service revenues...... $501,081 $404,485 $13,868 $117,662 $(17,543)(H) $1,019,553
Operating expenses:
Cost of carrier services
(exclusive of depreciation
and amortization shown
separately below)........... 448,305 364,773 9,923 97,867 (17,543)(H) 903,325
Selling, general and
administrative.............. 28,433 56,652 2,324 58,822 -- 146,231
Depreciation and
amortization................ 13,541 27,823 390 20,716 36,229(I) 97,517
5,786(I)
(6,968)(J)
Restructuring and other
special charges............. 37,800 -- -- 6,387 -- 44,187
-------- -------- ------- -------- -------- ----------
Total operating
expenses........... 528,079 449,248 12,637 183,792 17,504 1,191,260
-------- -------- ------- -------- -------- ----------
Operating income
(loss)............. (26,998) (44,763) 1,231 (66,130) (35,047) (171,707)
Interest and other income..... 3,308 3,026 -- 4,488 -- 10,822
Interest expense.............. (12,914) (33,413) (65) (33,607) (8,325)(K) (58,208)
30,116(L)
Loss on investment in
TelDaFax.................... -- -- -- -- (990)(Q) (990)
Foreign exchange loss......... (620) (1,749) -- -- -- (2,369)
-------- -------- ------- -------- -------- ----------
Income (loss) from
continuing
operations before
income taxes....... (37,224) (76,899) 1,166 (95,249) (14,246) (222,452)
Provision (benefit) for income
taxes....................... (10,126) (7,335) 264 -- 10,198(M) (6,999)
-------- -------- ------- -------- -------- ----------
Income (loss) from
continuing
operations......... (27,098) (69,564) 902 (95,249) (24,444) (215,453)
Preferred stock dividends..... (1,968) -- -- (2,049) (493)(N) (2,461)
2,049(O)
-------- -------- ------- -------- -------- ----------
Income (loss) from
continuing
operations
available to common
stockholders....... $(29,066) $(69,564) $ 902 $(97,298) $(22,888) $ (217,914)
======== ======== ======= ======== ======== ==========
Loss per common share from
continuing operations:
Basic....................... $ (0.78) $ (4.30)(P)
======== ==========
Diluted..................... $ (0.78) $ (4.30)(P)
======== ==========
Weighted average shares
outstanding:
Basic....................... 37,423 50,634(P)
======== ==========
Diluted..................... 37,423 50,634(P)
======== ==========
</TABLE>
193
<PAGE> 207
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A. This column represents the historical financial position and results of
operations of World Access. The World Access results of operations for
the year ended December 31, 1999 includes the results of Comm/Net from
May 1, 1999 and the results of FaciliCom from December 7, 1999. The
World Access results of operations for the six months ended June 30,
2000 include the results of operations of LDI from February 11, 2000.
B. Under the terms of the Indenture governing World Access' $300.0 million
of 13.25% Senior Notes due 2008, World Access has an obligation to
utilize the net cash proceeds from the sale of certain of its equipment
businesses to make a one-time tender offer for all or a portion of the
13.25% Senior Notes outstanding. Based on the net cash received to date
from the sale of Telco Systems in April 2000, World Access is currently
obligated to tender for approximately $160.0 million of its 13.25%
Senior Notes by January 2, 2001. The net cash relates to the $268.6
million cash element of the Telco Systems sales price, less
approximately $11.0 million in transaction expenses and $97.0 million
of income taxes. The income taxes represents the net cash liability
World Access is expected to incur as a result of the gain it will
realize on the sale of Telco Systems for federal and state income tax
purposes. Income taxes assume a tax basis for Telco Systems of
approximately $92.0 million and a combined federal and state tax rate
of 40%.
The actual tender price is defined in the Indenture as face value less
the current value of five points, or $15.0 million, of World Access
common stock paid to the note holders in December 1999 in connection
with the exchange of FaciliCom notes. Assuming $6.00 per share as the
value of World Access common stock, the current tender price would be
approximately 98% of face value. Since the tender price will be below
face value and the notes carry what World Access believes to be an
attractive interest rate, we are not able to forecast how much, if any,
of the $160.0 million will actually be tendered. However, to be
conservative, we have included a pro forma adjustment to reflect the
potential $156.8 million reduction in cash and $160.0 million reduction
in long-term debt that will occur if 100% of the tender offer is
accepted.
Under the Indenture, World Access will also be required to tender for a
portion of the 13.25% Senior Notes outstanding when it receives
additional net cash proceeds from the sale of 9.6 million shares of
BATM Advanced Communications stock or from the sale of its NACT
business. The BATM shares, which had a value of approximately $75.4
million at June 30, 2000, were received by World Access in connection
with the sale of Telco Systems. World Access is contractually
restricted from selling or otherwise monetizing these shares until
April 5, 2001 without the consent of BATM. Any tender offer related to
these two events must be commenced within nine months from the date
World Access receives the related cash proceeds. Since the amount and
timing of this future tender offer is contingent upon future events, we
have not included a pro forma adjustment to reflect this potential
reduction in cash and long-term debt.
194
<PAGE> 208
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
C. On September 21, 2000, World Access purchased all of the outstanding
shares of TelDaFax held by the funds advised by Apax, except the A+M
fund, in exchange for shares of World Access common stock. The Apax
funds, excluding the A+M fund, owned 11,178,176 shares of TelDaFax
stock, equal to 33.03% of the outstanding capital stock of TelDaFax. In
accordance with the purchase agreement, each share of TelDaFax common
stock shall be converted into the right to receive 1.025 shares of
World Access common stock. The fair value of the World Access common
stock is determined as follows (in thousands, except per share
amounts):
<TABLE>
<S> <C>
TelDaFax common shares acquired by World Access............. 11,178
Multiplied by: Exchange ratio............................... 1.025
--------
Shares of World Access common stock exchanged............... 11,458
Multiplied by: Average market price(a)...................... $ 11.42
--------
Value of World Access common stock exchanged................ $130,851
========
</TABLE>
(a) The average price represents the average market price of World
Access common stock for the three trading days prior and the three
trading days subsequent to June 14, 2000, the date the economic
terms of the purchase were announced.
D. This column represents the historical results of operations of
FaciliCom for the period January 1, 1999 to December 6, 1999.
On August 17, 1999 the Company entered into a definitive merger
agreement with FaciliCom International, Inc. ("FaciliCom"), a privately
owned company that is a facilities-based provider of European and U.S.
originated international long-distance voice, data and Internet
services. On December 7, 1999, the transaction was completed in its
final form whereby FaciliCom merged into the Company (the "FaciliCom
Merger").
In connection with the FaciliCom Merger, the stockholders of FaciliCom
received approximately $56.0 million in cash, 369,901 shares of
Convertible Preferred Stock, Series C (the "Series C Preferred Stock"),
and 495,557 vested options that each may be exercised to acquire one
share of the Company's common stock at an average exercise price of
$2.63 per share. In addition, the Company issued 1,912,500 non-qualified
options to purchase Company common stock at an exercise price of $15.00
per share in exchange for substantially all the options held by
FaciliCom's employees. The Series C Preferred Stock which has a $369.9
million liquidation preference was valued at $265.5 million based on the
fair value of the assets received as of the date of acquisition. The
stock options were valued at $24.8 million based on the Black-Scholes
option valuation model. Included in other liabilities in the table
below, is $300.0 million 10 1/2% FaciliCom Series B Senior Notes due
2008 which were exchanged for the Company's 13.25% Senior Notes due 2008
having an aggregate principal amount of $300.0 million. As consideration
for this exchange the Company issued 942,627 shares of its common stock
valued at $15.0 million to FaciliCom noteholders.
The Series C Preferred Stock bears no dividend and is convertible into
shares of the Company's common stock at a conversion rate of $20.38 per
common share, subject to adjustment in the event of below market
issuances of common stock, stock dividends, subdivisions, combinations,
reclassifications and other distributions with respect to common stock.
If the closing trading price of the Company's common stock exceeds
$20.38 per share for 60 consecutive trading days, the Series C Preferred
Stock will automatically convert into common stock. Initially, the
holders of the Series C Preferred Stock were entitled to elect four new
directors to the Company's board of directors. Except for the election
of directors, the holders of the Series C Preferred Stock vote on an
as-converted basis with the holders of the Company's common stock.
195
<PAGE> 209
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of FaciliCom has been accounted for using the purchase
method of accounting. Accordingly, the results of FaciliCom's operations
have been included in the accompanying consolidated financial statements
from December 7, 1999. The excess of purchase price over the fair value
of net assets acquired has been recorded as goodwill and is being
amortized over a 20 year period. The following summarizes the allocation
of the purchase price (in thousands):
<TABLE>
<S> <C>
Purchase price:
Cash...................................................... $ 56,000
Preferred stock issued.................................... 265,515
Common stock issued....................................... 15,000
Stock options issued...................................... 24,785
Fees and expenses......................................... 15,650
---------
Total purchase price.............................. 376,950
Allocation to fair value of net assets:
Current assets............................................ (183,934)
Property and equipment.................................... (116,479)
Intangible assets......................................... (9,206)
Other assets.............................................. (1,362)
Current liabilities....................................... 207,362
Other liabilities......................................... 313,148
---------
Goodwill.......................................... $ 586,479
=========
</TABLE>
E. This column represents the historical results of operations of Comm/Net
for the period January 1, 1999 to April 30, 1999.
In May 1999, the Company acquired substantially all the assets and
assumed certain liabilities of Comm/Net Holding Corporation and its
wholly owned subsidiaries, Enhanced Communications Corporation, Comm/Net
Services Corporation and Long Distance Exchange Corporation (Comm/Net
Holdings and its wholly owned subsidiaries are collectively referred to
herein as "Comm/Net"). Comm/Net, headquartered in Plano, Texas, is a
facilities-based provider of wholesale international long distance and
wholesale prepaid calling card services, primarily to the Mexican
telecommunications markets.
In connection with the acquisition, the Company issued 23,174 shares of
4.25% Cumulative Junior Convertible Preferred Stock, Series B (the
"Series B Preferred Stock"), valued at approximately $18.5 million with
a $23.2 million liquidation preference, and paid approximately $3.5
million to retire certain Comm/Net notes payable outstanding at the time
of acquisition. The Series B Preferred Stock is convertible into shares
of the Company's common stock at a conversion rate of $16.00 per common
share, subject to standard anti-dilution adjustments. If the closing
trading price of the Company's common stock exceeds $16.00 per share for
45 consecutive trading days, the Series B Preferred Stock will
automatically convert into common stock. Preferred dividends began
accruing July 1, 1999 and are payable quarterly. In March 2000, the
Series B Preferred Stock was converted into 1,448,373 shares of the
Company's common stock.
The acquisition of Comm/Net has been accounted for under the purchase
method of accounting. Accordingly, the results of Comm/Net's operations
have been included in the accompanying consolidated financial statements
from May 1, 1999. The excess of purchase price over the fair
196
<PAGE> 210
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
value of net assets acquired has been recorded as goodwill and is being
amortized over a 20 year period. the following summarizes the allocation
of the purchase price (in thousands):
<TABLE>
<S> <C>
Purchase price:
Preferred stock issued.................................... $18,539
Debt paid................................................. 3,502
Fees and expenses......................................... 800
-------
Total purchase price.............................. 22,841
Allocation to fair values of net assets:
Current assets............................................ (7,754)
Property and equipment.................................... (3,351)
Current liabilities....................................... 9,609
Other assets and liabilities, net......................... 1,368
-------
Goodwill.......................................... $22,713
=======
</TABLE>
F. These columns represents the historical results of operations of LDI.
For the Unaudited Pro Forma Condensed Combined Statement of Operations
for the three months ended March 31, 2000, the historical results of
operations of LDI are for the period January 1, 2000 to February 10,
2000. For the Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999, the historical results
of operations of LDI are for the period January 1, 1999 to December 31,
1999.
G. The LDI merger has been accounted for under the purchase method of
accounting. Under the terms of the Agreement and Plan of Merger dated
as of December 17, 1999, the purchase price was determined as follows
(in thousands):
<TABLE>
<S> <C>
Purchase price:
Issuance of preferred stock (i)........................... $217,560
Debt forgiven............................................. 4,674
Fair value of World Access options issued in exchange for
LDI options (ii)....................................... 21,731
Fees and expenses......................................... 2,000
--------
245,965
Allocation to fair value of net assets:
Cash...................................................... (42,476)
Other current assets...................................... (15,447)
Intangible assets......................................... (27,614)
Property and equipment.................................... (17,113)
Other assets.............................................. (871)
Current liabilities....................................... 80,433
Other liabilities......................................... 723
--------
Goodwill.................................................... $223,600
========
</TABLE>
(i) World Access management has determined the fair value of the
185,000 shares of Series D Preferred Stock issued as part of the LDI
merger consideration to be $217,560 or $1,176 per share. The fair value
was determined by the fair value of the assets received as of the date
of acquisition. 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
197
<PAGE> 211
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 options
outstanding to acquire shares of 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 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.
H. Elimination of inter-company revenues and related costs.
I. 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 $127.4 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):
<TABLE>
<CAPTION>
HISTORICAL
PRO FORMA GOODWILL PRO FORMA
GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENTS
-------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
For the six months ended June 30, 2000:
LDI....................................... $223,600 $ 5,590 $ (4,778) $ 812
======= ======== =======
For the year ended December 31, 1999:
FaciliCom................................. 586,479 29,324 (2,475) 26,849
Resurgens................................. 127,425 6,371 (409) 5,962
LDI....................................... 223,600 11,180 (8,210) 2,970
Comm/Net.................................. 22,713 1,136 (688) 448
------- -------- -------
$48,011 $(11,782) $36,229
======= ======== =======
</TABLE>
198
<PAGE> 212
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization of additional intangible assets over their estimated useful
lives. The pro forma adjustment for intangible asset amortization was
computed as follows (in thousands):
<TABLE>
<CAPTION>
INTANGIBLE PRO FORMA HISTORICAL PRO FORMA
ASSETS AMORTIZATION AMORTIZATION ADJUSTMENT
---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
For the six months ended June 30, 2000:
LDI........................................ $27,614 $1,972 $ (925) $1,047
FaciliCom.................................. 9,206 921 (269) 652
------- ------ ------- ------
$36,820 $2,893 $(1,194) $1,699
======= ====== ======= ======
For the year ended December 31, 1999:
LDI........................................ $27,614 $3,944 $ -- $3,944
FaciliCom.................................. 9,206 1,842 -- 1,842
------- ------ ------- ------
$36,820 $5,786 $ -- $5,786
======= ====== ======= ======
</TABLE>
J. Adjustment to depreciation expense for the adjustment to fair values
of switching equipment and IRUs at FaciliCom.
K. Represents the adjustment to interest expense related to the exchange
of $300.0 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>
L. Adjustment to reduce interest expense related to the elimination of LDI
indebtedness resulting from the acquisition as follows:
<TABLE>
<CAPTION>
FOR THE
42 DAY FOR THE YEAR
PERIOD ENDED ENDED
FEBRUARY 11, DECEMBER 31,
2000 1999
------------ -----------------
<S> <C> <C>
Interest expense on LDI's 12 1/4% Senior Notes..... $4,609 $27,656
Amortization of original issue discount on LDI's
12 1/4% Senior Notes............................. 200 1,202
Amortization of LDI's 12 1/4% Senior Notes offering
costs............................................ 157 944
Interest expense on notes payable to the holders of
LDI's 12 1/4% Senior Notes....................... 52 314
------ -------
Net decrease in interest expense......... $5,018 $30,116
====== =======
</TABLE>
M. Adjustment for the additional tax benefit derived from 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.
N. 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.
199
<PAGE> 213
WORLD ACCESS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
O. To eliminate historical LDI preferred stock dividends and preferred
stock and warrant redemption accretion.
P. Represents pro forma weighted average shares and basic diluted earnings
from continuing operations per share for the year ended December 31,
1999. 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.
For the six months ended June 30, 2000, no additional shares of common
stock are deemed to be outstanding. 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 shares would be anti-dilutive.
Q. On September 21, 2000, World Access acquired 33.03% of the outstanding
shares of TelDaFax. The Unaudited Pro Forma Condensed Combined
Statements of Operations for the year ended December 31, 1999 and the
six months ended June 30, 2000, give effect to this acquisition as if
it had occurred on January 1, 1999. As a result, the following loss
from investments have been recognized:
<TABLE>
<CAPTION>
33.03%
TELDAFAX ACQUISITION BY
NET LOSS WORLD ACCESS
-------- --------------
<S> <C> <C>
Six months ended June 30, 2000.............................. (8,702) (2,874)
Year ended December 31, 1999................................ (2,996) (990)
</TABLE>
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MANAGEMENT OF THE COMBINED COMPANY
EXECUTIVE OFFICERS
Following the consummation of the STAR merger and/or the WorldxChange
merger, John D. Phillips will serve as Chairman of the Board and Chief Executive
Officer of the combined company, and Walter J. Burmeister will serve as the
President of the combined company. It is anticipated that the other current
executive officers of World Access will continue as executive officers of the
combined company with the duties and responsibilities they currently have at
World Access. At the time of mailing this joint proxy statement/prospectus, the
companies have not yet determined which specific offices will be held by the
current executive officers of STAR and WorldxChange.
BOARD OF DIRECTORS
The board of directors of World Access currently consists of 11 members,
seven of which are elected by the World Access common stockholders and four of
which are nominated and elected by the Series C preferred stockholders. Upon the
completion of the STAR merger and/or the WorldxChange merger, the percentage of
the total outstanding World Access common stock represented by the number of
shares of World Access common stock issuable upon conversion of the Series C
preferred stock will significantly decrease, and as a result the Series C
preferred stockholders will be entitled to designate only two directors.
The current directors of World Access elected by common stockholders are:
Stephen J. Clearman, John P. Imlay, Jr., Massimo Prelz Oltramonti, John D.
Phillips, John P. Rigas, Carl E. Sanders and Lawrence C. Tucker. The current
directors of World Access designated by the Series C preferred stockholders are:
Walter J. Burmeister, Kirby J. Campbell, Bryan Cipoletti and Dru A. Sedwick. In
connection with the completion of the STAR and/or WorldxChange mergers, two of
the current directors of World Access designated by the Series C preferred
stockholders will no longer serve on the World Access board. As of the date of
this joint proxy statement/prospectus, the two directors whose terms will end
upon completion of the STAR and/or WorldxChange mergers have not been
determined.
Under the terms of the STAR merger agreement, World Access agreed to elect
Christopher Edgecomb, or such other person designated by STAR and agreed to by
World Access, to the board of directors of World Access immediately following
completion of the STAR merger. Under the terms of the WorldxChange merger
agreement, World Access agreed to elect one designee of WorldxChange to the
World Access board of directors immediately following completion of the
WorldxChange merger. The WorldxChange merger agreement provides that this
designee will be Walter Anderson, who is currently the Chairman of the Board of
WorldxChange, or another person designated by Gold & Appel Transfer S.A. and
reasonably acceptable to World Access. Mr. Anderson has the power to direct such
designation by Gold & Appel Transfer S.A. As of the date of this joint proxy
statement/prospectus, the director designees of STAR and WorldxChange have not
been determined.
DESCRIPTION OF WORLD ACCESS' BUSINESS AND STRATEGY
In 1999, World Access adopted a strategy designed to build on its
U.S.-based carrier service business and position itself to become a significant
provider of bundled voice, data and Internet services to retail business
customers located in selected European countries. World Access believes that the
European telecommunications market has become extremely fragmented in recent
years due primarily to deregulation and significant forecasted growth. As a
result, World Access expects that a significant consolidation of carriers
operating in Europe will occur in the next few years, not unlike that which
occurred in the United States telecommunications market during the late 1980's
and 1990's. The strategy of World Access is to establish a pan-European
telecommunications network and gain significant market share during this period
as a consolidator in this market. To execute its strategy, World Access intends
to aggressively pursue the acquisition of businesses, with a particular emphasis
on those that provide retail services to small and medium sized businesses
operating in Europe.
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To support its retail services strategy, World Access acquired FaciliCom
International in December 1999. FaciliCom had invested in excess of $200.0
million over the past few years to establish an inter-country network in the
U.S. and 13 European countries. Although the vast majority of its revenues were
derived from transporting traffic for other carriers, similar to World Access'
base business, FaciliCom's network was also capable of supporting certain retail
traffic and related services. This acquisition effectively doubled the size of
World Access' carrier service revenue, provided a significant amount of European
originated revenue and lowered the combined company's costs of terminating
international traffic in Europe.
World Access entered 2000 with an annual revenue base in excess of $1.0
billion, almost all of which relates to transporting traffic for other carriers.
In February 2000, World Access acquired substantially all the assets of Long
Distance International. The most significant and strategic asset acquired was
NETnet International, a wholly-owned subsidiary. NETnet, which had revenue of
approximately $83.0 million in 1999, provides an array of telecommunications
services to small and medium sized business customers in Austria, France,
Germany, Italy, Norway, Spain, Sweden, Switzerland and the United Kingdom.
The acquisition of NETnet gave World Access approximately 20,000 retail
customers, an experienced retail sales force and a foundation for the offering
of bundled voice, data and Internet services to its targeted market in Europe.
It also provided World Access with a strong retail trade name, which World
Access currently expects to use for all of its retail product offerings in
Europe. World Access hopes to substantially improve the historical gross margins
realized by NETnet by terminating selected NETnet traffic over the World Access
network and eliminating the costs of redundant network facilities.
With the addition of NETnet, World Access now generates approximately eight
percent of its total revenue from retail services and the remainder from its
base carrier business. Of the total revenue, approximately 60% results from
traffic originated in the United States and 40% from traffic originated in
Europe.
In February 2000, World Access entered into agreements to merge with STAR
and WorldxChange. After completing these mergers, World Access expects its
revenue mix will be approximately 20% retail and 80% carrier. In addition to an
improved retail/carrier revenue mix, the STAR and WorldxChange mergers are
expected to provide World Access with substantial benefits in the areas of
network coverage, network capacity and reduced operating costs.
On a combined basis, the networks and operations of all three companies
contain redundant switching equipment, facilities and personnel. World Access
will eliminate these redundant assets and significantly reduce the headcount of
the combined company in an effort to realize cost synergies. Implementing this
process includes the write-down of switching and transmission equipment taken
out of service, the write-off of certain leasehold improvements, establishing
provisions for lease commitments remaining on certain facilities with no future
use, employee termination benefits and other related costs. To the extent that
these items relate to World Access facilities and personnel, World Access will
record a restructuring charge in accordance with EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) and FAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of. All other costs relate to facilities and personnel of the
acquired enterprises, and, accordingly, will be treated as purchase price in
accordance with EITF 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination.
In connection with World Access' August 1, 2000 consolidation of
WorldxChange, management committed to such a consolidation plan. Although the
plan has been approved, management is still in the process of quantifying the
specific costs of the plan. Currently, management's best estimate of the costs
attributable to World Access facilities and personnel is in the range of $30.0
million to $50.0 million. A range has not been established for costs associated
with WorldxChange facilities and personnel.
Management has not finalized a consolidation plan for the World Access and
STAR integration; however, management believes that further consolidation
activities resulting from the STAR merger will
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not significantly involve World Access facilities or personnel, and thus, no
material EITF 94-3 charge will be required.
The STAR and WorldxChange mergers will give World Access substantial
operations and network capacity in Germany and the United Kingdom, which
represent the two largest segments of the European telecommunications market.
World Access expects to leverage these operations to further grow its retail
business in these two key countries. WorldxChange has also developed
Internet-based information management systems that incorporate all key aspects
of retail telecommunications services, including billing, fraud protection and
customer care. These information systems are expected to serve as the platform
for supporting all retail operations conducted by World Access in Europe.
Although the STAR and WorldxChange mergers are expected to provide
significant benefits to World Access, they also dramatically increase the
business and financial risks World Access must overcome to execute its strategy.
World Access, STAR and WorldxChange all have a history of significant net
operating losses, and World Access is expected to assume approximately $300.0
million in debt upon the consummation of the two mergers. You should carefully
review the risk factors contained in this joint proxy statement/prospectus.
The sale of $70.0 million of Series A Preferred Stock, the sale of $158.1
million of common stock in private placement transactions and approximately
$275.0 million of gross cash proceeds from the sale of two equipment businesses
in April 2000 have significantly enhanced the financial strength of World Access
and improved its liquidity. World Access believes that existing cash balances of
approximately $400.0 million, available borrowings under a $100.0 million
revolving bank line of credit and additional cash expected to be generated from
the sale of remaining World Access Equipment Group assets will provide World
Access with sufficient financial resources to support the cash requirements of
World Access, STAR and WorldxChange for at least the next 12 months.
In June 2000, World Access agreed to acquire all or a majority of TelDaFax
AG, a provider of bundled fixed line, wireless, Internet and e-commerce services
to business and residential customers in Germany. In 1999, TelDaFax had revenue
of approximately $329.0 million. As of June 30, 2000, TelDaFax had approximately
$26.0 million in cash and marketable securities, with essentially no debt.
TelDaFax currently operates nine switches and has 170 interconnection
points within Germany. It is also in the process of deploying a 2,800-kilometer
fiber optic network between selected German cities that will provide the
foundation for future growth in its service offerings. The TelDaFax network,
together with the existing network assets of World Access and STAR, will give
World Access an extensive telecommunication network in Germany. In addition,
TelDaFax has a dedicated sales force that consists of 350 direct sales personnel
and over 1,000 non-exclusive sales agents.
World Access stockholders will receive a separate proxy
statement/prospectus on the TelDaFax acquisition in the near future. The
financial statements of TelDaFax have been included in this joint proxy
statement/prospectus and considered in the preparation of the Unaudited Pro
Forma Financial Information contained herein.
WORLD ACCESS' PROPOSED ACQUISITION OF TELDAFAX AG
The board of directors of World Access has approved a Purchase and Transfer
Agreement under which World Access agreed to acquire shares of TelDaFax stock.
Pursuant to the TelDaFax Purchase Agreement, World Access agreed to acquire
shares of TelDaFax in five transactions, one of which has been completed:
- Funds Share Purchase. Apax Germany II L.P., Apax Funds Nominees Ltd. fur
"B" Account, Apax Funds Nominees Ltd. fur "D" Account and AP
Vermogensverwaltung Gesellschaft burgerlichen Rechts, collectively
referred to as the Apax funds, agreed to sell all of the TelDaFax shares
held by them to World Access. On September 21, 2000, World Access
purchased all of the
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TelDaFax shares owned by the Apax funds, 11,178,176 shares, in exchange for
11,457,631 shares of World Access common stock.
- Contribution. TelDaFax and NETnet Telekommunications GmbH and NewTel
Communications GmbH, each a subsidiary of World Access, entered into a
Contribution/Exchange Agreement under which World Access agreed to
contribute the German operations of NETnet and NewTel to TelDaFax in
exchange for newly issued shares of TelDaFax;
- Klose Share Purchase. From June 14, 2000 until December 31, 2001, Dr.
Henning F. Klose has a right to sell to World Access at Dr. Klose's
option, all shares of TelDaFax stock held by Dr. Klose in up to three
installments. From July 1, 2002 until December 31, 2002, World Access has
a right to purchase from Dr. Klose at World Access' option, all shares of
TelDaFax stock held by Dr. Klose. In the Klose share purchase, each share
of TelDaFax stock will be exchanged for 1.025 shares of World Access
common stock;
- A+M Share Purchase. From January 1, 2000 until April 30, 2001, A+M GmbH
& Co Vermogensverwaltung KG has a right to sell to World Access at A+M's
option, all shares of TelDaFax stock held by A+M. From July 1, 2001 until
December 31, 2001, World Access has a right to purchase from A+M at World
Access' option, all shares of TelDaFax stock held by A+M. In the A+M
share purchase, each share of TelDaFax stock will be exchanged for 1.025
shares of World Access common stock; and
- Tender Offer. World Access will conduct a tender offer for all of the
issued and outstanding shares of TelDaFax. In the tender offer, World
Access will offer as consideration 1.025 shares of World Access common
stock for each share of TelDaFax stock, subject to upward or downward
adjustment made in good faith by the World Access board in order to
complete the tender offer.
If World Access offers more than 1.025 shares of World Access common stock
for each TelDaFax common share in the tender offer, then World Access is
required to similarly increase the number of shares of World Access common stock
issued in exchange for the TelDaFax shares purchased from the Apax funds,
including A+M, and Dr. Klose.
The TelDaFax transactions that World Access has not completed require the
approval of a majority in voting power of the shares of World Access common
stock, Series A preferred stock, Series C preferred stock, Series D preferred
stock and Series E preferred stock entitled to vote and voting as a single
class. The World Access stockholders will consider and vote on the remaining
TelDaFax transactions at a separate special meeting. In connection with this
meeting, World Access will file a separate registration statement with the
Securities and Exchange Commission containing a proxy statement describing the
TelDaFax transactions.
WORLD ACCESS' THIRD QUARTER SPECIAL CHARGES AND FINANCIAL PROJECTIONS
On September 19, 2000, World Access announced its financial projections for
the remainder of 2000 and for 2001 based on a recently developed business model.
The new business model includes the results of WorldxChange, the financial
results of which will be consolidated for two months of the third quarter of
2000 and for all of the fourth quarter of 2000. The projections in the model
also include the results of STAR and TelDaFax, which are expected to close in
the fourth quarter of 2000, beginning in the first quarter of 2001.
World Access expects revenue for the third quarter of 2000 of approximately
$320.0 million, and it expects revenue for the fourth quarter of 2000 to be
approximately $340.0 million. World Access expects to record a restructuring
charge in the third quarter of 2000 of between $30.0 million and $50.0 million
related to the integration of WorldxChange. This charge reflects nonrecurring
costs associated with the consolidation of facilities, severance, integration of
network operations, and elimination of duplicate activities.
World Access also expects selling, general and administrative expenses in
the third quarter of 2000 to include a nonrecurring charge of approximately
$35.0 million in order to significantly increase reserves for
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doubtful accounts and accrue for costs associated with migration of billing
systems and rebranding of all retail activities using the NETnet brand.
In August 2000, World Access began to see a larger number of its customers
defer payments owed to it, particularly customers that were operating as
competitive local exchange carriers or those operating in the prepaid calling
card industry. These companies are typically referred to as Tier 3 carriers. In
late August and early September, several of these carriers declared bankruptcy
or announced their intent to reorganize. While World Access evaluates the
collectibility of its accounts receivable and establishes appropriate reserves
on a regular basis, these deteriorating conditions required World Access to
perform a more extensive review of the financial condition of its current
customer base, in particular Tier 3 carriers and resellers of telecom services.
As a result of this review, World Access came to the conclusion that many
of these companies were undercapitalized and would need significant additional
capital in the next three to 12 months to continue as going concerns. Based on
the continuing weakness being experienced in the debt markets for telecom
companies and the dramatic decrease in equity valuations for telecom companies
in recent months, World Access also concluded that it would be difficult for
many of these companies to raise the needed capital. The recent failures of
several telecom businesses and the public announcements by others of their need
to raise cash will only serve to further weaken the debt and equity markets
historically relied upon by these carriers.
In late August, in connection with the increasing number of late payments,
World Access elected to tighten its credit policies and aggressively discontinue
service when certain customers missed payment commitments. Based on the review
referenced above and after careful consideration, World Access subsequently
elected to discontinue services entirely to many Tier 3 customers and reseller
customers and significantly restrict the volume of traffic carried for others.
Although discontinuing or curtailing service to customers in and of itself
does not alleviate the legal liability for customers to pay for services
previously provided, and World Access certainly intends to pursue every
available course of action to ensure accounts receivable are collected, there is
now a much greater risk of loss for amounts owed by these customers. This risk
is associated with the deteriorating financial condition of these carriers,
weaknesses in the debt and equity markets for telecom companies and the fact
these carriers will be inclined to allocate available cash to the carriers they
are using to terminate their present and future traffic. In the future, these
customers will also likely be required to pay for a higher percentage of their
termination services on a prepaid basis, further reducing the amount of cash
available to pay for previous services provided. To recognize the increased risk
of loss related to the actions taken by World Access in late August and
September, World Access felt it was necessary to record a significant increase
in its reserve for doubtful accounts in the third quarter of 2000.
World Access also predicts that its revenue for 2001 will be approximately
$2.6 billion, pro forma for all outstanding acquisitions and assumed future
acquisitions included in the business model. These financial projections are
only estimates. Further, the projections assume future acquisitions. However,
World Access is not currently a party to any agreements or understandings with
respect to any material acquisitions other than STAR, WorldxChange and TelDaFax.
World Access cannot assure you that any expected future acquisitions will be
completed. World Access' actual results in the periods covered by these
projections may differ materially from these estimates.
PROPOSAL 3
AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF SHARES
OF COMMON STOCK THAT WORLD ACCESS IS ENTITLED TO ISSUE
FROM 150,000,000 SHARES TO 290,000,000 SHARES
Currently, World Access does not have a sufficient number of shares of
common stock authorized for issuance under its amended certificate of
incorporation to complete the STAR merger, the WorldxChange
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merger and its proposed transactions with TelDaFax AG described on page 203.
Neither the STAR merger agreement nor the WorldxChange merger agreement
condition the completion of the mergers on stockholder approval of an increase
in authorized shares. However, if the World Access stockholders do not approve
an increase in the authorized shares, World Access' management will determine
with which merger World Access will proceed or if an alternative structure for
one of the mergers is feasible.
The authorized capital of World Access currently consists of 150,000,000
shares of common stock, $.01 par value per share, and 10,000,000 shares of
preferred stock. The World Access board of directors has adopted a resolution
unanimously approving and recommending to the World Access stockholders for
their approval an amendment to Article IV of World Access' amended certificate
of incorporation to provide for an increase in the number of shares of common
stock authorized for issuance from 150,000,000 shares to 290,000,000 shares. An
analysis of common shares outstanding and reserved for issuance follows:
<TABLE>
<S> <C>
Outstanding as of October 1, 2000........................... 73,254,336
Reserved for issuance upon conversion of preferred stock.... 33,939,077
Reserved for issuance for stock options and warrants........ 15,484,196
Reserved for issuance upon conversion of debentures......... 3,105,380
-----------
Total outstanding and reserved as of October 1,
2000............................................. 125,782,989
STAR merger (assuming 100% paid in stock)................... 22,700,000
WorldxChange merger......................................... 29,800,000
Conversion of debt in connection with above mergers......... 10,000,000
Reserved for exchange of STAR and WorldxChange stock
options................................................... 3,800,000
TelDaFax transactions (assuming 100% acquired).............. 23,200,000
-----------
Total outstanding and reserved upon completion of
pending mergers and transactions................. 215,282,989
===========
</TABLE>
If Proposal 3 is approved by the World Access stockholders, and the STAR
merger, WorldxChange merger and TelDaFax transactions are completed, World
Access will have approximately 78.6 million shares of common stock available for
issuance.
The World Access board of directors believes the increase in the number of
shares of common stock authorized for issuance is desirable to enhance our
flexibility in connection with possible future actions, such as public or
private offerings of shares for cash, dividends payable in our stock, corporate
mergers and acquisitions, and implementation and continuation of employee
benefit plans. Having additional authorized shares for issuance in the future
would allow shares of common stock to be issued without the expense and delay of
a special meeting of stockholders. The additional shares of common stock may be
voting or non-voting as determined in the board's sole discretion with no
further authorization by security holders required for the creation and issuance
of the additional shares, subject to the requirements of the Nasdaq National
Market that stockholder approval be obtained for certain issuances of additional
shares of common stock in excess of 20% of the number of shares then
outstanding. In addition, if World Access issued a new series of common stock or
any preferred stock that disparately reduced the voting rights of the World
Access common stock, then the World Access common stock could be excluded from
the Nasdaq National Market. The terms of any new series of common stock or any
preferred stock subject to this proposal cannot be stated or estimated at this
time.
The World Access board of directors is not proposing the increase in the
authorized number of shares of common stock with the intention of using the
shares for anti-takeover purposes. However, it is possible that the issuance of
additional shares of common stock authorized by this Proposal 4 may render more
difficult or discourage a merger, tender offer or proxy contest involving World
Access, the assumption of control of World Access by the holder of a large block
of the common stock or the removal of incumbent
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management. For example, the issuance of additional shares of common stock could
discourage a potential acquiror by:
- increasing the number of shares of common stock necessary to gain control
of World Access;
- permitting World Access, through the public or private issuance of shares
of common stock, to dilute the stock ownership of a potential acquiror;
or
- permitting World Access to privately place shares of common stock with
purchasers who side with the board of directors in opposing a takeover
bid.
Except for the proposed issuance in connection with the TelDaFax
transaction, World Access does not have any current plans, agreements or
understandings under which any of the additional shares of common stock to be
authorized would be issued.
Approval of this Proposal 3 requires the affirmative vote of a majority in
voting power of the outstanding shares of World Access common stock, Series A
preferred stock, Series C preferred stock, Series D preferred stock and Series E
preferred stock voting as a single class, and a majority of the outstanding
shares of World Access common stock voting as a single class. If approved by the
World Access stockholders, the amendment to the amended certificate of
incorporation will become effective upon filing with the Secretary of the State
of Delaware a certificate of amendment to our amended certificate of
incorporation, which filing is expected to take place shortly after the World
Access special meeting.
THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS
STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS AMENDED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR
ISSUANCE FROM 150,000,000 SHARES TO 290,000,000 SHARES.
PROPOSAL 4
AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE
OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED DIRECTORS FROM 12 TO 15
The World Access board of directors has adopted a resolution unanimously
approving and recommending to the stockholders for their approval an amendment
to Article IX of the World Access amended certificate of incorporation to
increase the number of authorized directors from 12 to 15.
Article IX of the World Access amended certificate of incorporation
currently provides that the World Access board of directors shall consist of not
fewer than three members and not more than 12 members. The exact number of
authorized directors within this range may be fixed from time to time by a
resolution of the World Access board. The World Access board of directors
believes an increase in the maximum number of directors from 12 to 15 will
provide it greater flexibility in determining the board's composition.
Approval of this Proposal 4 requires the affirmative vote of at least 75%
in voting power of the outstanding shares of World Access common stock, Series A
preferred stock, Series C preferred stock, Series D preferred stock and Series E
preferred stock entitled to vote and voting as a single class. If approved by
the World Access stockholders, the amendment to the amended certificate of
incorporation will become effective upon filing with the Secretary of State of
Delaware a certificate of amendment to the World Access amended certificate of
incorporation, which filing is expected to take place shortly after the World
Access special meeting.
THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS
STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS AMENDED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED DIRECTORS FROM 12 TO 15.
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PROPOSAL 5
AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF
INCORPORATION TO END THE CLASSIFICATION OF THE WORLD ACCESS
BOARD OF DIRECTORS SO THAT ALL DIRECTORS WILL SERVE TERMS
OF ONE YEAR AND UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED
The World Access board of directors has adopted a resolution unanimously
approving and recommending to the stockholders for their approval an amendment
to Article IX of the World Access amended certificate of incorporation to end
the classification of the World Access board of directors.
Article IX of the World Access amended certificate of incorporation
currently provides for the division of the board of directors into three classes
with each serving staggered three year terms. The purpose of dividing the
directors into three classes was to promote continuity and stability in our
management and policies by making an attempted takeover of World Access more
difficult. A classified board of directors extends the time required to make a
change in control of the board and tends to discourage any hostile takeover
because it takes at least two annual meetings to make a change in control of the
board, since only a minority of the directors are elected at each meeting.
The World Access board of directors believes that the elimination of the
classified board will allow World Access stockholders to express their views
annually regarding the board in its entirety by electing all directors annually
and also help to ensure that each director will represent the interest of all
stockholders. Further, the elimination of the classified board promotes greater
accountability by all directors each year and encourages directors to better
serve stockholders while discouraging preserving the status quo. Because there
is no limit to the number of terms an individual may serve, the continuity and
stability of the World Access board's membership and our policies and long-term
strategic planning should not be affected. Although eliminating the
classification of the World Access board may increase the risk of a hostile
takeover, World Access' management believes the benefits of eliminating the
classification of the board provides greater potential for value to
shareholders. Further, as World Access seeks to acquire new businesses, it may,
from time to time, grant board nominees to acquired companies, for which shorter
terms are beneficial. If this proposal is approved, World Access directors will
be elected for and will serve one year terms until their successors are duly
elected and qualified or until the earlier of their death, resignation or
removal. The amendment to the World Access certificate of incorporation to
eliminate the classified board would not shorten the terms of directors elected
or appointed prior to it becoming effective. The new procedure would, however,
apply to all World Access directors as their terms expire.
Approval of this Proposal 5 requires the affirmative vote of at least 75%
in voting power of the outstanding shares of World Access common stock, Series A
preferred stock, Series C preferred stock, Series D preferred stock and Series E
preferred stock entitled to vote and voting as a single class. If approved by
the World Access stockholders, the amendment to the amended certificate of
incorporation will become effective upon filing with the Secretary of State of
Delaware a certificate of amendment to the World Access amended certificate of
incorporation, which filing is expected to take place shortly after the World
Access special meeting.
THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS
STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS AMENDED CERTIFICATE OF
INCORPORATION TO END THE CLASSIFICATION OF THE WORLD ACCESS BOARD OF DIRECTORS
SO THAT ALL DIRECTORS WILL SERVE TERMS OF ONE YEAR AND UNTIL THEIR SUCCESSORS
ARE DULY ELECTED AND QUALIFIED.
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PROPOSAL 6
AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN TO INCREASE THE
NUMBER OF WARRANTS ISSUABLE UNDER THE PLAN FROM 600,000 WARRANTS TO 1,200,000
WARRANTS
In December 1994, in an effort to attract and retain the best available
personnel to serve on its board of directors, World Access established the World
Access, Inc. Directors' Warrant Incentive Plan. Other purposes of the Warrant
Plan are to provide additional incentive to the persons serving as World Access
directors, to encourage their continued service on the World Access board, and
to align director and stockholder long-term incentives. World Access directors
currently receive no cash compensation.
The Warrant Plan also represents a source of equity capital to World Access
in that directors are required to pay the warrant exercise price in the form of
cash. In addition, warrants issued under the Warrant Plan are non-qualified for
federal income tax purposes. This tax treatment is intended to provide World
Access income tax deductions equal to the difference between the aggregate
market value and aggregate exercise price of the warrants on the dates of
exercise.
DESCRIPTION OF PROPOSED AMENDMENT
The aggregate number of shares of World Access common stock currently
authorized for issuance pursuant to the Warrant Plan is 600,000. As of October
1, 2000, 450,000 shares available under the Warrant Plan had been issued or were
contingently issuable upon the exercise of outstanding warrants. To date, all
warrants under the Warrant Plan have been granted only to outside directors of
the board. On April 25, 2000, the World Access board approved, subject to and
effective upon stockholder approval, an amendment to the Warrant Plan that would
authorize an additional 600,000 shares of World Access common stock for issuance
under the Warrant Plan, so that the total shares authorized for the Warrant Plan
will be 1,200,000 shares. If the proposed amendment is approved by the World
Access stockholders, this change will be effective as of April 25, 2000.
World Access believes that the increase in the authorized shares under the
Warrant Plan is in the best interests of all stockholders and will further the
purposes of the Warrant Plan. The number of authorized shares has not been
increased since the Warrant Plan was initially adopted in December 1994. World
Access has grown significantly since that time and is forecasting significant
additional growth during the next few years. The increase in the number of
authorized shares will provide World Access with 750,000 shares available for
future issuance under the Warrant Plan. With five elected outside directors
currently serving on the World Access board of directors, these shares would
allow for three years of potential grants, assuming the performance criteria
under the Warrant Plan is met in each year.
BRIEF SUMMARY OF THE WARRANT PLAN
The Warrant Plan provides that each member of the World Access board may be
granted on an annual basis, in the discretion of the World Access board,
warrants to purchase up to 50,000 shares of World Access common stock in the
aggregate. However, no warrants may be granted under the Warrant Plan during
1999 and thereafter unless the fair market value of the World Access common
stock has increased a certain amount over the previous four years. The shares
may be authorized, but unissued, reacquired or forfeited shares of World Access
common stock. Each warrant will have a five-year term. The initial exercise
price of the warrants granted under the Warrant Plan shall be 110% of the fair
market value of the World Access common stock on the date of grant. World Access
must, at all times, keep available and reserve a number of shares sufficient to
satisfy the Warrant Plan's requirements.
The warrants shall become exercisable in one or more installments as the
World Access board may determine, but if a director has not attended at least
75% of the meetings of the World Access board for the year in which an
installment first becomes exercisable, then the installment will not become
exercisable at that time. Generally, no warrant shall be exercisable within the
first six months of its term. The warrants are exercisable only while the World
Access board member remains a member of the board, and for 60 days thereafter.
This exercise period is extended to three months if the termination of service
is
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due to a total and permanent disability. Generally, the exercise period is
extended to six months following a non-employee director's death if death occurs
while still a director, and the portion of the warrant exercisable is determined
as if the director had lived and continued service as a director for an
additional six months. If death occurs during the three months following
termination of service as a director, the warrant may be exercised during the
six months following death, but only to the extent that it had accrued at the
date of termination. Payment of the exercise price may be made in cash or check
or any combination of cash and check. Warrants generally may not be transferred
other than by will or by the laws of descent or distribution, or pursuant to a
qualified domestic relations order. However, the World Access board may, in its
discretion, authorize transfer to the spouse, children, or grandchildren of the
warrant holder, to a trust for the family members, to a partnership of which the
family members are the only partners, or to a charitable organization.
The World Access board will adjust the number of shares of World Access
common stock available for issuance under the Warrant Plan and the price per
share of World Access common stock covered by each outstanding warrant
proportionately for the following:
- any increase or decrease in the number of issued shares of World Access
common stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the World Access common
stock, or
- any other increase or decrease in the number of issued shares of World
Access common stock effected without receipt of consideration by World
Access, except for the conversion of convertible securities or the
issuance by World Access of stock or convertible securities.
Warrants to be issued pursuant to the Warrant Plan will become immediately
exercisable:
- if World Access is to be consolidated with or acquired by another entity
in a merger;
- upon the sale of substantially all of World Access's assets or the sale
of at least 90% of the outstanding World Access common stock to a third
party;
- upon the merger or consolidation of World Access with or into any other
corporation or the merger or consolidation of any corporation with or
into World Access in which consolidation or merger the stockholders of
World Access receive distributions of cash or securities; or
- upon the liquidation or dissolution of World Access.
The World Access board has authority to:
- determine, upon review of relevant information and in accordance with the
Warrant Plan, the fair market value of the World Access common stock;
- interpret the Warrant Plan;
- prescribe, amend and rescind rules and regulations relating to the
Warrant Plan;
- authorize any person to execute on behalf of World Access any instrument
required to effectuate the grant of a warrant previously granted under
the Warrant Plan; and
- make all other determinations deemed necessary or advisable for the
administration of the Warrant Plan.
All World Access board determinations will be final and binding on all
holders of warrants.
A warrant may be suspended or terminated if the Chief Executive Officer of
World Access reasonably believes that the warrant holder has committed an act of
misconduct. If the World Access board (excluding the relevant warrant holder)
determines that the warrant holder has committed an act of embezzlement, fraud,
dishonesty, nonpayment of an obligation owed to World Access, breach of
fiduciary duty or deliberate disregard of World Access rules resulting in loss,
damage or injury to World Access, or if the warrant holder makes unauthorized
disclosure of any World Access trade secret or confidential information, engages
in unfair competition, induces any World Access customer to breach a contract
with World Access, or induces any principal for whom World Access acts as agent
to terminate such agency relationship, such warrant holder shall not be entitled
to exercise any warrant.
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The Warrant Plan will continue in effect until December 2004, unless
earlier terminated by the World Access board. The World Access board may amend
or terminate the Warrant Plan at any time, provided any such amendment or
termination will not affect previously granted warrants, unless otherwise agreed
in writing between World Access and the holder of the warrant.
As of October 1, 2000, there were 350,000 warrants issued and outstanding
under the Warrant Plan at exercise prices ranging from $8.25 to $25.85 per
share, all of which were exercisable. As of October 1, 2000, 100,000 warrants
have been exercised under the Warrant Plan. Current directors of World Access
have been granted warrants to acquire the following number of shares of Common
Stock under the Warrant Plan: Mr. Clearman - 150,000; Mr. Imlay - 50,000; Mr.
Phillips - 100,000; and Mr. Sanders - 50,000.
Federal Income Tax Consequences. Neither World Access nor the warrant
holder has income tax consequences from the grant of warrants under the Warrant
Plan. Generally, in the tax year when the holder exercises a warrant, the
warrant holder recognizes ordinary income in the amount by which the fair market
value of the shares at the time of exercise exceeds the exercise price for the
warrants. World Access will generally have a deduction in the same amount as the
ordinary income recognized by the warrant holder in World Access' tax year in
which or with which the warrant holder's tax year (of exercise) ends.
VOTE REQUIRED
Approval of this Proposal 6 requires the affirmative vote of a majority in
voting power of the outstanding shares of World Access common stock, Series A
preferred stock, Series C preferred stock, Series D preferred stock and Series E
preferred stock, voting as a single class. If approved by the World Access
stockholders, the amendment to the Warrant Plan will become effective upon the
approval.
THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS
STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT
INCENTIVE PLAN TO INCREASE THE NUMBER OF WARRANTS ISSUABLE UNDER THE PLAN FROM
600,000 WARRANTS TO 1,200,000 WARRANTS.
PROPOSAL 7
AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN
TO CHANGE THE PERFORMANCE CRITERIA UNDER THE PLAN
On April 25, 2000, the World Access board approved, subject to and
effective upon stockholder approval, an amendment to the Warrant Plan that would
change the performance criteria of the World Access common stock under the
Warrant Plan. If the proposed amendment is approved by the World Access
stockholders, this change will be effective as of April 25, 2000. The previous
performance criteria dates back to the inception of the Warrant Plan in December
1994 when World Access common stock traded at $1.25 per share.
Under the current provisions of the Warrant Plan, no warrants may be
granted for a year unless the price of World Access common stock has increased
by a compounded average annual growth rate equal to or in excess of 35% for the
four years preceding the year of grant. The proposed amendment would decrease
the period over which the growth rate of World Access common stock is to be
measured to determine whether warrants may be granted for a particular year.
Under the proposed amendment, beginning in February 2001, the growth rate of the
price of World Access common stock will be measured over the previous two years
rather than the previous four years. In addition, the stock price must have
grown by a compounded average annual growth rate equal to or in excess of 10%
over the measurement period, rather than 35%, in order for the World Access
board to grant warrants under the Warrant Plan.
World Access believes that the decrease in the measurement period for the
growth rate of World Access common stock for the determination of whether
warrants may be granted is in the best interests of all stockholders and will
further the purposes of the Warrant Plan. The target price to determine
eligibility
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in February 2001 is approximately $26.00 under both the previous and proposed
performance criteria. The proposed revisions to the performance criteria were
designed to address the fact that the previous criteria requires a target price
of more than $60.00 per share in February 2002. Warrants issued under the
Warrant Plan represent the only form of ongoing consideration paid to outside
directors. As a result, World Access believes the performance criteria defined
under this Warrant Plan must be reasonably defined to assist World Access in
attracting and retaining highly qualified outside directors.
VOTE REQUIRED
Approval of this Proposal 7 requires the affirmative vote of a majority in
voting power of the outstanding shares of World Access common stock, Series A
preferred stock, Series C preferred stock, Series D preferred stock and Series E
preferred stock, voting as a single class. If approved by the World Access
stockholders, the amendment to the Warrant Plan will become effective upon such
approval.
THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS
STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT
INCENTIVE PLAN TO CHANGE THE PERFORMANCE CRITERIA OF WORLD ACCESS COMMON STOCK
UNDER THE PLAN.
PROPOSAL 8
ELECTION OF WORLD ACCESS DIRECTORS
The World Access amended certificate of incorporation provides that the
World Access board shall be classified into three classes as nearly equal in
number as possible, so that approximately one-third of the members of the board
shall be elected at each annual meeting of stockholders, and each director shall
serve for a three-year term. The World Access amended certificate of
incorporation further provides that the World Access board shall consist of not
fewer than three members and not more than 12 members, with the exact number of
directors within the range to be fixed from time to time by the World Access
board. If Proposal 4 is approved by the World Access stockholders at the World
Access special meeting, World Access will amend its amended certificate of
incorporation to increase the number of authorized directors from 12 to 15.
Notwithstanding these provisions, the World Access amended certificate of
incorporation provides that whenever the holders of any one or more classes or
series of stock has the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, such directors so
elected shall not be divided into classes. The number of such directors shall
not be counted in determining the maximum number of directors permitted under
Article IX of the World Access amended certificate of incorporation, unless
expressly provided otherwise by the terms of the class or series in the World
Access amended certificate of incorporation. Messrs. Burmeister, Campbell,
Cipoletti and Sedwick are designees of the Series C preferred stock of World
Access and, as such, are not divided into classes. If Proposal 4 is approved at
the World Access special meeting, all World Access directors, including the
nominees for director named in this joint proxy statement/prospectus, will serve
terms of one year or until their successors are duly elected and qualified.
The World Access board has fixed the number of directors at 11, and the
World Access board currently is comprised of 11 members. There are two director
positions in the class whose term of office expires in 2000. These positions are
currently held by Stephen J. Clearman and John D. Phillips, who are standing for
reelection. The persons named as proxies are not entitled to vote for a greater
number of persons than the number of nominees named in this joint proxy
statement/prospectus. There are no family relationships among any World Access
directors, executive officers or nominees.
The World Access board knows of no reason why the nominees may be unable to
serve as a director. If a nominee is unable to serve, the shares represented by
all valid proxies received may be voted for a substitute nominee designated by
the World Access board, or the World Access board may reduce the number of
directors. If any director resigns, dies or is otherwise unable to serve out his
or her term, or the number of directors is increased by the World Access board,
any vacancy so arising may be filled by the
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World Access board. A director elected to fill a vacancy shall serve until the
next election of the class of directors to which the director belongs and until
his or her successor is elected and qualified.
THE WORLD ACCESS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
OF WORLD ACCESS VOTE "FOR" THE ELECTION OF STEPHEN J. CLEARMAN AND JOHN D.
PHILLIPS AS DIRECTORS.
INFORMATION REGARDING NOMINEES AND DIRECTORS
Biographical information follows for the person nominated and each person
whose term of office as a director will continue after the World Access special
meeting. Directors' ages are as of October 1, 2000.
WORLD ACCESS NOMINEES FOR DIRECTOR
Stephen J. Clearman. Mr. Clearman has served as one of World Access'
directors since 1988. Mr. Clearman co-founded Geocapital Partners. Since 1984,
he has served as a general partner of six Geocapital venture capital
partnerships. Mr. Clearman currently serves as a director of MemberWorks
Incorporated and several private companies, all of which principally provide
computer software or information services. Mr. Clearman's current term as a
director of World Access is scheduled to end at the World Access special
meeting. Mr. Clearman is 49.
John D. ("Jack") Phillips. Mr. Phillips has served as one of World Access'
directors since December 1994, as its Chief Executive Officer since December
1998 and as Chairman of its board of directors since May 1999. Mr. Phillips was
Chairman of the Board and Chief Executive Officer of Cherry Communications and
Cherry U.K. d/b/a Resurgens Communications Group from October 1997 until
December 1998, when World Access acquired both companies. He was President,
Chief Executive Officer and a director of Metromedia International from November
1995 until December 1996. Metromedia International was formed in November 1995
through the merger of The Actava Group, Inc., Orion Pictures Corporation, MCEG
Sterling Incorporated and Metromedia International Telecommunications, Inc. He
served as President, Chief Executive Officer and a director of Actava from April
1994 until November 1995. In May 1989, Mr. Phillips became Chief Executive
Officer of Resurgens Communications Group, Inc. and served in this capacity
until September 1993 when Resurgens merged with Metromedia Communications
Corporation and WorldCom. Mr. Phillips' current term as a director of World
Access is scheduled to end at the World Access special meeting. Mr. Phillips is
57.
WORLD ACCESS DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING
Massimo Prelz Oltramonti. Mr. Prelz has served as one of World Access'
directors since December 1999. He is a Managing Director of Gilbert Global
Equity Partners, L.L.C., a private equity firm with a diversified global
investment strategy. He previously served as Managing Director of Advent
International Corporation, the general partner of a series of global private
equity funds. In this capacity, he co-managed the media and telecom investment
activity of Advent International in Europe and was directly responsible for its
investments in Scandinavian Broadcasting Systems SA, Esat Telecom Group plc,
PrimaCom AG, Esaote S.p.A. and Jazztel SA. Prior to joining Advent International
in 1991, Mr. Prelz was a partner at Alta Berkeley Associates, a venture capital
group in London. He currently serves as Vice-Chairman of PrimaCom AG and is a
director of Esat Telecom Group plc, Jazztel SA and Iaxis N.V. Mr. Prelz's
current term as a director of World Access is scheduled to end at World Access'
2002 Annual Meeting of Stockholders. Mr. Prelz is 45.
Lawrence C. Tucker. Mr. Tucker has served as one of World Access'
directors since April 1999. He has been a General Partner of Brown Brothers
Harriman & Co., a private banking firm, since 1979 and he also serves on The
Partners' Steering Committee. Mr. Tucker serves as a director of MCI WorldCom,
Inc., the MCI WorldCom Venture Fund, US Unwired, Inc., National Healthcare
Corporation, Riverwood Holdings, Inc., VAALCO Energy Inc. and National Equipment
Services, Inc. Brown Brothers Harriman & Co. is the general partner of The 1818
Fund, L.P., The 1818 Fund II, L.P., The 1818 Fund III, L.P., and The 1818
Mezzanine Fund, L.P. Mr. Tucker serves on our board of directors as the designee
of the
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holder of our Series A preferred stock, and his current term as a director of
World Access is scheduled to end at World Access' 2002 Annual Meeting of
Stockholders. Mr. Tucker is 57.
WORLD ACCESS DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING
John P. Imlay, Jr. Mr. Imlay has served as one of World Access' directors
since December 1998. He is Chairman of Imlay Investments, Inc., a private
investment firm which manages capital and provides venture funds for small
technology companies. He also serves as Chairman of Dun & Bradstreet Software
Services, Inc., an application software company, and as a director of Metromedia
International Group, Inc., a global media, entertainment and communications
company. Mr. Imlay is the former Chairman of Management Science America, a
mainframe application software company that was acquired by Dun & Bradstreet in
1990. He is also a director of the Atlanta Falcons and The Gartner Group. Mr.
Imlay's current term as a director of World Access is scheduled to end at World
Access' 2001 Annual Meeting of Stockholders. Mr. Imlay is 64.
John P. Rigas. Mr. Rigas has served as one of World Access' directors
since December 1999. He is a Managing Partner of Zilkha Capital Partners L.P., a
private equity firm involved in a wide variety of venture capital and technology
investments both in the U.S. and internationally. Mr. Rigas is a founder of
Zilkha Capital Partners and has been a member of its predecessor firms for
twelve years. He currently serves as the Chairman of Advanced Interactive
Systems Inc. and as a director of New Colt Holding, Inc., Omniglow, Inc. and
Total Sports, Inc. Mr. Rigas' current term as a director of World Access is
scheduled to end at World Access' 2001 Annual Meeting of Stockholders. Mr. Rigas
is 37.
Carl E. Sanders. Mr. Sanders has served as one of World Access directors'
since December 1998. He is engaged in the private practice of law as Chairman of
Troutman Sanders LLP, a law firm based in Atlanta, Georgia. He is a former
governor of the State of Georgia. Mr. Sanders is currently a director of Carmike
Cinemas, Matria Health Care and H.I.E. Corp. Mr. Sanders' current term as a
director of World Access is scheduled to end at World Access' 2001 Annual
Meeting of Stockholders. Mr. Sanders is 75.
WORLD ACCESS DIRECTORS NOT DIVIDED INTO CLASSES
Walter J. Burmeister. Mr. Burmeister has served as World Access' President
and one of its directors since December 1999. Mr. Burmeister was one of
FaciliCom's co-founders and served as its Chief Executive Officer, President and
one of its directors from 1995 until it merged with World Access in December
1999. Prior to co-founding FaciliCom, Mr. Burmeister founded TMG, a
telecommunications consulting firm, and he has served as its Chairman from 1992
to the present. Mr. Burmeister was Vice President and Chief Financial Officer of
Bell Atlantic International from 1989 to 1992. In this position, Mr. Burmeister
was responsible for overseeing business development in Central and South
America, the Middle East and Africa, as well as managing that company's
financial affairs. During his 31 years with Bell Atlantic, Mr. Burmeister was
Vice President of Bell of Pennsylvania's and Diamond State Telephone's sales
organization and headed the C&P Telephone Operations Staff. Mr. Burmeister has
served as a director of Skysat Communications Network since 1992. Mr. Burmeister
serves on World Access board of directors as a designee of the holders of our
Series C preferred stock. Mr. Burmeister is 61.
Kirby J. Campbell. Mr. Campbell has served as one of World Access'
directors since December 1999. He served as Treasurer, Vice President and as a
director of FaciliCom from its inception in 1995 until it merged with World
Access in December 1999. Since June 1997, Mr. Campbell has been the Chief
Executive Officer of Armstrong Holdings, Inc., FaciliCom's indirect majority
stockholder, and he was previously Executive Vice President of Armstrong
Holdings. Mr. Campbell also holds various executive and board positions with
Armstrong Holdings' affiliated companies. Mr. Campbell serves on our board of
directors as a designee of the holders of our Series C preferred stock. Mr.
Campbell is 53.
Bryan Cipoletti. Mr. Cipoletti has served as one of World Access'
directors since December 1999. He served as a director of FaciliCom from
September 1997 until it merged with us in December 1999. Mr. Cipoletti has been
Chief Financial Officer of Armstrong Holdings since December 1999 and was Vice
President of Finance of Armstrong Holdings from 1993 to 1999. Mr. Cipoletti also
holds various executive
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and board positions with Armstrong Holdings' affiliated companies. Mr. Cipoletti
serves on our board of directors as a designee of the holders of Series C
preferred stock. Mr. Cipoletti is 40.
Dru A. Sedwick. Mr. Sedwick has served as one of World Access' directors
since December 1999. He served as Secretary, Vice President and as a director of
FaciliCom from FaciliCom's inception in 1995 until it merged with us in December
1999. Since June 1997, Mr. Sedwick has been President of Armstrong Holdings, and
previously he was Senior Vice President of Armstrong Holdings. Mr. Sedwick also
holds various executive and board positions with Armstrong Holdings' affiliated
companies. Mr. Sedwick serves on our board of directors as a designee of the
holders of the World Access Series C preferred stock. Mr. Sedwick is 36.
MEETINGS AND COMMITTEES OF THE WORLD ACCESS BOARD
During 1999, the World Access board met seven times and took actions by
unanimous written consent 14 times. The World Access board has a standing
Executive Committee, Audit Committee and Compensation Committee. No incumbent
World Access board member attended fewer than 75% of the aggregate of:
- the total number of meetings of the World Access board which the director
was eligible to attend during 1999 and
- the total number of meetings held by any committee of the World Access
board upon which the director served during 1999.
The Executive Committee was formed in December 1999 and presently consists
of Messrs. Burmeister, Campbell, Phillips and Tucker. The Executive Committee
performs the duties as are delegated to it by the board of directors, subject to
the limitations on the delegation contained in the Delaware General Corporation
Law.
The Audit Committee, which presently consists of Messrs. Cipoletti,
Oltramonti and Rigas, recommends engagement of independent auditors for World
Access, reviews and approves services performed by the auditors, reviews and
evaluates World Access' accounting system and its system of internal controls
and performs other related duties delegated to the committee by the World Access
board. The Audit Committee met two times during 1999.
The Compensation Committee, which presently consists of Messrs. Clearman,
Imlay, Sanders and Sedwick, performs the duties regarding compensation for
executive officers as the World Access board may delegate to the Compensation
Committee from time to time. The Compensation Committee met eight times during
1999.
The World Access board has not established a separate committee of its
members to nominate candidates for election as directors.
WORLD ACCESS DIRECTOR COMPENSATION
World Access' non-employee directors receive no cash compensation for their
service as directors of World Access. Their compensation is in the form of stock
warrants as discussed below. The directors are reimbursed for out-of-pocket
travel and related expenses incurred in connection with their attendance at
meetings of the World Access' board or its committees and at other World Access
events to which they are invited.
In December 1994, in an effort to attract and retain experienced executives
to serve as outside directors, the Outside Directors' Warrant Plan was adopted.
World Access' stockholders approved the Warrant Plan at the 1995 Annual Meeting
of Stockholders.
The purposes of the Warrant Plan are to attract and retain the best
available personnel for service as directors of World Access, to provide
additional incentive to the persons serving as directors, to align director and
stockholder long-term interests and to encourage continued service on the World
Access
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board. Warrants may be granted under the Warrant Plan only to directors of World
Access who are neither employees of World Access nor of any of its affiliates.
The aggregate number of shares of common stock authorized to be issued pursuant
to the Warrant Plan is 2,400,000, subject to adjustments as described below. The
Warrant Plan provides that each eligible non-employee director elected to serve
as a director of World Access on or after October 1, 1994 may be granted, in the
discretion of the World Access board, warrants to purchase no more than 450,000
shares of common stock in the aggregate. The initial exercise price of the
warrants will be not less than the fair market value of the common stock subject
to the warrant on the date of grant.
In June 1999, the our board granted the following directors warrants to
purchase a total of 201,000 shares of World Access' common stock at an exercise
price of $11.69 per share, the then current market price: Mr. Clearman -- 17,000
shares; Mr. Imlay -- 42,000 shares; Mr. Sanders -- 42,000 shares; and Mr.
Tucker -- 100,000 shares. These warrants, which were fully vested upon issuance,
expire on June 15, 2004.
In December 1999, Mr. Prelz and Mr. Rigas joined World Access' board and
were each granted warrants to purchase 100,000 shares of World Access' common
stock at an exercise price of $17.62 per share, the then current market price.
These warrants, which were fully vested upon issuance, expire on December 9,
2004.
In December 1994, we also adopted the Directors' Warrant Incentive Plan
pursuant to which our board may grant, beginning in February 1997, to each
non-employee director on an annual basis warrants to purchase up to 50,000
shares of common stock at an exercise price per share equal to no less than 110%
of the fair market value of the common stock at the date of grant. No warrants
may be granted under the Incentive Plan in a given year unless our common stock
has appreciated by a compounded annual average rate of return in excess of 35%
for the four-year period preceding the year of grant. The aggregate number of
shares of common stock authorized to be issued pursuant to the Incentive Plan is
600,000, subject to adjustments as described below. Upon stockholder approval at
the World Access special meeting, 35% for the four-year period will be amended
to 10% for the two-year period and the number of authorized shares will be
increased to 1.2 million shares.
In March 1999, pursuant to the Incentive Plan, our board granted each of
Messrs. Clearman, Imlay and Sanders warrants to purchase 50,000 shares of our
common stock at an exercise price of $8.25 per share, 110% of the then current
market price. These warrants became fully vested on December 31, 1999 and expire
on March 10, 2004.
The Warrant Plan and the Incentive Plan provide that warrants awarded under
these plans will become immediately exercisable:
- if we are consolidated with or acquired by another entity in a merger,
- upon the sale of substantially all of our assets or the sale of at least
90% of outstanding common stock to a third party,
- upon our merger or consolidation with or into any other corporation or
the merger or consolidation of any corporation with or into us, in which
consolidation or merger our stockholders received distributions of cash or
securities as a result of the merger or consolidation, or
- upon our liquidation or dissolution.
DESCRIPTION OF WORLD ACCESS' CAPITAL STOCK
WORLD ACCESS COMMON STOCK
The holders of World Access common stock are entitled to one vote for each
share held of record on all matters to be voted on by the stockholders. There is
no cumulative voting with respect to the election of directors. Accordingly,
holders of a majority of the outstanding shares of World Access common stock
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and the holders of the World Access Series A preferred stock, Series D preferred
stock and Series E preferred stock, voting on an as converted to common stock
basis, can elect all members of World Access' board of directors. Holders of the
remaining shares of World Access common stock by themselves cannot elect any
member of the board of directors.
The holders of World Access common stock are entitled to receive dividends
when dividends are declared by the board of directors. In the event of the
dissolution of World Access, the holders of World Access common stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the World Access common stock.
Holders of shares of World Access common stock, as such, have no conversion,
preemptive or other subscription rights. There are no redemption provisions
applicable to the World Access common stock.
WORLD ACCESS PREFERRED STOCK
The World Access certificate of incorporation authorizes the World Access
board of directors to issue shares of preferred stock in one or more series and
to fix the rights of the shares to be included in such shares. The World Access
certificate of incorporation authorizes the issuance of 10,000,000 shares of
preferred stock, of which 50,000 shares designated as Series A preferred stock,
350,260 shares designated as Series C preferred stock, 184,000 shares designated
as Series D preferred stock, and 9,645 shares designated as Series E are issued
and outstanding. The material terms of the Series A preferred stock, the Series
C preferred stock, the Series D preferred stock and the Series E preferred stock
are summarized below.
World Access Series A preferred stock
Dividends. The holders of the Series A preferred stock are entitled to
receive quarterly cash dividends at an annual rate on the liquidation preference
of the Series A preferred stock, which is $1,000, equal to 4.25%, when declared
by the World Access board of directors. Dividends payable on the Series A
preferred stock are cumulative and accrue, whether or not declared, on a daily
basis from April 19, 1999.
Ranking. The Series A preferred stock ranks, as to dividend and
liquidation rights, senior to World Access common stock, the Series C preferred
stock and the Series D preferred stock.
Voting rights. In addition to any voting rights provided by law, the
holders of the Series A preferred stock are entitled to vote on all matters
voted on by holders of World Access common stock voting together as a single
class with the holders of World Access common stock, Series C preferred stock,
Series D preferred stock and other shares entitled to vote thereon. Each holder
of the Series A preferred stock is entitled to cast the number of votes per
share as is equal to the number of votes that the holder would be entitled to
cast if the holder had converted its shares into World Access common stock on
the record date for determining the stockholders entitled to vote on any such
matters.
In addition, unless the consent or approval of a greater number of shares
is then required by law, the vote of the holders of at least 66 2/3% of the
outstanding shares of Series A preferred stock, voting separately as a single
series, is required to:
- authorize, increase the authorized number of shares of or issue any
shares of any class of stock ranking senior or equal to the Series A
preferred stock;
- authorize, adopt or approve an amendment to the certificate of
incorporation of World Access that would increase or decrease the par
value of the Series A preferred stock, or change the rights of the Series
A preferred stock, or would change the rights of stock ranking senior or
equal to the Series A preferred stock;
- amend or alter the certificate of incorporation so as to adversely affect
the Series A preferred stock;
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<PAGE> 231
- authorize or issue any security convertible into, exchangeable for or
evidencing the right to purchase or otherwise receive any shares of any
class or classes of stock ranking senior or equal to the Series A
preferred stock;
- effect the voluntary dissolution, recapitalization or reorganization of
World Access, or the consolidation or merger of World Access with or into
another entity; or
- authorize, increase the authorized number of shares of, or issue any
shares of capital stock having an optional or mandatory redemption date
earlier than April 21, 2004 or amend the terms of any capital stock to
provide that such capital stock has an optional or mandatory redemption
date earlier than April 21, 2004.
Board of directors representation. If World Access:
- fails to declare or pay the full amount of dividends payable on the
Series A preferred stock for two quarterly dividend periods, whether
consecutive or not, or
- fails to comply with specific affirmative and negative covenants of World
Access set forth in the Stock Purchase Agreement, dated April 19, 1999,
between World Access and The 1818 Fund III, L.P.,
then the number of directors on the World Access board of directors must be
increased by one, and the holders of the Series A preferred stock will have the
exclusive right to fill such directorship. The person designated as a director
by the holders of the Series A preferred stock will continue in such position
until such breach is cured.
Redemption. On or after April 21, 2003, World Access has the right to
redeem the Series A preferred stock for a price per share equal to $1,000 plus
an amount per share equal to all accrued and unpaid dividends through the
redemption date. If a change of control of World Access occurs on or before
April 21, 2001, World Access has the right to redeem the Series A preferred
stock for a price per share equal to $1,250 plus an amount per share equal to
all accrued and unpaid dividends through the redemption date.
Conversion price. The Series A preferred stock is convertible, at any
time, into shares of World Access common stock for a conversion price equal to
$11.50 per share. The conversion price is subject to adjustment in the event of
below market issuances of World Access common stock, stock dividends,
subdivisions, combinations, reclassifications and other distributions with
respect to World Access common stock and certain other instances described in
the World Access certificate of incorporation.
Mandatory exchange. If at any time on or after April 19, 2004 until April
19, 2009, the holders of at least 50% of the Series A preferred stock demand
that World Access exchange the Series A preferred stock, then World Access must
exchange all such shares for, at World Access' option, either shares of World
Access common stock or subordinated nonconvertible notes of World Access. The
exchange must occur at a per share price equal to $1,000 per share plus an
amount per share equal to all accrued and unpaid dividends to the exchange date.
The exchange date must occur at any time, or from time to time, during the
period from the 40th day following the date a stockholder demands the exchange
to the third anniversary of such date. Any shares of common stock issued in the
exchange will be valued at 95% of the average market price of World Access
common stock for the ten trading days preceding the applicable exchange date,
but in no event greater than the conversion price then in effect.
Mandatory conversion. If for 45 consecutive trading days the market price
of World Access common stock exceeds 261% of the conversion price in effect on
each such trading day, all shares of Series A preferred stock will be
automatically converted into such number of shares of World Access common stock
as equals the number of shares subject to conversion multiplied by the quotient
of $1,000 divided by the conversion price in effect on the last trading day of
such 45-day period.
218
<PAGE> 232
World Access Series C preferred stock
Ranking. The Series C preferred stock ranks, as to dividends, equal with
the World Access common stock and the Series D preferred stock and junior to the
Series A preferred stock. With respect to liquidation preference, the Series C
preferred stock ranks senior to the World Access common stock, junior to the
Series A preferred stock, and equal with the Series D preferred stock.
Voting rights. In addition to any voting rights provided by law, except
with respect to the election of directors, the holders of the Series C preferred
stock are entitled to vote on all matters voted on by holders of World Access
common stock voting together as a single class with the holders of World Access
common stock, Series A preferred stock, Series D preferred stock and other
shares entitled to vote thereon. Each holder of the Series C preferred stock is
entitled to cast the number of votes per share as is equal to the number of
votes that the holder would be entitled to cast if the holder had converted its
shares into World Access common stock on the record date for determining the
stockholders entitled to vote on any such matters.
In addition, unless the consent or approval of a greater number of shares
is then required by law, the vote of the holders of at least 66 2/3% of the
outstanding shares of Series C preferred stock, voting separately as a single
series, is required to:
- authorize, increase the authorized number of shares of or issue any
shares of any class of stock ranking senior to the Series C preferred
stock;
- authorize, adopt or approve an amendment to the certificate of
incorporation of World Access that would increase or decrease the par
value of the Series C preferred stock, or change the rights of the Series
C preferred stock, or would change the rights of stock ranking senior to
the Series C preferred stock;
- amend or alter the certificate of incorporation so as to adversely affect
the Series C preferred stock;
- authorize or issue any security convertible into, exchangeable for or
evidencing the right to receive any shares of any class or classes of
stock ranking senior to the Series C preferred stock; and
- effect the voluntary dissolution, recapitalization or reorganization of
World Access, or the consolidation or merger of World Access with or into
another entity, or the sale or other distribution to another entity of
all or substantially all of the assets of World Access.
Board of directors representation. The holders of the Series C preferred
stock have the right, voting as a separate series, to nominate and elect four
directors to the World Access board of directors and are not entitled to vote
with respect to the election of any other directors, provided that on the record
date for determining the stockholders eligible to vote for directors, at least
15% of the originally issued Series C preferred stock is outstanding. However,
if the World Access common stock issuable upon conversion of the Series C
preferred stock equals less than 20% of the outstanding shares of capital stock
of World Access entitled to vote for the election of directors, then, so long as
the outstanding shares of Series C preferred stock equal at least 15% of the
originally issued Series C preferred stock, the holders of the Series C
preferred stock have the right to elect, voting as a separate series, the number
of directors which, as a percentage of the total number of World Access
directors, is at least equal to the percentage of all outstanding shares of
capital stock entitled to vote for the election of directors held by such
holders of Series C preferred stock, on an as converted basis.
Conversion price. The Series C preferred stock is convertible, at any
time, into shares of World Access common stock for a conversion price equal to
$20.38 per share. The conversion price is subject to adjustment in the event of
below market issuances of World Access common stock, stock dividends,
subdivisions, combinations, reclassifications and other distributions with
respect to World Access common stock and other instances described in the World
Access certificate of incorporation.
Mandatory conversion. If for 60 consecutive trading days the market price
of World Access common stock exceeds the conversion price in effect on each such
trading day, all shares of Series C preferred
219
<PAGE> 233
stock will be automatically converted into such number of shares of World Access
common stock as equals the number of shares subject to conversion multiplied by
the quotient of $1,000 divided by the conversion price in effect on the last
trading day of such 60-day period.
In addition, any outstanding shares of Series C preferred stock that have
not been converted into World Access common stock by December 7, 2002 will be
automatically converted into such number of shares of World Access common stock
as is equal to the number of shares of Series C preferred stock subject to
conversion, multiplied by the quotient of (i) $1,000 divided by (ii) the average
market price for the 20 consecutive days ending on December 7, 2002.
Notwithstanding the foregoing, the average market price for the 20 consecutive
days ending on December 7, 2002 may not be less than $11.50 or greater than the
conversion price, and is subject to increase based on a specific decline in the
Nasdaq Composite Index between December 7, 1999 and December 7, 2002.
World Access Series D preferred stock
Ranking. The Series D preferred stock ranks, as to dividends, equal with
the World Access common stock and the Series C preferred stock and junior to the
Series A preferred stock. With respect to liquidation preference, the Series D
preferred stock ranks senior to the World Access common stock, junior to the
Series A preferred stock, and equal with the Series C preferred stock.
Voting rights. In addition to any voting rights provided by law, the
holders of the Series D preferred stock are entitled to vote on all matters
voted on by holders of World Access common stock voting together as a single
class with the holders of World Access common stock, Series A preferred stock,
Series C preferred stock and other shares entitled to vote thereon. Each holder
of the Series D preferred stock is entitled to cast the number of votes per
share as is equal to the number of votes that the holder would be entitled to
cast if the holder had converted its shares into World Access common stock on
the record date for determining the stockholders entitled to vote on any such
matters.
Conversion price. The Series D preferred stock is convertible, at any
time, into shares of World Access common stock for a conversion price equal to
$18.00 per share. The conversion price is subject to adjustment in the event of
below market issuances of World Access common stock, stock dividends,
subdivisions, combinations, reclassifications and other distributions with
respect to World Access common stock and other instances described in the World
Access certificate of incorporation.
Mandatory conversion. If for 60 consecutive trading days the market price
of World Access common stock exceeds the conversion price in effect on each such
trading day, all shares of Series D preferred stock will be automatically
converted into such number of shares of World Access common stock as equals the
number of shares subject to conversion multiplied by the quotient of $1,000
divided by the conversion price in effect on the last trading day of such 60-day
period.
In addition, any outstanding shares of Series D preferred stock that have
not been converted into World Access common stock by February 14, 2003 will be
automatically converted into such number of shares of World Access common stock
as is equal to the number of shares of Series D preferred stock subject to
conversion, multiplied by the quotient of (i) $1,000 divided by (ii) the average
market price for the 20 consecutive days ending on February 14, 2003.
Notwithstanding the foregoing, the average market price for the 20 consecutive
days ending on February 14, 2003 may not be less than $11.50 or greater than the
conversion price, and subject to increase based on a specific decline in the
Nasdaq Composite Index between February 14, 2000 and February 14, 2003.
World Access Series E preferred stock
Ranking. The Series E preferred stock ranks, as to dividends, equal with
the World Access common stock, the Series C preferred stock, and Series D
preferred stock and junior to the Series A preferred stock. With respect to
liquidation preference, the Series E preferred stock ranks senior to the World
Access common stock, junior to the Series A preferred stock, and equal with the
Series C preferred stock and Series D preferred stock.
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<PAGE> 234
Voting rights. In addition to any voting rights provided by law, the
holders of the Series E preferred stock are entitled to vote on all matters
voted on by holders of World Access common stock voting together as a single
class with the holders of World Access common stock, Series A preferred stock,
Series C preferred stock, Series D preferred stock and other shares entitled to
vote thereon. Each holder of the Series E preferred stock is entitled to cast
the number of votes per share as is equal to the number of votes that the holder
would be entitled to cast if the holder had converted its shares into World
Access common stock on the record date for determining the stockholders entitled
to vote on any such matters.
Conversion price. The Series E preferred stock is convertible, at any
time, into shares of World Access common stock for a conversion price equal to
$21.75 per share. The conversion price is subject to adjustment in the event of
below market issuances of World Access common stock, stock dividends,
subdivisions, combinations, reclassifications and other distributions with
respect to World Access common stock and other instances described in the World
Access certificate of incorporation.
Mandatory conversion. If for ten consecutive trading days the market price
of World Access common stock exceeds the conversion price in effect on each such
trading day, all shares of Series E preferred stock will be automatically
converted into such number of shares of World Access common stock as equals the
number of shares subject to conversion multiplied by the quotient of $1,000
divided by the conversion price in effect on the last trading day of such
ten-day period.
In addition, any outstanding shares of Series E preferred stock that have
not been converted into World Access common stock by July 13, 2003 will be
automatically converted into such number of shares of World Access common stock
as is equal to the number of shares of Series E preferred stock subject to
conversion, multiplied by the quotient of (i) $1,000 divided by (ii) the average
market price for the ten consecutive days ending on July 13, 2003.
Notwithstanding the foregoing, the average market price for the ten consecutive
days ending on July 13, 2003 may not be less than $11.50 or greater than the
conversion price, and subject to increase based on a specific decline in the
Nasdaq Composite Index between July 13, 2000 and July 13, 2003.
PRINCIPAL STOCKHOLDERS OF WORLD ACCESS
As of October 1, 2000, the issued and outstanding classes of World Access
voting securities were as follows:
<TABLE>
<CAPTION>
COMMON
SHARES SHARES
OUTSTANDING EQUIVALENT
----------- -----------
<S> <C> <C>
Common stock................................................ 73,254,336 73,254,336
Series A preferred stock.................................... 70,000 6,086,956
Series C preferred stock.................................... 350,260 17,186,451
Series D preferred stock.................................... 184,000 10,222,222
Series E preferred stock.................................... 9,645 443,448
-----------
Total voting securities........................... 107,193,413
===========
</TABLE>
The following table sets forth information regarding the beneficial
ownership of the World Access common stock and each individual class of World
Access preferred stock as of October 1, 2000 for:
- each person who beneficially owns more than 5% of the World Access common
stock;
- each current World Access director individually;
- each current World Access executive officer who would be a named
executive officer under Rule 402 of Regulation S-K; and
- all current directors and executive officers of World Access as a group.
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<PAGE> 235
The following table also sets forth information assuming the completion of
both the STAR and WorldxChange mergers. For purposes of this table, we have
assumed that World Access will pay 100% of the STAR merger consideration in
World Access common stock.
<TABLE>
<CAPTION>
TOTAL SHARES TOTAL SHARES
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
OWNED(1) OWNED OWNED(1) OWNED
SHARES BEFORE BEFORE AFTER AFTER
UNDERLYING COMPLETION COMPLETION COMPLETION COMPLETION
SHARES DERIVATIVE OF THE OF THE OF THE OF THE
NAME OWNED(1) SECURITIES(2) MERGERS MERGERS(3) MERGERS MERGERS(3)
---- ---------- ------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
WORLD ACCESS COMMON STOCK
Apax Partners Co.(4)
Possaqtstrabe 11........... 11,457,631 -- 11,457,631 15.6% 11,457,631 9.1%
D-81679 Munchen
Germany
Armstrong International
Telecommunications,
Inc.(5).................... -- 15,162,015 15,162,015 17.1 15,162,015 10.8
One Armstrong Place
Butler, PA 16001
WorldCom Network Services,
Inc.(6).................... 7,081,444 -- 7,081,444 9.7 17,081,444 13.6
500 Clinton Center Drive
Clinton, MS 39056
The 1818 Fund III, L.P.(7)... -- 6,086,956 6,086,956 7.7 6,086,956 4.6
59 Wall Street
New York, NY 10005
Morgan Stanley & Co.
Incorporated(8)............ -- 5,685,111 5,685,111 7.2 5,685,111 4.3
1585 Broadway
New York, NY 10036
Roger B. Abbott(9)........... -- -- -- * 9,939,982 7.9
9999 Willow Creek Road
San Diego, CA 92131
Walter Anderson(10).......... -- -- -- * 7,691,817 6.1
Gold & Appel Transfer, S.A.
Omar Hodge Building
Wickhams City
Tortola, British V.I.
Walter J.
Burmeister+++(11).......... -- 1,135,694 1,135,694 1.5 1,135,694 *
Kirby J. Campbell+........... -- -- -- * -- *
Bryan Cipoletti+............. -- -- -- * -- *
Stephen J. Clearman+(12)..... 1,309,044 167,000 1,476,044 2.0 1,476,044 1.2
John P. Imlay, Jr.+.......... 59,900 179,000 238,900 * 238,900 *
John D. Phillips+++(13)...... 1,312,500 1,175,333 2,487,833 3.3 2,487,833 2.0
Massimo Prelz
Oltramonti+(14)............ 1,885,251 100,000 1,985,251 2.7 1,985,251 1.6
John P. Rigas+(15)........... 1,561,958 100,000 1,661,958 2.3 1,661,958 1.3
Carl E. Sanders+(16)......... 62,000 179,000 241,000 * 241,000 *
Dru A. Sedwick+.............. -- -- -- * -- *
Lawrence C. Tucker+(7)....... -- 6,186,956 6,186,956 7.8 6,186,956 4.7
W. Tod Chmar++............... 312,500 50,000 362,500 * 362,500 *
Mark A. Gergel++(17)......... 27,249 263,499 290,748 * 290,748 *
</TABLE>
222
<PAGE> 236
<TABLE>
<CAPTION>
TOTAL SHARES TOTAL SHARES
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
OWNED(1) OWNED OWNED(1) OWNED
SHARES BEFORE BEFORE AFTER AFTER
UNDERLYING COMPLETION COMPLETION COMPLETION COMPLETION
SHARES DERIVATIVE OF THE OF THE OF THE OF THE
NAME OWNED(1) SECURITIES(2) MERGERS MERGERS(3) MERGERS MERGERS(3)
---- ---------- ------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Mies++(17)........ 2,480 33,750 36,230 * 36,230 *
Bryan D. Yokley.............. -- -- -- * -- *
All directors and executive
officers as a group (15
persons)................... 6,532,882 9,570,232 16,103,114 19.4 15,977,444 11.9
</TABLE>
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK
<S> <C> <C> <C> <C> <C> <C>
The 1818 Fund III, L.P....... 70,000 -- 70,000 100.0 70,000 100.0
Lawrence C. Tucker........... 70,000 -- 70,000 100.0 70,000 100.0
SERIES C PREFERRED STOCK
Armstrong International
Telecommunications, Inc.... 309,002 -- 309,002 88.2 309,002 88.2
Walter J. Burmeister......... 19,161 -- 19,161 5.5 19,161 5.5
Juan Carlos Valls............ 19,161 -- 19,161 5.5 19,161 5.5
1530 Key Boulevard #306
Arlington, VA 22209
SERIES D PREFERRED STOCK
Morgan Stanley & Co.
Incorporated............... 102,332 -- 102,332 55.6 102,332 55.6
AIM High Yield Fund.......... 16,851 -- 16,851 9.1 16,851 9.1
11 Greenway Plaza, #1919
Houston, TX 77046
NETnet International S.A..... 14,800 -- 14,800 8.0 14,800 8.0
Siege Social; L-1611
41 Avenue de la Gare
R.C. Luxemburg B49615
Kemper High Yield Series..... 11,794 -- 11,794 6.4 11,794 6.4
222 South Riverside Plaza
Chicago, IL 60606
SERIES E PREFERRED STOCK
3i Group plc................. 6,760 -- 6,760 70.1 6,760 70.1
91 Waterloo Road
GB-SE 8XP London
England
David Marcus................. 1,659 -- 1,659 17.2 1,659 17.2
4, Chemin de Normandie
CH-1206 Geneva
Switzerland
Soditic SA................... 645 -- 645 6.7 645 6.7
118 Rue du Rhone
1204 Geneva
Switzerland
</TABLE>
---------------
* Less than one percent
+ Director
++ Named executive officer
223
<PAGE> 237
(1) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Securities Exchange Act. Unless otherwise noted, we believe that
all persons named in the table have sole voting and investment power with
respect to all shares of World Access common stock beneficially owned by
them.
(2) Unless otherwise indicated, represents shares which may be acquired by the
exercise of stock options and warrants on or before November 30, 2000.
(3) Shares of common stock subject to options, warrants and convertible
securities are deemed outstanding for the purpose of computing the
percentage ownership of the person holding such derivative securities, but
are not deemed outstanding for computing the percentage ownership of any
other person.
(4) Represents 3,676,995 shares of World Access common stock owned by Apax
Germany II, L.P., 2,570,778 shares owned by Apax Funds Nominees Ltd. fur
"B" Account, 3,849,888 shares owned by Apax Funds Nominees Ltd. fur "D"
Account and 1,359,970 shares owned by AP Vermogensverwaltung Gesellschaft
burgerlichen Rechts. Apax Partners Co., advisor to these funds, is deemed
to be the beneficial owner of these shares.
(5) Represents 15,162,015 shares of World Access common stock issuable upon the
conversion of 309,002 shares of Series C preferred stock.
(6) Includes 1,746,500 shares of World Access common stock held in escrow
pursuant to our acquisition of Cherry Communications Incorporated in
December 1998. This amount currently represents our best estimate of the
shares to ultimately be released to WorldCom Network Services, Inc., a
wholly owned subsidiary of WorldCom, Inc., upon the final resolution of all
creditor claims against Cherry Communications in U.S. Bankruptcy Court.
WorldCom Network Services directs the voting of these shares while they are
held in escrow. Also includes 10,000,000 shares to be issued to WorldCom in
connection with the consummation of the STAR and WorldxChange mergers.
WorldCom has agreed to exchange approximately $115.0 million of trade debt
currently due from STAR and WorldxChange for World Access common stock at
an exchange ratio of $11.50 per share.
(7) Includes 6,086,956 shares of World Access common stock issuable upon the
conversion of 70,000 shares of Series A preferred stock owned of record by
The 1818 Fund III, a private equity partnership. The general partner of the
1818 Fund III is Brown Brothers Harriman & Co. Mr. Tucker, a partner at
Brown Brothers Harriman & Co., is deemed to be the beneficial owner of
these shares due to his role as co-manager of The 1818 Fund III.
(8) Represents 5,685,111 shares of World Access common stock issuable upon the
conversion of 102,332 shares of Series D preferred stock.
(9) Represents 15,099,472 shares of WorldxChange common stock converted into
World Access common stock at .6583 per share. All WorldxChange shares,
other than (i) 1,000,000 shares as to which Mr. Abbott has sole voting
power pursuant to a voting trust agreement, (ii) 81,176 shares that are
held directly by Mr. Abbott, and (iii) 81,176 shares that are held directly
by Mr. Abbott's spouse, Rosalind Abbott, are jointly held by Mr. Abbott and
his spouse as community property.
(10) Represents 11,684,365 shares of WorldxChange common stock owned by Gold &
Appel, Transfer, S.A. converted into World Access common stock at .6583 per
share. Under a power of attorney from Gold & Appel, Walter Anderson has
sole investment power over these shares and as a result may be deemed to be
the beneficial owner of such shares. Mr. Anderson, however, disclaims
beneficial ownership of these shares.
(11) Includes 940,204 shares of World Access common stock issuable upon the
conversion of 19,161 shares of Series C preferred stock.
(12) Includes 1,211,982 shares of World Access common stock owned by Geocapital
V, L.P., 36,900 shares owned by Geocapital Advisors, L.P., and 7,952 shares
owned by Geocapital Investors V, L.P. Mr. Clearman, a general partner of
these partnerships, is deemed to be the beneficial owner of these shares.
224
<PAGE> 238
(13) Includes 787,500 shares of World Access common stock owned of record by
Resurgens Partners, LLC, of which Mr. Phillips has the sole voting and
dispositive power. Also includes 100,000 shares held in the name of Mr.
Phillips' wife as custodian for two of Mr. Phillips' minor children, with
respect to which Mr. Phillips disclaims beneficial ownership.
(14) Represents 1,443,887 shares of World Access common stock owned by Gilbert
Global Equity Partners, L.P. and 441,364 shares owned by Gilbert Global
Equity Partners (Bermuda), L.P. Mr. Prelz, a Managing Director of Gilbert
Global Equity Partners, L.P., is deemed to be the beneficial owner of these
shares.
(15) Includes 1,552,958 shares of World Access common stock owned by Zilkha
Capital Partners, L.P. Mr. Rigas, a Managing Partner of Zilkha Capital
Partners, L.P., is deemed to be the beneficial owner of these shares.
(16) Includes 2,000 shares of World Access common stock owned by Mr. Sanders'
wife, with respect to which Mr. Sanders disclaims beneficial ownership.
(17) Includes the following shares of World Access common stock acquired through
voluntary employee contributions to World Access' 401(k) Plan and
contributed to the 401(k) Plan under a matching contribution program
offered to all 401(k) Plan participants: Mr. Gergel -- 4,499 shares and Mr.
Mies -- 730 shares.
225
<PAGE> 239
EXECUTIVE OFFICERS OF WORLD ACCESS
INFORMATION REGARDING EXECUTIVE OFFICERS OF WORLD ACCESS
The information with respect to World Access' executive officers is set
forth in Item 4.5 of Part I of World Access' Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
On June 1, 2000 Bryan D. Yokley joined World Access as its Executive Vice
President and Chief Financial Officer and Mark A. Gergel was named World Access'
Executive Vice President of Corporate Development. Information concerning Mr.
Yokley is set forth in the following paragraph.
Bryan D. Yokley, 38, has served as World Access' Executive Vice President
and Chief Financial Officer since June 2000. He was a partner in the
international accounting firm of Ernst & Young LLP, prior to his employment with
World Access and had over 15 years of experience with Ernst & Young. Mr. Yokley
was a key partner in Ernst & Young's Southeast technology practice based in
Atlanta, and while at Ernst & Young, specialized in the telecommunications
industry. Mr. Yokley also served as a Practice Fellow at the Financial
Accounting Standards Board during 1995 to 1997.
WORLD ACCESS' EXECUTIVE COMPENSATION
Summary of Compensation. The following table sets forth the cash and
non-cash compensation World Access awarded or paid its named executive officers,
consisting of its Chief Executive Officer and its four most highly compensated
executive officers other than its Chief Executive Officer, during 1997, 1998 and
1999.
WORLD ACCESS' SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
---------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS (#) COMPENSATION ($)(6)
--------------------------- ---- -------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
John D. Phillips(1)................. 1999 $625,000 $1,000,000 1,267,000 $ --
Chairman and Chief Executive 1998 26,000 -- 50,000 --
Officer 1997 -- -- 50,000 --
W. Tod Chmar(2)..................... 1999 300,000 300,000 175,000 --
Executive Vice 1998 9,800 -- -- --
President and Secretary 1997 -- -- -- --
Mark A. Gergel(3)................... 1999 300,000 210,000 90,000 5,000
Executive Vice President and 1998 168,100 -- -- 4,200
Chief Financial Officer 1997 97,500 115,000 216,000 28,000
A. Lindsay Wallace(4)............... 1999 270,000 -- 160,000 36,500
President of World Access 1998 160,400 65,000 70,000 4,200
Equipment Group 1997 -- -- -- --
Michael F. Mies(5).................. 1999 150,000 45,000 50,000 5,000
Senior Vice President 1998 101,000 30,000 -- --
of Finance and Treasurer 1997 -- -- 42,500 21,500
</TABLE>
---------------
(1) Mr. Phillips joined World Access' board in December 1994, was appointed its
Chief Executive Officer in December 1998 and its Chairman in May 1999. Under
the Directors' Warrant Incentive Plan, Mr. Phillips was granted warrants to
purchase 50,000 shares of World Access common stock at $9.21 per share and
50,000 shares of common stock at $25.85 per share in 1997 and 1998,
respectively. These warrants were fully vested as of December 31, 1999.
(2) Mr. Chmar joined World Access as Executive Vice President and Secretary in
December 1998.
(3) During 1997, Mr. Gergel was paid a flat sum allowance of $25,000 for the
relocation of his household to Atlanta, Georgia.
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(4) Mr. Wallace joined World Access in February 1998 in connection with World
Access' acquisition of a majority interest in NACT Telecommunications, Inc.
During 1999, Mr. Wallace was paid $31,500 to reimburse him for costs
incurred in the relocation of his household to Atlanta, Georgia.
(5) During 1997, Mr. Mies was paid a flat sum allowance of $21,500 for the
relocation of his household to Atlanta, Georgia.
(6) Except as noted above, All Other Compensation represents matching
contributions that World Access provides to all eligible employees under its
401(k) benefit plan.
WORLD ACCESS OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the grant of stock
options to the named executive officers during 1999.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE ($) AT ASSUMED
-------------------------------------- ANNUAL RATES OF
NUMBER OF % OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John D. Phillips(1).......... 750,000 10.6% $12.75 1/12/04 $8,077,500 $11,842,500
250,000 3.5 12.75 4/16/04 2,767,500 4,127,500
17,000 .2 11.69 6/16/04 209,600 307,000
250,000 3.5 15.88 11/29/04 2,160,000 3,782,500
W. Tod Chmar(2).............. 100,000 1.4 8.19 2/12/04 1,543,000 2,059,000
75,000 1.1 15.88 11/29/04 648,000 1,134,700
Mark A. Gergel(2)............ 40,000 .6 11.69 6/16/04 493,200 722,400
50,000 .7 15.88 11/29/04 432,000 756,500
A. Lindsay Wallace(3)........ 130,000 1.8 12.75 1/12/04 1,400,100 2,052,700
30,000 .4 11.69 6/16/04 369,900 541,800
Michael F. Mies(3)........... 37,500 .5 8.19 2/12/04 578,600 772,100
12,500 .2 11.69 6/16/04 154,100 225,800
</TABLE>
---------------
(1) The 750,000 and 250,000 options granted to Mr. Phillips at $12.75 per share
were originally scheduled to vest over a four-year period. In connection
with Mr. Phillips' execution of a letter agreement with Armstrong
International Telecommunications, Inc. (see "Executive Employment
Agreements"), World Access' board elected to vest all these options in full
upon the consummation of its merger with FaciliCom in December 1999. The
17,000 options vested immediately upon issuance, and the other 250,000 of
options will vest one-third on each of the first three anniversaries from
date of grant.
(2) The first option grant indicated will vest 25% on each of the first four
anniversaries from date of grant and the second grant will vest one-third on
each of the first three anniversaries from date of grant.
(3) All options granted will vest 25% on each of the first four anniversaries
from date of grant.
(4) The 5% and 10% appreciation rates are set forth in the Securities and
Exchange Commission rules and no representation is made that common stock
will appreciate at these assumed rates or at all.
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WORLD ACCESS' AGGREGATED OPTION AND WARRANT EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value of director
warrants and employee options exercised by the World Access named executive
officers during 1999 and the value at December 31, 1999 of unexercised warrants
and options held by each such officer. The value of unexercised warrants and
options reflects the increase in market value of World Access' common stock from
the date of grant through December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY(2)
NUMBER OF WARRANTS AND OPTIONS WARRANTS AND OPTIONS
SHARES AT 12-31-99 AT 12-31-99
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Phillips -- $ -- 1,117,000 250,000 $7,130,500 $ 842,500
W. Tod Chmar -- -- -- 175,000 -- 1,358,700
Mark A. Gergel 10,125 107,500 237,500 156,000 1,038,400 470,900
A. Lindsay Wallace -- -- 122,380 212,500 712,700 1,071,800
Michael F. Mies -- -- 17,500 71,250 37,800 582,700
</TABLE>
---------------
(1) The "value realized" represents the difference between the exercise price of
the shares and the market price of the shares on the date the warrants and
options were exercised. The value realized was determined without
considering any taxes which may have been owed.
(2) "In-the-Money" warrants and options have an exercise price less than $19.25
per share, the closing price of the World Access common stock as of December
31, 1999.
WORLD ACCESS' EXECUTIVE EMPLOYMENT AGREEMENTS
On April 16, 1999, World Access entered into new employment agreements with
each of John D. Phillips, its Chairman and Chief Executive Officer, W. Tod
Chmar, its Executive Vice President and Secretary, and Mark A. Gergel, its
Executive Vice President. On June 1, 2000, World Access entered into an
employment agreement with Bryan D. Yokley, its Executive Vice President and
Chief Financial Officer. Mr. Phillips' employment agreement provides for a base
salary of $625,000 per year. The agreement further provides that Mr. Phillips
may be awarded an annual bonus in the discretion of the World Access board
pursuant to a bonus or incentive plan or otherwise. The initial term of the
agreement is three years, with an automatic one-year extension on each
anniversary of the agreement's effective date unless either party to the
agreement gives notice of termination. If, during the term of the agreement, Mr.
Phillips' employment with World Access is terminated (i) by World Access without
cause, as defined below, or (ii) by Mr. Phillips for good reason, as defined
below, Mr. Phillips will be entitled to an amount in cash equal to two times his
base annual salary, which will be paid in bi-weekly installments over a period
of 24 months, and to his then current life insurance, disability, medical,
dental and hospitalization benefits for a period of 24 months or such longer
period as may be provided by the terms of the appropriate program, all of Mr.
Phillips' stock options, warrants and stock appreciation rights granted on or
prior to the date of his employment agreement shall become fully vested and
immediately exercisable until the first anniversary of Mr. Phillips' termination
date, and all performance units granted to Mr. Phillips at any time prior to his
termination shall become fully vested.
Mr. Chmar's employment agreement provides for a base salary of $300,000 per
year. The agreement further provides that Mr. Chmar may be awarded an annual
bonus in the discretion of the World Access board pursuant to a bonus or
incentive plan or otherwise. The initial term of the agreement is three years,
with an automatic one-year extension on each anniversary of the agreement's
effective date unless either party to the agreement gives notice of termination.
If, during the term of the agreement, Mr. Chmar's employment with World Access
is terminated (i) by World Access without cause or (ii) by Mr. Chmar for good
reason, Mr. Chmar will be entitled to an amount in cash equal to his base annual
salary, which will be paid in bi-weekly installments over a period of 12 months,
and to his then current life insurance, disability, medical, dental and
hospitalization benefits for a period of 12 months or such longer period as
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<PAGE> 242
may be provided by the terms of the appropriate program, all of Mr. Chmar's
stock options, warrants and stock appreciation rights granted on or prior to the
date of his employment agreement shall become fully vested and immediately
exercisable until the first anniversary of Mr. Chmar's termination date, and all
performance units granted to Mr. Chmar at any time prior to his termination
shall become fully vested.
Mr. Gergel's employment agreement provides for a base salary of $300,000
per year. The agreement further provides that Mr. Gergel may be awarded an
annual bonus in the discretion of our board pursuant to a bonus or incentive
plan or otherwise. The initial term of the agreement is three years, with an
automatic one-year extension on each anniversary of the agreement's effective
date unless either party to the agreement gives notice of termination. If,
during the term of the agreement, Mr. Gergel's employment with World Access is
terminated (i) by World Access without cause or (ii) by Mr. Gergel for good
reason following a change of control, Mr. Gergel will be entitled to an amount
in cash equal to his base annual salary, which will be paid in bi-weekly
installments over a period of 12 months, and to his then current life insurance,
disability, medical, dental and hospitalization benefits for a period of 12
months or such longer period as may be provided by the terms of the appropriate
program, all of Mr. Gergel's stock options, warrants and stock appreciation
rights granted on or prior to the date of his employment agreement shall become
fully vested and immediately exercisable until the first anniversary of Mr.
Gergel's termination date, and all performance units granted to Mr. Gergel at
any time prior to his termination shall become fully vested. Notwithstanding
these provisions, if Mr. Gergel terminates his employment for any reason, in
addition to receiving the same treatment with respect to his options, warrants,
rights and performance units, he shall be entitled to an amount of cash equal to
one-half of his base annual salary and the benefits described above for a period
of six months.
Mr. Yokley's employment agreement provides for a base salary of $300,000
per year. The agreement further provides that Mr. Yokley will be paid a signing
bonus equal to the costs he incurred to leave his previous job and may be
awarded an annual bonus in the discretion of the World Access board pursuant to
a bonus or incentive plan or otherwise. The initial term of the agreement is
three years, with an automatic one-year extension on each anniversary of the
agreement's effective date unless either party to the agreement gives notice of
termination. This notwithstanding, the term of Mr. Yokley's agreement cannot
expire until 24 months after a change in control of World Access as defined in
the agreement. If, during the term of the agreement, Mr. Yokley's employment
with World Access is terminated (i) by World Access without cause or (ii) by Mr.
Yokley for good reason, Mr. Yokley will be entitled to an amount in cash equal
to two times his base annual salary, which will be paid in bi-weekly
installments over a period of 12 months, and to his then current life insurance,
disability, medical, dental and hospitalization benefits for a period of 12
months or such longer period as may be provided by the terms of the appropriate
program, all of Mr. Yokley's stock options, warrants and stock appreciation
rights granted on or prior to the date of his employment agreement which have
vested or which would vest in the two years following Mr. Yokley's termination
date shall become fully vested and immediately exercisable until the first
anniversary of Mr. Yokley's termination date, and all performance units granted
to Mr. Yokley at any time prior to his termination shall become fully vested.
For the purposes of the employment agreements with each of Messrs.
Phillips, Chmar, Gergel and Yokley the following definitions apply:
A termination of employment is for cause if the employee has been convicted
of a felony or a felony prosecution has been brought against the employee or if
the termination is evidenced by a resolution adopted in good faith by two-thirds
(2/3) of the board that the employee (i) intentionally and continually failed
substantially to perform his reasonably assigned duties, other than a failure
resulting from the employee's incapacity due to physical or mental illness or
from the employee's assignment of duties that would constitute good reason,
which failure continued for a period of at least 30 days after a written notice
of demand for substantial performance has been delivered to the employee
specifying the manner in which the employee has failed substantially to perform
or (ii) intentionally engaged in illegal conduct or gross misconduct which
results in material economic harm to World Access.
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<PAGE> 243
Good reason means a good faith determination by the employee that any one
or more of the following events has occurred, without the employee's express
written consent:
- the assignment to the employee of any duties inconsistent with the
employee's position, authority, duties or responsibilities as in effect
immediately prior to the date of his employment agreement, or any other
action by World Access that results in a material diminution in such
position, authority, duties or responsibilities;
- a reduction by World Access in the employee's base salary, or a change in
the eligibility requirements or performance criteria under any bonus,
incentive or compensation plan, program or arrangement under which the
employee is covered immediately prior to his termination date which
adversely affects the employee;
- any failure to pay the employee any compensation or benefits to which he
is entitled within five days of the date due;
- World Access' requiring the employee to be based anywhere other than
within 50 miles of the employee's job location as of the date of his
employment agreement, except for reasonably required travel on World
Access' business which is not greater than such travel requirements prior
to the date of his employment;
- the taking of any action by World Access that would materially adversely
affect the physical conditions existing in or under which the employee
performs his employment duties;
- the insolvency or the filing of a petition for bankruptcy by World
Access;
- any purported termination of the employee's employment for cause by World
Access which does not comply with his terms of his employment agreement;
or
- any breach by World Access of any provision of an employment agreement.
A change in control shall have occurred if:
- a majority of the directors of World Access shall be persons other than
persons:
- for whose election proxies shall have been solicited by the board; or
- who are then serving as directors appointed by the board to fill
vacancies on the board caused by death or resignation, but not by
removal, or to fill newly-created directorships;
- a majority of the outstanding voting power of World Access shall have
been acquired or beneficially owned by any person (other than World
Access, a subsidiary of World Access or the employee) or any two or more
persons acting as a partnership, limited partnership, syndicate, or other
group acting in concert for the purpose of acquiring, holding or
disposing of voting stock of World Access, which group does not include
the employee; or
- there shall have occurred:
- a merger or consolidation of World Access with or into another
corporation other than (1) a merger or consolidation with a subsidiary
of World Access or (2) a merger or consolidation in which (a) the
holders of voting stock of World Access immediately prior to the merger
as a class continue to hold immediately after the merger at least a
majority of all outstanding voting power of the surviving or resulting
corporation or its parent and (b) all holders of each outstanding class
or series of voting stock of World Access immediately prior to the
merger or consolidation have the right to receive substantially the same
cash, securities or other property in exchange for their voting stock of
World Access as all other holders of the class or series;
- a statutory exchange of shares of one or more classes or series of
outstanding voting stock of World Access for cash, securities or other
property;
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<PAGE> 244
- the sale or other disposition of all or substantially all of the assets
of World Access, in one transaction or a series or transactions; or
- the liquidation or dissolution of World Access; unless more than 25% of
the voting stock, or the voting equity interest, of the surviving
corporation or the corporation or other entity acquiring all or
substantially all of the assets of World Access in the case of a merger,
consolidation or disposition of assets or of World Access or its
resulting parent corporation in the case of a statutory share exchange
is beneficially owned by the employee or a group that includes the
employee.
John D. Phillips and Armstrong International Telecommunications, Inc. have
entered into a letter agreement, pursuant to which Mr. Phillips has agreed not
to sell or transfer, directly or indirectly, any shares of World Access common
stock held by him without the prior written consent of Armstrong International
Telecommunications for so long as Armstrong International Telecommunications or
any of its affiliates remains a stockholder of World Access. The provisions of
the letter agreement terminate upon:
- Mr. Phillips' death or disability;
- any decision to remove, or to not reelect, Mr. Phillips as the Chief
Executive Officer of World Access in which at least 50% of the directors
elected by the holders of World Access Series C preferred stock vote in
favor of the removal or fail to vote in favor of the reelection;
- the fifth anniversary of the closing of our merger with FaciliCom in the
event that Mr. Phillips is no longer Chief Executive Officer of World
Access for any reason; and
- upon a change of control of World Access.
On November 29, 1999, we entered into an agreement with A. Lindsay Wallace,
President of our Equipment Group, that provides incentive compensation for Mr.
Wallace in the event of the sale of specified divisions of our Equipment Group.
This agreement provides that World Access will pay to Mr. Wallace:
- a cash payment equal to 0.75% of the gross consideration received by
World Access upon the sale of the NACT Switching Division;
- a cash payment equal to 0.75% of the gross consideration received by
World Access upon the sale of the Wireless Local Loop Division; and
- 0.5% of the gross consideration received by World Access upon the sale of
the Telco Systems Division.
This agreement also provides that all stock options granted to Mr. Wallace
under our 1991 Stock Option Plan and 1998 Incentive Equity Plan will become
fully vested upon the sale of the NACT Switching Division and the Telco Systems
Division, and those options may be exercised by Mr. Wallace at any time until
the one year anniversary of the termination of Mr. Wallace's employment with
World Access. Additionally, this agreement states that if Mr. Wallace's
employment with World Access is terminated as a direct result of the sale of one
of these divisions, World Access will continue to pay Mr. Wallace's current base
salary through the second anniversary of his termination date. World Access'
obligations under this agreement are conditioned upon Mr. Wallace remaining the
President of the Equipment Group through the closing of the sales of these
divisions, his assistance in facilitating these sales and his agreement to serve
as a full-time employee or consultant with the buyer of these divisions for a
period of six months following the closing date. This agreement may be revoked
at any time by the Chief Executive Officer of World Access, in his sole
discretion.
WORLD ACCESS' COMPENSATION COMMITTEE REPORT
This report sets forth information on the compensation and benefits
provided to World Access' Chief Executive Officer and other executive officers
of World Access during 1999 and has been prepared by the Compensation Committee
of World Access' board of directors.
Compensation philosophy. The Compensation Committee is currently comprised
of four non-employee directors. Among other things, the Compensation Committee
reviews and approves annual
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<PAGE> 245
executive officer compensation. In general, the compensation policies adopted by
the Compensation Committee are designed to (i) attract and retain executives
capable of leading World Access to meet its business objectives and (ii)
motivate World Access executives to enhance long-term stockholder value.
The annual compensation of Mr. Phillips, our Chairman and Chief Executive
Officer, and our other executive officers consists of a combination of base
salary, incentive bonuses and stock options. The Compensation Committee sets
base salaries for executive officers based principally on an assessment of World
Access' short and long-term goals and the specific responsibilities of each
officer. Information on individual performance is provided to the Compensation
Committee by our Chief Executive Officer. In addition to individual performance
against goals and responsibilities, the Compensation Committee is aware of
executive compensation practices at comparable companies, for example, companies
which are generally of the same size in related industries. The Compensation
Committee uses this information only as a general reference, however, and not to
set specific salary amounts.
Incentive bonuses. Annually, the Compensation Committee establishes the
performance goals and range of bonuses under our Short-Term Incentive Plan for
Senior Executives which was approved by our stockholders in June 1999. The
performance goals for 1999 were tied to World Access achieving predefined levels
of:
- earnings per share;
- revenue;
- earnings before interest, taxes, depreciation and amortization; and
- common stock price appreciation. Each performance goal operates
independently, so achieving or failing to achieve results from one
measurement does not reflect the eligible bonus amounts awarded for
others.
Stock options. The stock option program is a long-term incentive plan for
executive officers and other key employees. The objectives of the program are to
align executive and stockholder long-term interests by creating a strong and
direct relationship between executive compensation and stockholder returns. The
Compensation Committee strongly believes that by providing those individuals who
have substantial responsibility for the management and growth of World Access
and the maximizing of stockholder returns with an opportunity to increase their
ownership of common stock, the best interests of stockholders and executives
will be more closely aligned. World Access stock options typically vest over
three to four years, which increases the long-term value of these awards.
The Compensation Committee's determination of the number of options to
award to an individual executive officer is made in a manner similar to that
described above with respect to the setting of salaries. In addition, in
determining the number of options to be granted to an individual, the
Compensation Committee takes into account the number of options already granted
to that individual and the value of those options.
Discussion of 1999 Chief Executive Officer compensation. Based on our
actual performance against Short-Term Incentive Plan goals in 1999, as well as
Mr. Phillips' ability to complete several key strategic initiatives during the
year, the Compensation Committee awarded Mr. Phillips an incentive bonus of $1.0
million. Key strategic initiatives completed by Mr. Phillips included:
- $50.0 million investment by The 1818 Fund III;
- acquisition of Comm/Net;
- FaciliCom merger;
- $75.0 million private placement by institutional investors;
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<PAGE> 246
- pending acquisition of Long Distance International; and
- pending monetization of the Company's equipment businesses. The
Compensation Committee also considered Mr. Phillips' continued progress
in establishing a broad, experienced management team, the efficient
integration of acquired businesses and the significant increase in the
Company's market capitalization during 1999.
Submitted by the Compensation
Committee
Stephen J. Clearman
John P. Imlay, Jr.
Carl E. Sanders
Dru A. Sedwick
WORLD ACCESS' COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
World Access' Compensation Committee consists of the four persons named as
signatories to the Compensation Committee Report above. There are no
Compensation Committee interlocks.
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<PAGE> 247
WORLD ACCESS STOCK PRICE PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
World Access common stock with the cumulative total return, including reinvested
dividends, of the Nasdaq National Market -- United States owned companies and
Nasdaq Telecommunications Stocks for the five years ended December 31, 1999. The
Nasdaq National Market total returns were prepared by the Center for Research in
Security Prices at the University of Chicago.
<TABLE>
<CAPTION>
WORLD ACCESS NASDAQ (U.S.) NASDAQ (TELCOM)
------------ ------------- ---------------
<S> <C> <C> <C>
1994 100.00 100.00 100.00
1995 300.00 141.33 130.91
1996 320.00 173.89 133.86
1997 955.00 213.07 195.75
1998 855.00 300.25 322.30
1999 770.00 542.43 561.27
</TABLE>
---------------
Assumes that the value of the investment in the World Access common stock and
each index was $100 on December 31, 1994, and that all dividends were
reinvested.
(1) World Access common stock
(2) Total Return Index for The Nasdaq Stock Market (U.S. Companies)
(3) Total Return Index for Nasdaq Telecommunications Stocks
Pursuant to Securities and Exchange Commission regulations, this
performance graph is not "soliciting material," is not deemed filed with the
Commission and is not to be incorporated by reference in any of World Access'
filings under the Securities Act or the Securities Exchange Act.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires World Access' directors and
executive officers, and persons who own beneficially more than ten percent of a
registered class of World Access' equity securities, to file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in
ownership of World Access' securities. Directors, executive officers and greater
than ten-percent stockholders are required by Commission regulations to furnish
World Access with copies of all Section 16(a) reports they file.
To the best of World Access' knowledge, based solely on review of the
copies of such reports furnished to it and representations that no other reports
were required, all Section 16(a) filing requirements applicable to World Access'
directors, executive officers and greater than ten-percent beneficial owners
were complied with during the 1999 fiscal year, except for Mr. Phillips, whose
Annual
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<PAGE> 248
Statement of Changes in Beneficial Ownership on Form 5 was not filed timely. Mr.
Phillips was required to file a Form 5 to reflect shares of World Access common
stock that he gifted to his children in December 1999.
RELATIONSHIPS AND RELATED TRANSACTIONS WITH WORLD ACCESS' DIRECTORS, OFFICERS
AND STOCKHOLDERS
During 1999, World Access paid aggregate fees of approximately $215,900 to
JDP Aircraft II, Inc. for charter flight services provided to World Access. John
D. Phillips, World Access' Chairman and Chief Executive Officer, is the sole
shareholder and an officer of JDP Aircraft II.
In April 1999, World Access issued 50,000 shares of Series C preferred
stock to The 1818 Fund III for consideration of $50.0 million. Lawrence C.
Tucker, one of World Access' directors, is a co-manager of The 1818 Fund III.
World Access paid Brown Brothers Harriman & Co. $750,000 for advisory
services in connection with a $75.0 million private placement of World Access
common stock in December 1999 and $830,000 for advisory services in connection
with an $83.1 million private placement of World Access common stock in February
2000. Additionally, World Access paid Brown Brothers Harriman & Co.
approximately $1.6 million for advisory services in connection with the sale of
Telco Systems, Inc. in April 2000. Mr. Tucker is a General Partner of Brown
Brothers Harriman.
FaciliCom, with which World Access merged in December 1999, has
historically relied on its majority stockholder, Armstrong Holdings, Inc. for
the performance of services, including customer billing. In connection with the
FaciliCom merger, an affiliate of Armstrong Holdings received 309,002 shares of
World Access' Series C preferred stock, which represented approximately 20.0% of
World Access' voting common stock at December 31, 1999. In December 1999, World
Access entered into a two-year services agreement with Armstrong Holdings. The
terms of the agreement includes professional services billed at hourly rates and
data center services based on usage and disk storage space. World Access
believes that the terms of the agreements are competitive with similar services
offered in the industry.
In December 1999, World Access sold 4,713,128 shares of restricted common
stock for $75.0 million, or $15.91 per share, in a private transaction with a
group of institutional and sophisticated investors. Entities affiliated with
Geocapital Partners, entities affiliated with Gilbert Global Equity Partners,
and Zilkha Capital Partners were the purchasers of $20.0 million, $30.0 million,
and $13.0 million of World Access common stock, respectively, in this
transaction. Stephen J. Clearman, a general partner of Geocapital Partners,
Massimo Prelz Oltramonti, a Managing Director of Gilbert Global Equity Partners,
and John P. Rigas, a Managing Partner of Zilkha Capital Partners, are members of
the World Access board of directors.
ACCOUNTANTS
The World Access board has appointed Ernst & Young LLP, independent public
accountants, as independent accountants for World Access for the fiscal year
ending December 31, 2000. Representatives of Ernst & Young LLP are expected to
be present at the World Access special meeting, will have an opportunity to make
a statement if they so desire and will be available to respond to appropriate
questions from stockholders.
On December 22, 1998, World Access engaged Ernst & Young LLP as the
certifying accountants and dismissed PricewaterhouseCoopers LLP. The World
Access board approved this change in accountants. World Access had no
disagreements with its former accountant on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
which disagreement(s), if not resolved to the satisfaction of the former
accountant, would have caused them to make reference to the subject matter of
the disagreement(s) in connection with their reports during each of the two
years in the period ended December 31, 1997 and from January 1, 1998 to December
22, 1998 and such accountants' report on the financial statements for each of
the past two years did not contain an adverse opinion or
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<PAGE> 249
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedules included in our Annual Report on Form 10-K/A,
Amendment No. 2, for the years ended December 31, 1999 and 1998, as set forth in
their report, which is incorporated by reference in this joint proxy
statement/prospectus and elsewhere in the registration statement. Our
consolidated financial statements and schedules are incorporated by reference in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
The financial statements of World Access for the year ended December 31,
1997 incorporated in this joint proxy statement/prospectus by reference to the
Annual Report on Form 10-K/A, Amendment No. 2, of World Access for the year
ended December 31, 1999 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, dated March 5, 1998, except
for the discontinued operations described in Note C, which are as of March 14,
2000, given on the authority of that firm as experts in auditing and accounting.
The consolidated financial statements of FaciliCom International, Inc. and
subsidiaries incorporated in this World Access joint proxy statement/prospectus
by reference to the World Access Current Report on Form 8-K dated December 22,
1999, as amended, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is also incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
Ernst & Young LLP, independent certified public accountants, have audited
the consolidated financial statements of Long Distance International, Inc. at
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, as set forth in their report, which is incorporated by
reference in this joint proxy statement/prospectus and elsewhere in the
registration statement. The Long Distance International, Inc. financial
statements are incorporated by reference in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The consolidated financial statements of STAR incorporated in this joint
proxy statement/prospectus by reference to STAR's Form 10-K/A, Amendment No. 1
for the year ended December 31, 1999, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report dated April 14,
2000 with respect thereto, which is also incorporated by reference into this
joint proxy statement/prospectus, and are so incorporated in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of WorldxChange at September 30, 1999 and 1998, and for
each of the three years in the period ended September 30, 1999, as set forth in
their report. The WorldxChange financial statements are included in the joint
proxy statement/prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
BDO Deutsche Warentreuhand, independent auditors, have audited the
consolidated financial statements of TelDaFax AG at December 31, 1999 and 1998,
and for each of the three years in the period ended December 31, 1999, as set
forth in their report. The TelDaFax financial statements are included in the
joint proxy statement/prospectus and elsewhere in the registration statement in
reliance on BDO Deutsche Warentreuhand's report, given on their authority as
experts in accounting and auditing.
WORLD ACCESS STOCKHOLDER PROPOSALS
Proposals of World Access stockholders submitted pursuant to Rule 14a-8 of
the Exchange Act for inclusion in the proxy statement for the 2001 annual
meeting of stockholders of World Access must be
236
<PAGE> 250
received by World Access at its principal executive offices at 945 E. Paces
Ferry Road, Suite 2200, Atlanta, Georgia 30326 a reasonable time before World
Access begins to print and mail the proxy materials for its 2001 annual meeting
of stockholders.
Under the World Access amended certificate of incorporation, stockholders
desiring to nominate persons for election as directors at an annual meeting must
notify the Secretary of World Access in writing not less than 120 calendar days
in advance of the date which is one year later than the date of World Access
proxy statement released to stockholders in connection with the previous year's
annual meeting of stockholders; provided, however, that if no annual meeting of
stockholders was held in the previous year or if the date of the forthcoming
annual meeting of stockholders has been changed by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement or
if the forthcoming meeting is not an annual meeting of stockholders, then to be
timely the stockholders' notice must be so received not later than the close of
business on the tenth day following the earlier of:
- the day on which notice of the date of the forthcoming meeting was mailed
or given to stockholders by or on behalf of World Access or
- the day on which public disclosure of the date of the forthcoming meeting
was made by or on behalf of World Access.
Any such stockholders' notices must contain the specific information set
forth in the World Access amended certificate of incorporation. Stockholders
will be furnished a copy of the World Access amended certificate of
incorporation without charge upon written request to the Secretary of World
Access.
STAR STOCKHOLDER PROPOSALS
Proposals of STAR stockholders submitted pursuant to Rule 14a-8 of the
Exchange Act for inclusion in the proxy statement for the 2000 annual meeting of
stockholders of STAR must be received by STAR at its principal executive offices
at 223 East De La Guerra Street, Santa Barbara, California 93101 a reasonable
time before STAR begins to print and mail the proxy materials for its 2000
annual meeting of stockholders.
OTHER MATTERS THAT MAY COME BEFORE THE WORLD ACCESS SPECIAL MEETING
The World Access board does not know of any other matters which may come
before the World Access special meeting. If any other matters are properly
presented at the World Access special meeting, it is the intention of the
persons named in the accompanying proxy to vote, or otherwise act, in accordance
with their best judgement on the matters.
OTHER MATTERS THAT MAY COME BEFORE THE STAR SPECIAL MEETING
The STAR board does not know of any other matters which may come before the
STAR special meeting. If any other matters are properly presented at the STAR
special meeting, it is the intention of the persons named in the accompanying
proxy to vote, or otherwise act, in accordance with their best judgement on the
matters.
LEGAL MATTERS
The legality of the World Access common stock offered by this joint proxy
statement/prospectus, including the material federal income tax consequences of
the mergers, will be passed upon for World Access by Long Aldridge & Norman LLP,
Atlanta, Georgia. LAN Equities Partnership, L.P., an affiliate of Long Aldridge
& Norman LLP, is the owner of 106,953 shares of World Access common stock issued
to Long Aldridge as payment for legal fees incurred from time to time. Riordan &
McKinzie, a Professional Corporation, Los Angeles, California, will opine on
matters with respect to the STAR merger for STAR, including STAR's corporate
existence and good standing and other matters as may be reasonably requested by
World Access. With respect to certain matters concerning Delaware law, STAR will
rely on Richards, Layton & Finger, a Professional Corporation, Wilmington,
Delaware.
237
<PAGE> 251
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE
COMMUNICATIONS
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 2000 (Unaudited),
September 30, 1999 and 1998............................... F-3
Consolidated Statements of Operations for the nine months
ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and
each of the three years in the period ended September 30,
1999...................................................... F-4
Consolidated Statements of Shareholders' Deficit and
Comprehensive Income/Loss for the nine months ended June
30, 2000 (Unaudited) and each of the three years in the
period ended September 30, 1999........................... F-5
Consolidated Statements of Cash Flows for the nine months
ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and
each of the three years in the period ended September 30,
1999...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
TELDAFAX AG
Independent Auditors' Report................................ F-28
Consolidated Balance Sheets as of June 30, 2000 (Unaudited),
December 31, 1999 and 1998................................ F-29
Consolidated Statements of Operations for the six months
ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and
each of the three years in the period ended December 31,
1999...................................................... F-30
Consolidated Statements of Shareholders' Deficit and
Comprehensive of Changes in Combined Equity Shareholder's
Funds for the six months ended June 30, 2000 (Unaudited)
and each of the three years in the period ended December
31, 1999.................................................. F-31
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and
each of the three years in the period ended December 31,
1999...................................................... F-32
Notes to the Consolidated Financial Statements.............. F-33
</TABLE>
F-1
<PAGE> 252
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Communications Telesystems International d.b.a.
WorldxChange Communications
We have audited the consolidated balance sheets of Communications
Telesystems International d.b.a. WorldxChange Communications as of September 30,
1999 and 1998, and the related consolidated statements of operations,
shareholders' deficit, and cash flows for each of the three years in the period
ended September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
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
Communications Telesystems International d.b.a. WorldxChange Communications at
September 30, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1999, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Diego, California
December 10, 1999,
except for the fourth paragraph of
Note 5 and the sixth paragraph of
Note 13 as to which the date is
May 22, 2000
F-2
<PAGE> 253
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
----------- --------------------
2000 1999 1998
----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,913 $ 38,030 $ 20,917
Accounts receivable, net of allowance of $14,173 at June
30, 2000 (unaudited) and $9,590 and $10,690 at September
30, 1999 and 1998, respectively......................... 103,172 54,991 38,966
Prepaid expenses and other current assets................. 32,566 8,224 3,825
--------- --------- --------
Total current assets............................... 142,651 101,245 63,708
Equipment and leasehold improvements, net................... 193,494 114,765 49,697
Intangible assets........................................... 90,162 12,194 --
Other assets................................................ 4,105 6,798 6,724
--------- --------- --------
Total assets....................................... $ 430,412 $ 235,002 $120,129
========= ========= ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accrued network costs..................................... $ 174,830 $ 83,993 $ 49,796
Accounts payable.......................................... 23,682 13,770 14,144
Other accrued liabilities................................. 44,758 16,333 15,377
Payable to related parties................................ 2,396 -- 468
Deferred revenue.......................................... 2,493 3,941 686
Current portion of long-term debt and subordinated
debentures.............................................. 187,020 9,799 13,421
Current portion of capital lease obligations.............. 14,805 10,582 6,851
--------- --------- --------
Total current liabilities.......................... 449,984 138,418 100,743
Long-term debt.............................................. 38,447 100,324 75,287
Subordinated debentures..................................... -- -- 1,182
Capital lease obligations................................... 32,382 29,395 22,844
Other long-term liabilities................................. 5,547 1,918 2,397
--------- --------- --------
Total liabilities.................................. 526,360 270,055 202,453
Minority interest........................................... -- -- 7,269
Shareholders' deficit:
Preferred Stock, no par value; Authorized
shares -- 10,000,000:
Series A Cumulative Preferred Stock; Issued and
outstanding 30,000 at June 30, 2000 (unaudited) and
September 30, 1999, and 23 at September 30, 1998;
liquidation preference of $1,000 per share............ 30,000 30,000 7
Series B Cumulative Preferred Stock; Issued and
outstanding -- zero at June 30, 2000 (unaudited) and
zero at September 30, 1999 and 1998; liquidation
preference of $1,000 per share........................ -- -- --
Common Stock, no par value; Authorized
shares -- 100,000,000, Issued and outstanding 42,613,954
at June 30, 2000 (unaudited), 36,965,911 at September
30, 1999 and 28,576,552 at September 30, 1998........... 148,056 99,047 10,297
Notes receivable from shareholders........................ (1,937) (1,474) --
Accumulated other comprehensive loss...................... (12,900) (2,405) (3,529)
Accumulated deficit....................................... (259,167) (160,221) (96,368)
--------- --------- --------
Total shareholders' deficit........................ (95,948) (35,053) (89,593)
--------- --------- --------
Total liabilities and shareholders' deficit........ $ 430,412 $ 235,002 $120,129
========= ========= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 254
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEARS ENDED SEPTEMBER 30,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $423,913 $304,324 $421,580 $398,867 $331,660
Operating expenses:
Cost of services (exclusive of
depreciation and amortization shown
separately below)...................... 337,814 238,599 328,334 287,312 235,027
Selling, general and administrative....... 124,014 88,431 124,112 114,897 113,459
Depreciation and amortization............. 35,131 12,394 17,705 12,332 8,677
-------- -------- -------- -------- --------
Total operating expenses.......... 496,959 339,424 470,151 414,541 357,163
Operating loss.............................. (73,046) (35,100) (48,571) (15,674) (25,503)
Interest expense............................ 22,694 12,448 16,883 11,947 8,682
Other expense, net.......................... 822 222 648 1,378 3,366
-------- -------- -------- -------- --------
Loss before minority interest............... (96,562) (47,770) (66,102) (28,999) (37,551)
Minority interest........................... -- (1,782) 2,251 1,546 473
-------- -------- -------- -------- --------
Net loss.................................... $(96,562) $(45,988) $(63,851) $(27,453) $(37,078)
Preferred stock dividends................... 2,384 -- 2 7 13
-------- -------- -------- -------- --------
Net loss applicable to common
stockholders........................... $(98,946) $(45,988) $(63,853) $(27,460) $(37,091)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 255
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND
COMPREHENSIVE INCOME/LOSS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B
CUMULATIVE CUMULATIVE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK NOTES RECEIVABLE
------------------ ------------------ --------------------- FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS
------- -------- ------- -------- ---------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996...... 82 $ 36 -- -- 27,572,000 $ 196 $ --
Repurchase of Series A Cumulative
Preferred Stock................... (59) (29) -- -- -- -- --
Dividends on Series A Cumulative
Preferred Stock................... -- -- -- -- -- -- --
Exercise of options/warrants....... -- -- -- -- 162,000 62 --
Comprehensive loss:
Net loss........................... -- -- -- -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- -- -- --
Total comprehensive loss.....
------ ------- ------- ------- ---------- -------- -------
BALANCE AT SEPTEMBER 30, 1997...... 23 7 27,734,000 258 --
Dividends on Series A
Preferred Stock.................... -- -- -- -- -- -- --
Issuance of Common Stock........... -- -- -- -- 788,127 10,000 --
Exercise of options/warrants....... -- -- -- -- 54,425 39 --
Comprehensive loss:
Net loss........................... -- -- -- -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- -- -- --
Total comprehensive loss.....
------ ------- ------- ------- ---------- -------- -------
BALANCE AT SEPTEMBER 30, 1998...... 23 7 -- -- 28,576,552 10,297 --
Repurchase of Series A
Cumulative Preferred Stock......... (23) (7) -- -- -- -- --
Dividends on Series A
Preferred Stock.................... -- -- -- -- -- -- --
Issuance of Series A
Cumulative Preferred Stock......... 30,000 30,000 -- -- -- -- --
Issuance of Common Stock........... -- -- -- -- 8,153,120 87,102 --
Exercise of options/warrants....... -- -- -- -- 236,239 1,648 --
Notes receivable for sales of
common stock...................... -- -- -- -- -- -- (1,474)
Comprehensive loss:
Net loss........................... -- -- -- -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- -- -- --
Total comprehensive loss.....
------ ------- ------- ------- ---------- -------- -------
BALANCE AT SEPTEMBER 30, 1999...... 30,000 $30,000 -- -- 36,965,911 $99,047 $(1,474)
------ ------- ------- ------- ---------- -------- -------
Dividends on Series A Cumulative
Preferred Stock (unaudited)....... -- -- -- -- -- -- --
Issuance of Series B Cumulative
Preferred Stock
net of issuance cost of $1,342
(unaudited)..................... -- -- 50,000 48,658 -- -- --
Conversion of Series B Cumulative
Preferred Stock into Common Stock
(unaudited)....................... -- -- (50,000) (48,658) 5,555,550 48,658 --
Exercise of options/warrants
(unaudited)....................... -- -- -- -- 92,493 351 --
Notes receivable for sales of
common stock (unaudited).......... -- -- -- -- -- -- (463)
Comprehensive loss:
Net loss (unaudited)............... -- -- -- -- -- -- --
Foreign currency translation
adjustment (unaudited)............ -- -- -- -- -- -- --
Total comprehensive loss
(unaudited).................
------ ------- ------- ------- ---------- -------- -------
BALANCE AT JUNE 30, 2000
(UNAUDITED)....................... 30,000 $30,000 -- $ -- 42,613,954 $148,056 $(1,937)
====== ======= ======= ======= ========== ======== =======
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
ACCUMULATED INCOME SHAREHOLDERS'
DEFICIT (LOSS) DEFICIT
----------- ------------- -------------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996...... $ (31,817) $ (434) $ (32,019)
Repurchase of Series A Cumulative
Preferred Stock................... -- -- (29)
Dividends on Series A Cumulative
Preferred Stock................... (13) -- (13)
Exercise of options/warrants....... -- -- 62
Comprehensive loss:
Net loss........................... (37,078) -- (37,078)
Foreign currency translation
adjustment........................ -- 197 197
---------
Total comprehensive loss..... (36,881)
--------- -------- ---------
BALANCE AT SEPTEMBER 30, 1997...... (68,908) (237) (68,880)
Dividends on Series A
Preferred Stock.................... (7) -- (7)
Issuance of Common Stock........... -- -- 10,000
Exercise of options/warrants....... -- -- 39
Comprehensive loss:
Net loss........................... (27,453) -- (27,453)
Foreign currency translation
adjustment........................ -- (3,292) (3,292)
---------
Total comprehensive loss..... (30,745)
--------- -------- ---------
BALANCE AT SEPTEMBER 30, 1998...... (96,368) (3,529) (89,593)
Repurchase of Series A
Cumulative Preferred Stock......... -- -- (7)
Dividends on Series A
Preferred Stock.................... (2) -- (2)
Issuance of Series A
Cumulative Preferred Stock......... -- -- 30,000
Issuance of Common Stock........... -- -- 87,102
Exercise of options/warrants....... -- -- 1,648
Notes receivable for sales of
common stock...................... -- -- (1,474)
Comprehensive loss:
Net loss........................... (63,851) -- (63,851)
Foreign currency translation
adjustment........................ -- 1,124 1,124
---------
Total comprehensive loss..... (62,727)
--------- -------- ---------
BALANCE AT SEPTEMBER 30, 1999...... $(160,221) $ (2,405) $ (35,053)
--------- -------- ---------
Dividends on Series A Cumulative
Preferred Stock (unaudited)....... (2,384) -- (2,384)
Issuance of Series B Cumulative
Preferred Stock
net of issuance cost of $1,342
(unaudited)..................... -- -- 48,658
Conversion of Series B Cumulative
Preferred Stock into Common Stock
(unaudited)....................... -- -- --
Exercise of options/warrants
(unaudited)....................... -- -- 351
Notes receivable for sales of
common stock (unaudited).......... -- -- (463)
Comprehensive loss:
Net loss (unaudited)............... (96,562) -- (96,562)
Foreign currency translation
adjustment (unaudited)............ -- (10,495) (10,495)
---------
Total comprehensive loss
(unaudited)................. (107,057)
--------- -------- ---------
BALANCE AT JUNE 30, 2000
(UNAUDITED)....................... $(259,167) $(12,900) $ (95,948)
========= ======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 256
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEARS ENDED SEPTEMBER 30,
--------------------- ----------------------------------
2000 1999 1999 1998 1997
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $ (96,562) $ (45,988) $ (63,851) $ (27,453) $ (37,078)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debt........................ 15,148 11,005 15,202 15,170 22,348
Depreciation and amortization................. 35,131 12,394 17,705 12,332 8,677
Deferred revenue.............................. (3,654) 1,825 3,255 (2,275) 2,714
Impairment of long-lived assets............... - - - - 659
Minority interest............................. - (1,782) (2,251) (1,546) (473)
Changes in operating assets and liabilities:
Accounts receivable......................... (25,455) (26,214) (31,227) (391) (48,411)
Receivables from related parties............ - (1,037) (1,448) (1,864) 1,317
Prepaid expenses and other assets........... (6,707) (2,536) (4,740) (5,551) (3,478)
Accrued network costs....................... 68,246 39,966 34,629 (12,255) 21,200
Accounts payable............................ 364 2,613 (1,031) (1,584) 12,136
Other accrued liabilities................... (24,387) 5,248 2,208 (6,318) 13,183
--------- --------- ---------- --------- ---------
Net cash used in operating
activities........................... (37,876) (4,506) (31,549) (31,735) (7,206)
INVESTING ACTIVITIES
Acquisition of equipment and leasehold
improvements.................................. (5,163) (25,125) (27,633) (11,990) (10,871)
Acquisition of ACC Europe, net of cash
acquired...................................... (55,745) - - - -
--------- --------- ---------- --------- ---------
Net cash used in investing
activities........................... (60,908) (25,125) (27,633) (11,990) (10,871)
FINANCING ACTIVITIES
Proceeds from revolving credit agreement........ 257,713 179,011 283,485 256,535 154,961
Repayments on revolving credit agreement........ (252,649) (178,820) (278,407) (255,885) (128,598)
Proceeds from issuance of long-term debt........ 35,725 - - 55,152 -
Repayment of long-term debt, subordinated
debentures, loans payable and capital
leases........................................ (21,800) (24,604) (30,433) (5,299) (16,602)
Payment of dividends on Preferred Stock......... - (2) (2) (7) (11)
Proceeds from the issuance of Preferred Stock... 48,658 - 30,000 - -
Proceeds from issuance of Common Stock.......... 20 71,286 71,648 10,039 62
Repurchase of Preferred Stock................... - (7) (7) - (30)
Proceeds from issuance of subsidiary common
stock to minority holders..................... - - - - 9,001
--------- --------- ---------- --------- ---------
Net cash provided by financing
activities........................... 67,667 46,864 76,284 60,535 18,783
Effect of exchange rate changes on cash......... - 47 11 (219) 197
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and
cash equivalents..................... (31,117) 17,280 17,113 16,591 903
Cash and cash equivalents at beginning of
period........................................ 38,030 20,917 20,917 4,326 3,423
--------- --------- ---------- --------- ---------
Cash and cash equivalents at end of period...... $ 6,913 $ 38,197 $ 38,030 $ 20,917 $ 4,326
========= ========= ========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest...................................... $ 14,665 $ 8,244 $ 9,248 $ 6,686 $ 7,176
Income taxes.................................. - 2 2 8 102
NON-CASH INVESTING AND FINANCING ACTIVITIES
Assets acquired by incurring capital lease
obligations or long-term debt................. 27,386 32,638 53,391 10,421 8,533
Common stock issued in exchange for the
acquisition of certain minority interest...... - - 17,102 - -
Debt issued in conjunction with acquisition of
ACC........................................... 53,000 - - - -
</TABLE>
See accompanying notes.
F-6
<PAGE> 257
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
1. BUSINESS ACTIVITY
Communications TeleSystems International d/b/a WorldxChange Communications
("WorldxChange"), a California corporation, is a facilities-based
telecommunications carrier that provides international and domestic
long-distance service to retail and carrier customers. Our retail base is
comprised of residential and commercial customers. Our wholesale base is
comprised of other U.S. and foreign telecommunications carriers and resellers.
We have established retail and carrier operations in the United States, the
Pacific Rim, Canada, Europe and Latin America. WorldxChange also provides
operator, debit/calling card service, toll free, private line and other enhanced
services.
WorldxChange has established operations in the United Kingdom, France,
Germany, Belgium, The Netherlands, Australia, New Zealand and Canada through
wholly-owned subsidiaries. WorldxChange has additional subsidiaries domiciled in
various other countries; however, the activity of these subsidiaries to date has
not been significant.
The revenue from WorldxChange's international operations continues to
increase as a percentage of total revenue. For the years ended September 30,
1997, 1998 and 1999 international revenue, including Canada, represented
approximately 13%, 20% and 22% of WorldxChange's total revenue, respectively.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared assuming that
WorldxChange will continue as a going concern. WorldxChange has experienced
recurring losses and has a deficiency in working capital and shareholders'
equity. WorldxChange's rapid growth and investments for additional anticipated
growth have required significant capital. Historically, WorldxChange's capital
needs have been met primarily through a combination of a revolving credit
facility, debt, lease financing, cash flows from operations and private
placement equity offerings. During the year ended September 30, 1999,
WorldxChange raised approximately $100 million in private placement offerings
(Note 8). Management believes its available cash, $30 million of financing
received from World Access (Note 13), $15 million of available credit facility
from a shareholder (Note 13), vendor committed financing, along with the
existing credit facility will be adequate to meet WorldxChange's domestic and
international capital requirements through September 30, 2000. Management also
believes that WorldxChange's ability to raise additional financing will enable
the continuation of its global expansion. However, without additional financing,
WorldxChange will be required to delay, reduce the scope of and/or eliminate
certain of its future expansion plans, and/or reduce its planned expenditures on
infrastructure and marketing activities.
Interim Financial Information (Unaudited)
The accompanying financial statements at June 30, 2000 and for the nine
months ended June 30, 1999 and 2000 are unaudited but include all adjustments
(consisting of normal recurring accruals), which, in the opinion of management,
are necessary for a fair statement of the financial position and the operating
results and cash flows for the interim date and periods presented. Results for
the interim period ended June 30, 2000 are not necessarily indicative of results
for the entire year or future periods.
F-7
<PAGE> 258
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
Consolidation
The accompanying consolidated financial statements include the accounts of
WorldxChange and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents are highly liquid investments purchased with maturities of
three months or less when purchased to be cash equivalents.
Foreign Currency
Assets and liabilities of operations outside the United States, for which
the functional currency is not U.S. dollars, are translated into U.S. dollars
using the exchange rate in effect at each period end. Revenues and expenses are
translated at the average exchange rate prevailing during the period. Cumulative
translation adjustments are included as a separate component of shareholders'
deficit. Exchange gains and losses from foreign currency transactions are
included in "Other (income) expense," in the accompanying Consolidated
Statements of Operations.
Concentration of Credit Risk
WorldxChange's customer base is comprised of several hundred carrier
customers and over 750,000 residential and commercial users of its direct dial
long distance telephone services, as well as hotels and other users of its
operator-assisted long distance telephone services. These customers are located
principally throughout the United States (U.S.), and to a much lesser extent in
the Pacific Rim, Europe, Latin America, and Canada. WorldxChange's U.S. revenues
from residential and smaller commercial users are billed and collected by local
exchange carriers (LECs). These LECs pass through to WorldxChange their
collection experience with customers billed under these billing agreements.
WorldxChange direct bills carrier and certain commercial customers in the U.S.
and direct bills all customers in its international markets. WorldxChange
performs credit evaluations of the financial condition of these direct bill
customers, and may require a deposit in certain circumstances. Revenue is
reported net of estimated customer credits which are provided for in the
financial statements at the same time the corresponding revenue is recognized.
The Company periodically estimates its reserve requirements for uncollectable
accounts, and the bad debt expense is included in selling, general and
administrative expense. No one customer accounted for more than 10% of revenues
for any period during fiscal 1999, 1998 and 1997 and for the nine months ended
June 30, 2000.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost and are
depreciated or amortized using the straight-line method over the estimated
useful lives of the assets (generally two to seven years) Equipment under
capital leases are recorded at the net present value of the minimum lease
payments and are amortized over the shorter of the useful life of the asset or
the lease term (ranging from three to seven years). Interests in international
undersea and on-land fiber-optic cable systems are amortized over their
estimated useful lives, typically 20 years.
F-8
<PAGE> 259
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
Installation Costs
Installation costs consists of costs incurred by WorldxChange for the
expansion of its switching capacity and related network. These costs also
include dialer installation costs incurred upon establishing network services
with certain operator services customers. These costs are amortized using the
straight-line method over three years.
Accrued Network Costs
Accrued network costs represent an estimate for cost of network services
received from third party telecommunications companies for which WorldxChange
has not been invoiced. The estimates are based upon vendor contract rates and
actual minutes utilized per WorldxChange's records.
Minority Interest
Certain of WorldxChange's subsidiaries have sold stock to outside
investors. Income or losses from these operations are allocated to minority
shareholders based on ownership percentages. Losses in excess of the amounts
invested by the minority shareholders are absorbed by WorldxChange. In September
1999, WorldxChange issued 1,554,763 shares of its common stock in exchange for
the shares held by certain minority shareholders of its Australian subsidiary
and a related holding company (Note 8). At September 30, 1999 a 2.2% minority
interest remains in a WorldxChange subsidiary.
Stock-Based Compensation
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
WorldxChange accounts for compensation expense under its stock-based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. Pro forma disclosure of net loss,
as if the fair value-based method had been applied in measuring compensation
expense, is presented in Note 8.
Revenue Recognition
Revenue is recognized as long distance telecommunications services are
provided. Prepaid calling card revenue is reported net of selling discounts and
recorded when minutes are used. Deferred revenue relates to amounts received
from or billed to customers prior to WorldxChange providing telecommunications
services.
Cost of Services
Cost of services is exclusive of depreciation and amortization related to
the services network which is included in "Depreciation and amortization"
presented separately on the consolidated statements of operations.
Advertising
WorldxChange charges advertising costs to expense as the costs are
incurred. Total advertising expense was $15,836,000, and $13,898,000 for the
nine months ended June 30, 2000 and 1999. Total advertising expense was
$17,201,000, $14,117,000 and $19,118,000 for the years ended September 30, 1997,
1998, and 1999, respectively.
F-9
<PAGE> 260
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
Effective April 1, 1998, WorldxChange adopted SFAS No. 130, Reporting
Comprehensive Income. This statement requires that all components of
comprehensive income be reported, net of any related tax effect, in the
financial statements in the period in which they are recognized. The components
of comprehensive income for WorldxChange include net loss and foreign currency
translation adjustments.
Segment Information
Effective October 1, 1998, WorldxChange adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. This statement requires
disclosures of certain information about WorldxChange's operating segments,
products, geographic areas in which it operates and its major customers. This
information is presented in Note 12.
Fair Values of Financial Instruments
WorldxChange believes that the carrying amounts of its cash, cash
equivalents, accounts receivable, accounts payable, accrued liabilities, and
notes payable approximate their fair market values due to their short-term
nature or variable interest rates.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. In May
1999, the FASB voted to delay the effective date of SFAS No. 133 by one year.
The Company will be required to adopt FAS 133 for fiscal year 2001. This
statement establishes a new model for accounting for derivatives and hedging
activities. Under SFAS No. 133, all derivatives must be recognized as assets and
liabilities and measured at fair value. WorldxChange does not expect the
adoption of SFAS No. 133 to have a material impact on its consolidated financial
position or results of operations.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. ACQUISITIONS
In December 1998, WorldxChange completed a business combination with CTS
Telcom, Inc. and WorldxChange Limited, affiliates under common ownership and
management control, both of which have been accounted for in a manner similar to
a pooling-of-interests. WorldxChange issued 278,000 shares in connection with
the acquisition of WorldxChange Limited, and no consideration was paid for the
acquisition of CTS Telcom. The accompanying pooled consolidated financial
statements are derived from
F-10
<PAGE> 261
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
the combined historical financial statements of CTS Telcom, WorldxChange Limited
and WorldxChange. All significant intercompany accounts and transactions have
been eliminated.
Net revenues and net loss for fiscal 1997 and 1998 preceding the merger by
entity are as follows (in thousands):
<TABLE>
<CAPTION>
NET NET INCOME
REVENUES (LOSS)
-------- ----------
<S> <C> <C>
1997:
WxC....................................................... $328,517 $(35,349)
CTS Telcom................................................ 17,884 (2,184)
WxL New Zealand........................................... 18,342 455
Eliminations.............................................. (33,083) --
-------- --------
Combined.................................................. $331,660 $(37,078)
======== ========
1998:
WxC....................................................... $394,232 $(24,932)
CTS Telcom................................................ 16,343 (2,099)
WxL New Zealand........................................... 21,204 (422)
Eliminations.............................................. (32,912) --
-------- --------
Combined.................................................. $398,867 $(27,453)
======== ========
</TABLE>
4. BALANCE SHEET INFORMATION
Sale of Accounts Receivable with Recourse
WorldxChange sells certain receivables, subject to full recourse
provisions, to Zero Plus Dialing Incorporated (ZPDI), one of WorldxChange's
providers of billing and collection services. At June 30, 2000 the outstanding
balance of such accounts for which WorldxChange is contingently liable was zero.
At September 30, 1998 and 1999 the outstanding balance of such accounts for
which WorldxChange is contingently liable was approximately $4,019,000 and
$1,962,000, respectively.
Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, -------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Telecommunications equipment and cables............... $216,065 $125,190 $ 56,091
Computer equipment and software....................... 32,955 15,365 9,985
Office furniture, equipment and vehicles.............. 12,955 9,745 9,335
Leasehold improvements................................ 7,194 3,147 1,614
Equipment in progress................................. -0- 10,266 4,932
-------- -------- --------
269,169 163,713 81,957
Accumulated depreciation and amortization............. (75,675) (48,948) (32,260)
-------- -------- --------
$193,494 $114,765 $ 49,697
======== ======== ========
</TABLE>
F-11
<PAGE> 262
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
Telecommunications equipment and cables include eight indefeasible rights
of use in cable systems amounting to $41,892,000 and $825,000 and eleven
ownership interests in international cables amounting to $15,605,000 and
$4,224,000 at September 30, 1999 and 1998, respectively. As of June 30, 2000,
WorldxChange had indefeasible rights of use in cable systems amounting to
$56,868,000 and ownership interests in international cables amounting to
$16,728,000. These assets are amortized over the life of the agreements of 15 to
20 years.
Other Assets
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, ---------------
2000 1999 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Deposits.................................................. $3,331 $4,240 $3,417
Debt issuance costs, net of accumulated amortization of
$2,272, $1,686 and $97 at June 30, 2000, September 30,
1999 and 1998, respectively............................. 613 1,718 3,307
Offering Costs............................................ -- 652 --
Other..................................................... 161 188 --
------ ------ ------
$4,105 $6,798 $6,724
====== ====== ======
</TABLE>
Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, -----------------
2000 1999 1998
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Accrued taxes.......................................... $19,437 $ 3,734 $ 1,766
Accrued commissions.................................... 1,039 1,575 2,311
Accrued compensation and benefits...................... 3,519 3,144 3,384
Accrued settlements (Note 11).......................... -- 1,211 2,059
Accrued interest....................................... 7,116 634 901
Other.................................................. 13,647 6,035 4,956
------- ------- -------
$44,758 $16,333 $15,377
======= ======= =======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, -------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured subordinated note balance due December 2000
with interest payable at maturity of 12%............ $ 53,000 $ -- $ --
</TABLE>
F-12
<PAGE> 263
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, -------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Secured subordinated note, balance due November 2000
with interest payable quarterly at 12.5%............ $ 45,200 $ 45,200 $ 55,000
Unsecured note due February 2002 with varying monthly
principal payments from $300,000 to $1,250,000. The
unpaid principal bears interest at 13.0%, which is
payable at maturity................................. 18,316 -- --
Term loan due October 2000, with principal reductions
of $300,000 due monthly and interest payable monthly
at prime plus 5.00% (14.5% at June 30, 2000) and
prime plus 6.75% (15.00% at September 30, 1999 and
1998, respectively)................................. 3,800 4,600 5,125
Loan and security agreement payable upon collections
of accounts receivable with interest payable monthly
at prime rate plus 1.75% (11.25% at June 30, 2000)
and prime plus 2.75% (11.00% at September 30, 1999
and 1998 respectively).............................. 27,762 24,362 21,888
Term loan due February 2001 with interest payable at a
per annum rate equal to 11.0%....................... 35,725 -- --
Secured subordinated note with interest payable
quarterly at 10%.................................... -- -- 1,200
Note payable due March 2004, with principal and
interest payments payable in monthly installments of
$183,518 at 12.00%.................................. 6,507 7,521 --
Notes payable due June 2004 to March 2005, with
aggregate monthly principal and interest payments at
12% due in monthly installments of $355,410 at June
30, 2000 and $197,222 at September 30, 1999......... 14,129 8,693 --
Note payable due May 2004, with principal and interest
payments payable in monthly installments of $322,632
at 11.5%............................................ 11,956 13,742 --
Note payable due August 2004, with principal and
interest payments payable in monthly installments of
$73,235 at 11.5%.................................... 2,853 3,247 --
Note payable due June 2004, with principal and
interest payments payable in monthly installments of
$56,777 at 10%...................................... 2,201 2,568 --
Note Payable due June 2002 with quarterly payments of
$67,000............................................. 536 -- --
</TABLE>
F-13
<PAGE> 264
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
JUNE 30, -------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Note payable due May 2004 with principal and interest
payments made payable in monthly installments of
$93,044 at 11%...................................... $ 3,294 $ -- $ --
Secured and unsecured notes, with principal and
interest payments payable in quarterly installments,
maturing at various dates through June 2000.
Interest rates ranging from 10% to 14.25%........... 188 190 429
--------- -------- --------
225,467 110,123 83,642
Less current portion.................................. (187,020) (9,799) (8,355)
--------- -------- --------
$ 38,447 $100,324 $ 75,287
========= ======== ========
</TABLE>
In March 1997, WorldxChange entered into its credit facility, which
consists of an accounts receivable-based revolving credit facility and a term
loan. In February 2000, the credit facility was amended to increase the maximum
borrowing capacity, add a bridge loan, extend the maturity date of the revolving
credit agreement and term loan and reduce the interest rate charge. The credit
facility allows WorldxChange to borrow up to a maximum of $65.0 million, subject
to certain restrictions and borrowing base limitations. The maximum available
borrowing base under the revolving credit agreement is $30.0 million and is
determined as a specified percentage of eligible accounts receivable. The
balance outstanding on the revolving credit agreement is reduced by the
application of payments received on collections of accounts receivable. The
accounts receivable revolving credit facility had an outstanding balance of
approximately $27.8 million at June 30, 2000, and $2.2 million available for
borrowing pursuant to the borrowing base limitations. This facility bears
interest at the prime rate plus 1.75% and is repaid through collections of
accounts receivable. The term loan was issued in the amount of $5.0 million,
which at June 30, 2000 had an outstanding balance of approximately $3.8 million,
bears interest at the prime rate plus 5.00% and requires monthly reductions of
principal of $300,000 plus interest. The bridge loan has a maximum borrowing
availability of $30.0 million, bears interest at 11% and matures on February 11,
2001. The maturity date may be extended until October 1, 2003 by the bridge loan
participant. As part of the amended agreement and the WorldxChange merger
agreement, World Access agreed to participate in the bridge loan and agreed to
fund the $30.0 million under the agreement. As of June 30, 2000, the outstanding
balance on the bridge loan was $35.7 million and $9.3 million was available for
borrowing. In total, as of June 30, 2000, WorldxChange had $67.3 million
borrowed under the credit facility and $11.5 million available for borrowing.
The revolving credit agreement and the term loan with Foothill totaling $67
million on June 30, 2000 matures on October 1, 2000, unless both the $55 million
of subordinated promissory notes due November 30, 2000 and the $53 million of
ACC Europe acquisition notes due December 28, 2000 are retired prior to October
1, 2000, in which case the revolving credit agreement and the term loans with
Foothill mature October 1, 2003. As of June 30, 2000, WorldxChange was in
compliance with the restrictive covenants under the credit facility.
WorldxChange's obligations under the credit facility are secured by a first
position in substantially all of its assets.
F-14
<PAGE> 265
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
In May 2000, the credit facility was amended to increase the maximum
borrowing capacity to $80.0 million. The $15.0 million increase in the borrowing
capacity consists of an additional $15.0 million under the bridge loan, under
the same terms and conditions.
As of September 30, 1998 and 1999, and June 30, 2000, WorldxChange was in
compliance with these covenants, as amended and restructured in order to reflect
the debt and equity financings discussed below and in Note 8 and the acquisition
of two affiliated companies during fiscal 1999 as discussed in Note 3.
WorldxChange's obligations under this agreement are secured by a first position
in substantially all of its assets, excluding equipment where encumbrances
already exist.
From May through August 1998, WorldxChange issued and sold subordinated
promissory notes in the aggregate principal amounts of $55.0 million. These
notes bear interest at 12.5% per annum, provide for quarterly payments of
interest only and mature on November 30, 2000. These notes provide the lender
the right to require WorldxChange to use a portion of the net proceeds from any
private placement or public offering of WorldxChange's common stock to repay the
notes. As such, the outstanding balance at September 30, 1999 has been reduced
to $45,200,000. As of June 30, 2000 the outstanding balance was $45,200,000.
In addition, WorldxChange also issued a promissory note in August 1998 in
the amount of $1.2 million representing accrued interest on the subordinated
promissory notes. This note bears interest at the rate of 10.0% per annum,
provides for quarterly payments of interest only and matures on November 30,
2000. In accordance with the terms of the note, this balance was repaid out of
the proceeds of the private placement equity offerings.
In July 1999, WorldxChange entered into an indefeasible right of use
agreement to lease capacity in a transatlantic telecommunications cable system
for $4,000,000. At June 30, 2000 the outstanding balance related to this
agreement was $3,294,000.
In October 1998, WorldxChange entered into an indefeasible right of use
agreement to lease capacity in a transatlantic telecommunications cable system
for $8,250,000. The purchase was vendor financed with a note that bears interest
at 12.0% per annum and provides for monthly payments of principal and interest.
WorldxChange's obligations under this agreement are secured by a first-priority
security interest in the leased capacity. At June 30, 2000 and September 30,
1999, the outstanding balance related to this agreement was $6,507,000 and
$7,521,000, respectively.
In February 1999, WorldxChange entered into an indefeasible right of use
agreement to lease capacity in a nationwide fiber optic communications system.
The initial fee for each capacity segment is calculated based on mileage between
cities, as defined per the agreement. This purchase was vendor financed with
notes that bear interest at 12.0% per annum and provide for payments in equal
monthly installments of principal and interest. At June 30, 2000 and September
30, 1999, the outstanding balances related to this agreement were $14,129,000
and $8,693,000 respectively.
In March 1999, WorldxChange entered into an indefeasible right of use
agreement to lease capacity in a nationwide telecommunications network. Pursuant
to this agreement, WorldxChange signed notes payable to the vendor for the
purchase price. These notes bear interest at 11.5% per annum and provide for
monthly payments of principal and interest. WorldxChange's obligations under
this agreement are secured by a security interest in the leased capacity. At
June 30, 2000 and September 30, 1999, the aggregate outstanding balance were
approximately $14,809,000 and $16,989,000, respectively, which was
F-15
<PAGE> 266
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
comprised of two separate notes with balances outstanding of $11,956,000 and
$2,853,000 at June 30, 2000.
In June 1999, WorldxChange entered into an indefeasible right of use
agreement to lease capacity in a fiber optic communications system for
$2,969,000. The purchase was vendor financed with a note that bears interest at
10.0% per annum and provides for payments in equal monthly installments of
principal and interest, which are inclusive of all operation and maintenance
fees. At June 30, 2000 and September 30, 1999, the outstanding balances related
to this agreement were $2,201,000 and $2,568,000 respectively.
Subordinated debentures consisted of the following as of September 30, 1998
(in thousands):
<TABLE>
<S> <C>
10% subordinated debentures maturing through December 31,
1999...................................................... $ 807
15% subordinated debentures maturing through December 31,
1999...................................................... 5,441
-------
6,248
Less current portion........................................ (5,066)
-------
$ 1,182
=======
</TABLE>
As of September 30, 1999, WorldxChange has repaid all amounts outstanding
relating to the 10% and 15% subordinated debentures.
Maturities of long-term debt as of September 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
2000........................................................ $ 9,799
2001........................................................ 77,741
2002........................................................ 7,717
2003........................................................ 8,653
2004........................................................ 6,213
--------
Total............................................. $110,123
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Leases
WorldxChange leases its primary operating facilities under noncancellable
operating leases which expire at various dates through March 2015. Certain of
these leases contain escalation clauses based on inflation or fixed amounts and
the leases generally require WorldxChange to pay utilities, insurance, taxes and
other operating expenses. Rental expense under such leases was $6,299,000,
$3,426,000, $4,783,000, and $3,129,000, respectively, for the nine months ended
June 30, 2000 and June 30, 1999 and the years ended September 30, 1999 and 1998.
WorldxChange leases its switches and certain other telecommunication and
computer equipment under capital leases, most of which contain bargain or fair
market value purchase options. At June 30, 2000 and September 30, 1999 and 1998
assets acquired under these leases have an original cost of $51,985,000,
$42,958,000 and $40,099,000, respectively, and accumulated amortization of
$30,992,000, $24,375,000, and $18,515,000, respectively. The amortization of
these assets is included with depreciation and amortization expense presented in
the Consolidated Statements of Operations.
F-16
<PAGE> 267
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
Future minimum payments for capital leases and noncancellable operating
leases with initial or remaining terms of one year or more as of September 30,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING SEPTEMBER 30, LEASES LEASES
------------------------- -------- ---------
<S> <C> <C>
2000........................................................ $ 13,292 $3,198
2001........................................................ 11,475 2,317
2002........................................................ 11,535 1,264
2003........................................................ 7,206 247
2004........................................................ 3,530 138
Thereafter.................................................. 123 451
-------- ------
Total minimum lease payments................................ 47,161 $7,615
======
Less amount representing interest........................... (7,184)
--------
Present value of minimum lease payments..................... 39,977
Less current portion........................................ (10,582)
--------
Amounts due after one year.................................. $ 29,395
========
</TABLE>
Commitments for Undersea Cable and Land-based Fiber Optic Cable Systems
WorldxChange has entered into three agreements to increase its ownership of
undersea cables. These commitments will continue WorldxChange's further
expansion in international markets, and are expected to require incremental
capital expenditures of approximately $18.0 million. Of this balance, $4.0
million will be vendor financed at 11% interest, with monthly principal and
interest payments over a four year amortization period. The remaining $14.0
million will be paid in installments of $6.8 million upon service delivery date
and payments of $3.0 million and $4.2 million on the 1st and 2nd anniversaries
of the service delivery dates, respectively. As of September 30, 1999 and June
30, 2000 these obligations remain outstanding.
WorldxChange entered into an agreement during the year ended September 30,
1999 to acquire $25.0 million of capacity in land-based fiber optic cable
systems. The vendor has agreed to finance 90% of the commitment at 12% interest,
with monthly principal and interest payments over a five year amortization
period. At September 30, 1999, WorldxChange has purchased for cash of
approximately $10.0 million, leaving $15.0 million to be ordered. As of June 30,
2000, $7.2 million remained to be ordered.
7. INCOME TAXES
Income taxes are provided for in accordance with the provisions of FASB
Statement No. 109, Accounting for Income Taxes. Under this method, WorldxChange
recognizes deferred tax assets and liabilities for the expected future tax
effects of temporary differences between the carrying amounts and the tax bases
of assets and liabilities, as well as operating loss carryforwards.
F-17
<PAGE> 268
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
The significant components of WorldxChange's deferred tax assets and
liabilities as of September 30, 1998 and 1999 are shown below (in thousands). At
September 30, 1999, a valuation allowance of $51,113,000 has been recorded as
realization of such net deferred assets is uncertain:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforward...................... $ 28,541 $ 16,704
Foreign net operating loss carryforwards.................. 19,263 9,275
Accrued liabilities and reserves.......................... 4,263 3,720
Other..................................................... -- 336
-------- --------
52,067 30,035
Deferred tax liabilities:
Depreciation and amortization............................. (1,153) (2,145)
Other..................................................... 199 (56)
-------- --------
Net deferred tax assets..................................... 51,113 27,834
Deferred tax assets valuation allowance..................... (51,113) (27,834)
-------- --------
$ -- $ --
======== ========
</TABLE>
At September 30, 1999, WorldxChange had net operating loss carryforwards
available for federal, state and foreign tax purposes of approximately
$74,200,000, $45,000,000 and $55,000,000 respectively. The federal tax loss
carryforwards will begin expiring in 2007, unless previously utilized. The state
tax loss carryforwards began expiring in 1999 and will continue to expire
through 2003, unless previously utilized. The Canadian and Netherlands net
operating loss carryforwards in the amounts of $6,200,000 and $5,500,000,
respectively, will begin expiring in 2003. Other foreign loss carryforwards may
be carried forward indefinitely. The realization of future domestic benefits
from net operating loss carryforwards may be limited under Section 382 of the
Internal Revenue Code if certain cumulative changes occur in WorldxChange's
ownership.
8. SHAREHOLDERS' DEFICIT
Common Stock
In September 1998, WorldxChange completed a private placement for the
issuance of 1,659,214 shares of common stock. WorldxChange issued 788,127 shares
of common stock in September 1998 for $10,000,000. The remaining 871,087 shares
of common stock were issued in December 1998 for another $10,000,000. During
fiscal 1999, WorldxChange issued 5,727,000 shares of common stock for proceeds
of $60,000,000.
In September 1999, WorldxChange issued 1,554,763 shares of its common stock
in exchange for minority interests held in certain of its subsidiaries. The
acquisition was accounted for under the purchase method of accounting at a value
of $17,102,000, or $11.00 per share. The excess value of the stock issued over
the minority interest balance at September 30, 1999 was recorded as goodwill of
$12,194,000. This intangible asset is being amortized on a straight-line basis
over 20 years.
F-18
<PAGE> 269
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
Preferred Stock
As of September 30, 1998, WorldxChange had 23 shares of Series A Cumulative
Preferred Stock outstanding. The shares were non-voting and entitled the holders
to certain annual cumulative dividends. During fiscal 1999, all 23 shares were
repurchased by WorldxChange.
In August 1999, WorldxChange issued 30,000 shares of Series A Convertible
Preferred Stock for $30,000,000. The holders of the Series A Convertible
Preferred Stock are entitled to receive an annual cash dividend of $40 per share
(an aggregate of $100,000 at September 30, 1999). The holders of the Series A
Convertible Preferred Stock are entitled to certain antidilution rights and have
liquidation rights senior to those of common shareholders.
Each share of Series A Convertible Preferred Stock is convertible into
90.9091 shares of common stock. The stock is convertible at the option of the
holder six months after issuance provided WorldxChange has not completed a
public offering and no such offering is pending. The stock is automatically
convertible: (i) six months from a completed registered public offering,
provided there has been no other registered public offering during the course of
the six months and no registered public offering is pending, or (ii) in the
event there is no registered public offering, two years from the date of
issuance, provided there is no registered public offering pending.
Stock Options
WorldxChange's 1996 Stock Option Plan provides for the granting of stock
options to purchase, and the issuance of, up to 3 million shares to employees,
non-exempt directors and consultants. Generally, options are granted at prices
at least equal to fair value of WorldxChange's common stock on the date of grant
as determined by WorldxChange's Board of Directors. In addition, certain
officers and directors have been granted stock options outside the Plan.
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if WorldxChange had accounted for its employee stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using the minimum value method and
the following weighted average assumptions for fiscal year 1997, 1998 and 1999,
respectively: risk free interest rate of 6.20%, 5.25% and 5.75%; expected option
life of seven years; and no annual dividends.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
effects of applying SFAS 123 for pro forma disclosure purposes are not likely to
be representative of the effects on pro forma net income or loss in future years
because they do not take into consideration pro forma compensation expenses
related to grants made prior to fiscal 1996. WorldxChange's pro forma
information follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pro forma net loss..................................... $(65,016) $(28,176) $(37,432)
======== ======== ========
</TABLE>
F-19
<PAGE> 270
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
A summary of WorldxChange's stock option activity, including those issued
outside of the plans and related information are as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-
AVAILABLE NUMBER PRICE AVERAGE
FOR GRANT OF SHARES PER SHARE EXERCISE PRICE
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Balance as of September 30,
1996............................ 1,377,600 1,622,400 $ 0.42-$5.00 $ 1.54
Grants.......................... (1,977,559) 1,977,559 4.33-7.00 4.94
Exercises....................... -- (90,000) 0.42 0.42
Cancellations................... 1,312,525 (1,312,525) 4.33-5.00 4.57
----------- ----------- ------------- ------
Balance as of September 30,
1997............................ 712,566 2,197,434 0.42-7.00 2.84
Additional shares reserved...... 1,008,166 -- -- --
Grants.......................... (1,377,453) 1,377,453 7.00-10.00 9.67
Exercises....................... -- (54,425) 0.67-7.00 0.72
Cancellations................... 320,162 (320,162) 4.33-5.00 5.00
----------- ----------- ------------- ------
Balance as of September 30,
1998............................ 663,441 3,200,300 0.42-10.00 5.73
Additional shares reserved...... 4,000,000 -- -- --
Grants.......................... (1,273,752) 1,273,752 10.00-11.00 10.34
Exercises....................... -- (236,239) 0.67-11.00 6.98
Cancellations................... 495,391 (495,391) 5.00-10.00 9.06
----------- ----------- ------------- ------
Balance as of September 30,
1999............................ 3,885,080 3,742,422 0.42-11.00 6.85
Grants (unaudited).............. (621,581) 621,581 10.00-13.00 11.67
Exercises (unaudited)........... -- (92,486) 0.42-10.00 3.80
Cancellations (unaudited)....... 740,662 (740,662) 5.00-11.00 9.68
----------- ----------- ------------- ------
Balance as of June 30, 2000
(unaudited)..................... 4,011,659 3,530,855 0.42-13.00 $ 7.02
=========== =========== ============= ======
</TABLE>
The following table summarizes significant ranges of outstanding and
exercisable options at June 30, 2000 (unaudited):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING LIFE AVERAGE AVERAGE
EXERCISE PRICES SHARES IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.42-$0.67 909,575 2.75 $ 0.58 909,575 $ 0.58
$5.00-$9.00 721,951 6.10 6.21 570,326 5.87
$10.00-$10.00 1,254,528 8.48 10.00 613,609 10.00
$11.00-$13.00 644,801 9.27 11.21 78,223 11.29
--------- ---- ------ --------- ------
3,530,855 6.66 $ 7.02 2,171,733 $ 5.02
========= ==== ====== ========= ======
</TABLE>
The weighted average fair value at date of grant for options granted during
fiscal 1997, 1998 and 1999 were $1.43, $1.88 and $2.52 per share, respectively,
and $3.46 per share for the nine months ended June 30, 2000.
F-20
<PAGE> 271
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
9. RELATED PARTY TRANSACTIONS
Affiliated Long Distance Companies
In fiscal 1996, WorldxChange began utilizing long distance services from
four affiliated companies owned by a relative of WorldxChange's
officers/shareholders. Billings by the four affiliates for long distance
services provided to WorldxChange were approximately $12,607,000, $5,409,000 and
$1,705,000 for the years ended September 30, 1997, 1998 and 1999, respectively.
WorldxChange had accounts payable to the four affiliates of $468,000 at
September 30, 1998 and no such amounts outstanding at September 30, 1999.
Effective January 1999, WorldxChange terminated the agreements with these
affiliates.
10. SAVINGS PLAN
In January 1996, WorldxChange adopted a 401(k) Savings Plan covering
substantially all employees that have been employed for at least one year and
meet other age and eligibility requirements. Participants may elect to
contribute up to six percent of their compensation. WorldxChange matches 25% of
participant contributions. WorldxChange's matching contribution totaled $62,000,
$82,000 and $100,000 during the years ended September 30, 1997, 1998 and 1999,
respectively.
11. LITIGATION AND REGULATION
WorldxChange is required under federal law and regulations to file tariffs
showing rates, terms and conditions affecting its services. WorldxChange has
filed interstate long distance tariffs with the FCC. The FCC has adopted an
order that, with certain exceptions, rescinds the requirement that carriers such
as WorldxChange maintain FCC tariffs and mandates that tariffs be withdrawn. The
FCC stayed its order pending judicial review. If tariffs are eliminated, it will
probably be necessary for WorldxChange to secure contractual agreements with its
customers providing for many of the terms of its existing tariffs. Absent
tariffs and contracts, WorldxChange believes that disputes could arise
concerning the respective rights of WorldxChange and its customers, which could
hinder WorldxChange's ability to collect its accounts receivable, increase
WorldxChange's overall bad debt losses and collection expenses, and increase
WorldxChange's exposure to unlimited damage claims. The FCC has not proposed to
change its requirements that tariffs for international services be filed, and
WorldxChange continues to file such tariffs.
The intrastate long distance operations of WorldxChange are also subject to
various state laws. The majority of states require certification or
registrations. WorldxChange has secured the ability to offer intra-state service
in forty-one states. Many states require tariff filing as well.
WorldxChange has been successful in obtaining all necessary regulatory
approvals to date, although revision of tariffs, authorities and approvals are
being made on a continuing basis and many such requests are pending at any one
time.
Some states may assess penalties on long distance service providers for
traffic sold prior to tariff approval. Such states may require refunds to be
made to customers. It is the opinion of management that such penalties and
refunds, if any, would not have a material adverse effect on the consolidated
results of operations, financial position or liquidity of WorldxChange.
In May 1997, the California Public Utilities Commission issued an order,
which became effective in October 1997, revoking WorldxChange's Certificate of
Public Convenience and Necessity in California and
F-21
<PAGE> 272
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
imposing certain other fines and penalties against WorldxChange based on the
California Public Utilities Commission's findings that WorldxChange violated
California laws and regulations requiring WorldxChange to obtain prior consumer
authorization before switching consumers' long distance carriers. As a result of
the revocation for WorldxChange's Certificate of Public Convenience and
Necessity, WorldxChange cannot provide intrastate telecommunication services in
California. In addition, WorldxChange must, among other things, (i) pay a $19.6
million fine to the state of California, $2 million of which has been paid with
the balance suspended so long as WorldxChange is not found to have committed any
future violations of California law or California Public Utilities Commission
directives; (ii) reimburse the California Public Utilities Commission for
$100,000 in prosecution costs which has also been paid; and (iii) pay
approximately $1.9 million in reparations to consumers, of which $1,211,000
remains payable at September 30, 1999 and $0 remains payable at June 30, 2000.
Under the California Public Utilities Commission's order, the suspension of
WorldxChange's Certificate of Public Convenience and Necessity and the other
sanctions and fines imposed on WorldxChange are binding on any successor of
WorldxChange. WorldxChange may apply to the California Public Utilities
Commission for reinstatement of the Certificate of Public Convenience and
Necessity after October 22, 2000, although there can be no assurance that such
reinstatement would be granted.
In addition, WorldxChange is subject to certain legal, regulatory and
administrative proceedings, claims and inquiries arising in the ordinary course
of business, some of which involve claims for substantial amounts of damages.
The ultimate outcome of such proceedings, claims or inquiries cannot be
predicted at this time. It is management's opinion, after consultation with its
legal counsel, that any such liability or possible restrictions placed on
WorldxChange's operations resulting from the ultimate resolution of such
proceedings, claims, and inquiries, beyond that provided, would not have a
material effect on WorldxChange's consolidated financial position or
WorldxChange's future consolidated results of operations or cash flows.
12. SEGMENT INFORMATION
In 1999, WorldxChange adopted SFAS 131. The prior year's segment
information has been restated to present three reportable operating segments.
WorldxChange's segments are organized on the basis of geographic location and
include North America, Pacific Rim and Europe. None of WorldxChange's operating
segments have been aggregated.
WorldxChange evaluates performance and allocates resources based on profit
or loss from operations before interest expense, other income (loss) and
minority interest. The accounting policies of the reportable segments are the
same as those described in the basis of presentation and summary of significant
accounting policies. Intersegment sales and transfers between geographic regions
are accounted for at prices that approximate arm's length transactions. No
single customer accounted for 10% or more of revenues in fiscal 1999, 1998 or
1997.
WorldxChange's regional segments earn revenue from direct-dial long
distance services as well as operator, debit/calling card, toll free, private
line and other enhanced services to residential customers, other
telecommunications carriers, and small to medium-sized businesses. Each of
WorldxChange's reportable regions represents a strategic business segment that
functions in an environment with common economic characteristics determined
based on historical and expected future performance.
F-22
<PAGE> 273
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
The Company markets its products domestically and internationally, with its
principal international markets being Australia and Europe. The tables below
contain information about the geographical areas in which the Company operates
and represent information utilized by management to evaluate its operating
segments. Revenues are attributed to countries based on location in which the
sale originated. Long-lived assets are based on the country of domicile.
<TABLE>
<CAPTION>
NORTH PACIFIC
AMERICA RIM EUROPE TOTALS
-------- ------- -------- ----------
<S> <C> <C> <C> <C>
June 30, 2000, and for the nine months then ended
(in thousands)
Sales to unaffiliated customers.................... $246,063 $38,178 $139,672 $ 423,913
Intersegment revenues.............................. 28,091 4,015 10,957 43,063
-------- ------- -------- ----------
Segment revenues................................... 274,154 42,193 150,629 466,976
Depreciation and amortization...................... 15,176 2,088 17,867 35,131
Segment operating loss............................. (32,894) (8,707) (31,445) (73,046)
Segment assets..................................... 639,668 29,952 379,632 1,049,252
Expenditures for long-lived assets................. 2,889 527 1,747 5,163
Reconciliations:
NET LOSS
Total operating loss for reportable segments....... $ (73,046)
Interest expense................................... (22,694)
Other expense, net................................. (822)
Minority interest.................................. --
----------
Total consolidated net loss................ $ (96,562)
==========
ASSETS
Total assets for reportable segments............... $1,049,252
Elimination of intercompany receivables............ (618,840)
----------
Total consolidated assets.................. $ 430,412
==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 and for the nine months then ended
(in thousands)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers.................... $238,013 $42,975 $ 23,336 $ 304,324
Intersegment revenues.............................. 35,551 9,953 4,987 50,491
-------- ------- -------- ----------
Segment revenues................................... 273,564 52,928 28,323 354,815
Depreciation and amortization...................... 9,823 1,298 1,273 12,394
Segment operating loss............................. (22,405) (3,785) (8,910) (35,100)
Segment assets..................................... 364,006 24,183 55,657 443,846
Expenditures for long-lived assets................. 15,765 1,742 7,618 25,125
Reconciliations:
NET LOSS
Total operating loss for reportable segments......... $ (35,100)
Interest expense................................... (12,448)
Other expense, net................................. (222)
Minority interest.................................. 1,782
----------
Total consolidated net loss................ $ (45,988)
==========
</TABLE>
F-23
<PAGE> 274
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C> <C> <C>
Total assets for reportable segments............... $ 443,846
Elimination of intercompany receivables............ (244,177)
----------
Total consolidated assets.................. $ 199,669
==========
September 30, 1999, and for the year then ended
(in thousands)
Sales to unaffiliated customers.................... $337,457 $55,619 $ 28,504 $ 421,580
Intersegment revenues.............................. 48,345 11,025 6,169 65,539
-------- ------- -------- ----------
Segment revenues................................... 385,802 66,644 34,673 487,119
Depreciation and amortization...................... 13,871 1,948 1,887 17,705
Segment operating loss............................. (24,619) (5,166) (18,786) (48,571)
Segment assets..................................... 444,250 18,273 111,987 574,510
Expenditures for long-lived assets................. 15,731 1,842 10,060 27,633
Reconciliations:
NET LOSS
Total operating loss for reportable segments....... $ (48,571)
Interest expense................................... (16,883)
Other expense, net................................. (648)
Minority interest.................................. 2,251
----------
Total consolidated net loss................ $ (63,851)
==========
ASSETS
Total assets for reportable segments............... $ 574,510
Elimination of intercompany receivables............ (339,508)
----------
Total consolidated assets.................. $ 235,002
==========
September 30, 1998, and for the year then ended
(in thousands)
Sales to unaffiliated customers.................... $321,763 $58,382 $ 18,722 $ 398,867
Intersegment revenues.............................. 44,650 22,605 7,576 74,831
-------- ------- -------- ----------
Segment revenues................................... 366,413 80,987 26,298 473,698
Depreciation and amortization...................... 9,988 1,484 860 12,332
Segment operating loss............................. (5,547) (3,041) (7,086) (15,674)
Segment assets..................................... 176,678 19,883 28,705 225,266
Expenditures for long-lived assets................. 11,790 200 -- 11,990
Reconciliations:
NET LOSS
Total operating loss for reportable segments......... $ (15,674)
Interest expense................................... 11,947
Other expense, net................................. 1,378
Minority interest.................................. 1,546
----------
Total consolidated net loss................ $ (27,453)
==========
ASSETS
Total assets for reportable segments............... $ 225,266
Elimination of intercompany receivables............ (105,137)
----------
Total consolidated assets.................. $ 120,129
==========
</TABLE>
F-24
<PAGE> 275
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1997, and for the year then ended
(in thousands)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers.................... $291,633 $24,437 $ 15,590 $ 331,660
Intersegment revenues.............................. 39,326 19,333 2,712 61,371
-------- ------- -------- ----------
Segment revenues................................... 330,959 43,770 18,302 393,031
Depreciation and amortization...................... 7,474 548 655 8,677
Segment operating profit (loss).................... (23,439) 2,433 (4,497) (25,503)
Other significant noncash item:
Write down of impaired long-lived assets........ 659 -- -- 659
Segment assets..................................... 136,355 17,796 17,583 171,734
Expenditures for long-lived assets................. 8,691 2,180 -- 10,871
Reconciliations:
NET LOSS
Total operating loss for reportable segments....... $ (25,503)
Interest expense................................... (8,682)
Other expense, net................................. (3,366)
Minority interest.................................. 473
----------
Total consolidated net loss................ $ (37,078)
==========
ASSETS
Total assets for reportable segments............... $ 171,734
Elimination of intercompany receivables............ (67,989)
----------
Total consolidated assets.................. $ 103,745
==========
</TABLE>
The following table summarizes revenue by region and by type of customer
for the years ended September 30, 1997, 1998 and 1999 and nine months ended June
30, 1999 and 2000:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30, YEARS ENDED SEPTEMBER 30,
--------------- ---------------------------
2000 1999 1999 1998 1997
------ ------ ------- ------- -------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
REVENUE BY REGIONS:
United States................................. $240.0 $233.5 $330.0 $318.1 $287.4
North America (other)......................... 6.0 4.5 7.5 3.7 4.3
------ ------ ------ ------ ------
North America total........................... 246.0 238.0 337.5 321.8 291.7
Pacific Rim................................... 38.2 43.0 55.6 58.4 24.4
Europe........................................ 139.7 23.3 28.5 18.7 15.6
------ ------ ------ ------ ------
Total............................... $423.9 $304.3 $421.6 $398.9 $331.7
====== ====== ====== ====== ======
REVENUE BY CUSTOMERS:
Carrier....................................... $172.9 $138.1 $186.9 $166.1 $163.3
Residential................................... 175.5 125.5 185.3 161.1 116.9
Operator Services............................. 7.6 17.7 22.9 41.1 28.7
Commercial.................................... 67.9 23.0 26.5 30.6 22.8
------ ------ ------ ------ ------
Total............................... $423.9 $304.3 $421.6 $398.9 $331.7
====== ====== ====== ====== ======
</TABLE>
F-25
<PAGE> 276
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
13. SUBSEQUENT EVENTS
On November 4, 1999, WorldxChange acquired the outstanding shares of
certain European subsidiaries of ACC Corp, a subsidiary of AT&T. The operations
of these subsidiaries are located in the United Kingdom, Germany, France and
Italy. As part of this transaction, WorldxChange also acquired from ACC Corp a
switch located in the United States and certain indefeasible rights of use of a
transatlantic telecommunications cable system. The $113 million purchase price
for this transaction was comprised of $60 million cash and a $53 million, 12%
per annum interest rate note due on or before December 28, 2000. The acquisition
has been accounted for as a purchase, and accordingly, the excess purchase price
over the fair value of the net assets acquired of approximately $85.0 million
has been preliminarily allocated to goodwill and customer base based on
management's estimates. Goodwill will be amortized on a straight-line basis over
twenty years and the customer base will be amortized over five years.
WorldxChange financed $50 million of the cash payment through the issuance
in November 1999 of 50,000 shares of Series B Convertible Preferred Stock to two
existing shareholders for $50 million. The Series B Convertible Preferred Stock
has a liquidation preference of $1,000 per share.
Unless previously converted prior to 180 days after the issuance date, on
the 180th day each share of Series B Stock shall be convertible automatically,
without any additional consideration by the holder thereof, into 111.111 fully
paid and non-assessable common shares.
Assuming that the acquisition of ACC Corp. had occurred on the first day of
WorldxChange's fiscal year ended September 30, 1998, pro forma condensed
consolidated results of operations would have been as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
--------------------
1999 1998
--------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 581,826 $517,670
Net loss.................................................... (128,654) (47,765)
</TABLE>
In January 2000, WorldxChange secured a loan, which allows for borrowing of
up to $15 million from a shareholder. The loans bear interest at 15% and becomes
payable on December 31, 2000.
In February 2000, WorldxChange signed an Agreement and Plan of merger with
World Access, Inc. Concurrent with the signing of the Agreement and Plan of
merger, World Access, Inc. agreed to participate in WorldxChange's existing loan
and security agreement with a financial institution whereby the existing line
increased by $30 million. The $30 million consists of a term loan, which bears
interest at 11% and is payable in total on February 11, 2001. In May 2000, the
loan and security agreement was amended to increase the term loan to $45
million.
In January 2000, WorldxChange negotiated payment terms with a network
provider to finance outstanding invoices payable to the carrier. Under the terms
of the agreement, the Company agreed to pay to the carrier a total of $24.1
million for services through August 31, 1999. Payments in the aggregate of $4.3
million are due and payable in monthly installments through September 30, 2000
and the remainder is payable in monthly installments of $1.25 million beginning
October 2000. The financing bears interest at 13%.
F-26
<PAGE> 277
COMMUNICATIONS TELESYSTEMS INTERNATIONAL
D.B.A.
WORLDXCHANGE COMMUNICATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000
AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
14. RECENT EVENT (UNAUDITED)
Effective August 1, 2000, WorldxChange has entered into an Executive
Management Services Agreement with World Access under which World Access will
manage the operations and business affairs of WorldxChange as if World Access
and WorldxChange had already completed the merger. The agreement will terminate
on the first to occur of the following:
- the parties terminate the WorldxChange merger agreement,
- the completion of the WorldxChange merger,
- World Access gives WorldxChange 15 days notice or WorldxChange materially
breaches the services agreement, or
- World Access materially breaches the services agreement.
F-27
<PAGE> 278
Herrn
Dr. Henning F. Klose
Vorsitzender des Vorstands
TelDaFax AG
Postfach 22 06
35010 Marburg
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of TelDaFax AG
as of December 31, 1999, 1998 and 1997, and the related consolidated statements
of operations, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly,
in all material respects, the financial position of TelDaFax AG as of December
1999, 1998 and 1997, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 11, the Company's 1999 financial statements have been
restated to account for the acquisition of Demuth & Dietl only from the
acquisition date, October 4, 1999.
Wiesbaden, August 2, 2000
BDO Deutsche Warentreuhand
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
<TABLE>
<S> <C> <C>
/s/ BUNGERS /s/ KARLIK
------------------------------ ------------------------------
H.G. Bungers Karlik
</TABLE>
F-28
<PAGE> 279
TELDAFAX GROUP
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN DM '000)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
2000 1999 1998
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and equivalents...................................... 53,882 178,287 159,011
Accounts receivable, less allowance for doubtful accounts
of DM 556 as of June 30, 2000 (unaudited) and DM 1,128
and DM 3,115 as of December 31, 1999 and 1998,
respectively........................................... 86,569 80,260 63,853
Inventories............................................... 4,908 4,129 68
Prepaid expenses and other current assets................. 57,579 29,422 7,843
Total current assets.............................. 202,938 292,098 230,775
Equipment and leasehold improvements, net................... 133,199 137,929 67,355
Intangible assets........................................... 32,261 16,451 13,624
Loan to related parties..................................... 1,385 1,411 --
Financial assets............................................ 4,461 -- --
Deferred tax assets, net.................................... 17,394 3,255 --
Other assets................................................ 3,340 4,027 815
------- ------- -------
Total assets...................................... 394,978 455,171 312,569
======= ======= =======
Current liabilities:
Accounts payable.......................................... 150,353 196,041 90,699
Accrued expenses.......................................... 10,784 6,575 12,094
Other current liabilities................................. 8,856 4,778 --
Current portion of long-term debt......................... 1,424 1,553 --
Current portion of capital lease obligations.............. 13,390 13,761 4,818
------- ------- -------
Total current liabilities......................... 184,807 222,708 107,611
Long-term debt.............................................. 1,549 1,572 --
Capital lease obligations................................... 37,873 44,251 10,076
Deferred tax liabilities.................................... -- -- 2,794
Other long-term liabilities................................. 707 721 753
------- ------- -------
Total long-term liabilities....................... 40,129 46,544 13,623
Minority interests.......................................... 1,811 (160) --
Shareholders' equity:
Common stock, Eur 2,60 as of June 30, 2000 (unaudited) and
December 31, 1999 and DM 5 par value as of December 31,
1998, 33,828,600 authorized, issued and outstanding as
of June 30, 2000 (unaudited) and December 31, 1999 and
1998, respectively..................................... 172,024 172,024 169,143
Additional paid in capital................................ 15,787 15,787 15,787
Retained earnings......................................... (19,580) (1,732) 6,405
------- ------- -------
Total shareholders' equity........................ 168,231 186,079 191,335
------- ------- -------
Total liabilities and shareholders' equity........ 394,978 455,171 312,569
======= ======= =======
</TABLE>
F-29
<PAGE> 280
TELDAFAX GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN DM '000, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- -----------------------------------
2000 1999 1999 1998 1997
---------- ---------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................................. 307,704 305,896 611,018 263,050 32,271
Cost of services...................... (279,607) (248,879) (548,110) (202,359) (31,085)
Gross profit.......................... 28,097 57,017 62,908 60,691 1,186
Sales expenses........................ (41,783) (26,257) (50,716) (31,417) (3,434)
General administration expenses....... (17,305) (2,808) (17,723) (8,570) (2,797)
Other operating income................ 2,260 829 791 327 76
Other operating expenses.............. (4,751) (5,307) (9,625) (2,969) (1,448)
Operating income (loss)............... (33,482) 23,474 (14,365) 18,062 (6,417)
Financial result...................... 197 1,494 764 425 (1,104)
Taxes................................. 13,691 (12,052) 7,009 (9,713) 1,667
Minority interests.................... 1,746 140 1,336 -- --
Net income (loss)..................... (17,848) 13,056 (5,256) 8,774 (5,854)
Income (loss) per Common Share from
Continuing Operations:
Basic and Diluted................... (0.53) 0.39 (0.16) 0.45 (5.16)
Weighted Average Shares Outstanding:
Basic and Diluted................... 33,828,600 33,828,600 33,828,600 19,296,826 1,133,525
</TABLE>
F-30
<PAGE> 281
TELDAFAX GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND
COMPREHENSIVE OF CHANGES IN COMBINED EQUITY SHAREHOLDER'S FUNDS
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID SHARE RETAINED
SHARES AMOUNT IN CAPITAL CAPITAL EARNINGS TOTAL
------------ ------- ------------- ------- -------- -------
PIECES DM'000 DM'000 DM'000 DM'000
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996...... -- -- -- 4,000 (7,732) (3,732)
Issuance of common stock.......... 20,000 100 100
Issuance of common stock.......... 1,648,000 8,240 8,240
Issuance of common stock.......... 714,860 3,574 14,450 18,024
Retirement of share capital....... (4,000) (4,000)
Loss of predecessor company....... (3,663) 3,663 --
Contribution in kind.............. 7,554 7,554
Loss for the period............... (5,854) (5,854)
---------- ------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1997...... 2,382,860 11,914 10,787 -- (2,369) 20,332
Issuance of common stock.......... 1,000,000 5,000 5,000 10,000
Issuance of IPO -- public......... 9,725,722 48,629 48,629
Issuance of IPO -- old
shareholders.................... 20,720,018 103,600 103,600
Cash dividends.................... --
Transfer to legal reserve......... 334 (334) --
Profit for the period............. 8,774 8,774
---------- ------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1998...... 33,828,600 169,143 16,121 -- 6,071 191,335
Issue of share capital (Euro), Dec
17, 1999........................ -- 2,881 (2,881) --
Loss for the period............... (5,256) (5,256)
---------- ------- ------ ------ ------- -------
BALANCE AT DECEMBER 31, 1999...... 33,828,600 172,024 16,121 -- (2,066) 186,079
Loss for the period (unaudited)... (17,848) (17,848)
---------- ------- ------ ------ ------- -------
BALANCE AT JUNE 30, 2000.......... 33,828,600 172,024 16,121 -- (19,914) 168,231
========== ======= ====== ====== ======= =======
</TABLE>
F-31
<PAGE> 282
CONSOLIDATED STATEMENTS OF CASH FLOWS
TELDAFAX GROUP
(ALL AMOUNTS IN DM '000)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
----------------------- -----------------------------
2000 1999 1999 1998 1997
---------- ---------- -------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss)...................................... (19,594) 12,916 (5,256) 8,774 (5,854)
Minority interests..................................... 1,746 140 (1,336) -- --
Amortization and depreciation.......................... 22,269 13,290 33,630 18,086 5,040
Depreciation of current assets......................... 2,860 -- -- -- --
Loss on the sale of property, plant and equipment...... 6 -- 3,800 6 --
Decrease (increase) in deferred tax assets............. (14,139) -- (3,255) -- --
Increase (decrease) in deferred tax liabilities........ -- -- (2,794) -- --
-------- -------- -------- -------- -------
(6,852) 26,346 24,789 26,866 (814)
-------- -------- -------- -------- -------
Decrease (increase) in accounts receivable trade, net
of bad debts......................................... (6,309) (14,013) (16,407) (59,817) (2,759)
Increase (decrease) in inventories..................... (779) -- (4,061) -- --
Decrease (increase) in prepaid expenses and other
current assets....................................... (28,157) (25,413) (21,579) (8,376) --
Decrease (increase) in other assets.................... 687 815 (3,112) 130 --
Increase (decrease) in accounts payable................ (45,688) 11,106 105,342 48,856 7,205
Increase (decrease) in other accrued liabilities....... 8,287 (729) 5,469 34,164 3,091
Increase (decrease) in tax provisions.................. -- 11,905 (6,210) 6,179 31
Increase (decrease) in provision for deferred taxes.... -- (89) -- (60) 2,854
Decrease (increase) in deferred taxes from loss
carryforwards........................................ -- -- -- 4,525 (4,525)
Increase (decrease) in other long-term liabilities..... (500) (18) 927 2,121 (1,674)
Adjustment for effects of acquisition of
subsidiaries......................................... (889) 821 4,472 -- --
-------- -------- -------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES................... (80,200) 10,731 89,630 54,588 3,409
-------- -------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................... (10,450) (29,029) (110,397) (65,796) (30,718)
Acquisitions........................................... (27,340) (30) (4,757) (350) --
-------- -------- -------- -------- -------
(37,790) (29,059) (115,154) (66,146) (30,718)
-------- -------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from capital increases........................ -- -- -- 157,229 2,199
Loans to related parties............................... -- -- (1,411) -- --
Proceeds in respect of share premium amounts........... -- -- -- 5,000 7,512
Proceeds from outstanding amounts due in respect of
capital subscribed................................... -- -- -- 9,615 --
Proceeds from outstanding amounts due in respect of
share premium amounts................................ -- -- -- 3,275 --
Payments on debt....................................... (23) (22) -- (6) (86)
Proceeds from issuance of debt......................... -- 22 3,125 (9,519) 9,519
Payments on capital lease obligations.................. (6,378) -- -- (12,066) --
Proceeds from long-term accounts payable............... -- 4,505 43,118 10,076 --
Payments on other long-term liabilities................ (14) (18) (32) (64) --
Other proceeds from paid-in capital.................... -- -- -- -- 3,663
Proceeds from issuance of other long-term debt......... -- -- -- -- 10,546
-------- -------- -------- -------- -------
(6,415) 4,487 44,800 163,540 33,353
-------- -------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (124,405) (13,841) 19,276 151,982 6,044
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 178,287 159,011 159,011 7,029 985
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. 53,882 145,170 178,287 159,011 7,029
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for: 12,815 7,729 26,812 5,468 1,106
Interest............................................. 1,617 700 3,415 5,425 1,106
Income taxes......................................... 11,198 7,029 23,397 43 --
NON-CASH INVESTING AND FINANCING ACTIVITIES............ 475 9,283 57,695 10,821 9,519
Assets acquired by incurring capital lease obligations
or................................................... 525 9,283 56,086 20,340 --
long term debt......................................... (50) -- 1,609 (9,519) 9,519
</TABLE>
F-32
<PAGE> 283
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DM IN THOUSANDS)
1. DESCRIPTION OF BUSINESS
TelDaFax Telefon-, Daten- und Fax Transfer GmbH & Co. KG was founded in
March 1995. On July 1, 1997, TelDaFax Telefon-, Daten und Fax Transfer GmbH &
Co. KG transferred all of its business assets to TelDaFax GmbH. TelDaFax AG was
then established through a change in the legal form of TelDaFax GmbH. The
transfer of the business assets was a contribution-in-kind to TelDaFax GmbH in
exchange for new shares. The assets were contributed at their fair market value.
The step-up amounts were treated as contributed capital. Following a resolution,
of the General Meeting of Shareholders on May 27, 1998, the legal form was
changed again to that of a stock corporation in accordance with Sections 190ff
and 238ff of the law governing changes in legal form. The incorporation into
TelDaFax AG was entered in the Commercial Register on June 10, 1998.
TelDaFax AG ("TelDaFax"), a German company, provides voice telephony, fax
and data transmission services along with mobile hardware and mobile phone cards
throughout Germany. TelDaFax provides fixed-to-mobile, -international and
-domestic connections to commercial and residential customers through a
communication network of dedicated lines leased from Deutsche Telekom AG. Prior
to January 1, 1998, these services were provided solely to commercial customers.
The receipt of a Category 4 License from the Federal Ministry for Post and
Telecommunications for fixed-line telecommunication services on September 30,
1997 and the full liberalization of the German telecommunications market on
January 1, 1998 allowed TelDaFax to expand these services to residential
customers under the carrier number "01030". TelDaFax also provides internet
access through its majority-owned subsidiary GeoNet Systems GmbH and mobile
phone hardware and calling cards through its majority-owned subsidiaries Demuth
& Dietl + Co. Kommunikationselektronic GmbH and Netztel Plus Drillish AG.
TelDaFax also wholly owns BNC Kommunikationssysteme GmbH & Co. KG, an operating
division responsible for monitoring TelDaFax router system, and TelDaFax
Vertriebs GmbH, an operating division consisting of TelDaFax's sales
organization.
The accompanying financial statements have been prepared in accordance with
United States generally accepted accounting principles, referred to as US GAAP.
TelDaFax maintains its financial records in accordance with German statutory
regulations which represents generally accepted accounting principles in
Germany. Generally, accepted accounting principles in Germany vary in certain
respects from US GAAP. Accordingly, TelDaFax has recorded certain adjustments in
order that these financial statements be in accordance with US GAAP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information (Unaudited)
The unaudited consolidated balance sheet as of June 30, 2000 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the six month periods ended June 30, 2000 and 1999, have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. All adjustments, in the opinion of management, that are necessary
for the fair statement of the financial position and the operating results and
cash flows for the interim periods have been presented. Results of operations
for the six month periods ended June 30, 2000 and 1999 are not necessarily
indicative of the results that may be achieved for the entire years or future
periods.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TelDaFax and its wholly-and majority-owned financial subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
F-33
<PAGE> 284
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
TelDaFax considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and trade receivables. Concentration of credit risk with respect to trade
receivables is limited as the outstanding total represents a large number of
customers with individually small balances. The Company does not require
collateral or other security interests against trade receivable balances;
however, it does maintain reserves for potential credit losses and such losses
have been within management's expectations. Substantially all of the Company's
cash and cash equivalents are deposited in financial institutions in Germany.
Inventories
Inventories are stated at the lower of cost or market and are valued using
the weighted-average method.
Property, Plant and Equipment
Property, plant and equipment, is valued at acquisition or production cost
and depreciated or amortized over their estimated useful lives, using the
straight-line method. Equipment under capital leases are recorded at the net
present value of the minimum lease payments and are amortized over the shorter
of the useful life of the asset or the lease term using the straight-line
method. The range of depreciable lives are as follows:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Technical equipment, plant and machinery.................... 4 - 7
Operational, office and other equipment..................... 4 - 20
</TABLE>
Intangible Assets
Intangible assets mainly relate to goodwill, acquired software, acquired
technical know-how and the license for fixed-line telecommunication services.
Goodwill is amortized on a straight-line basis over 15 years. Goodwill as
of June 30, 2000 and December 31, 1999, 1998 and 1997, net of accumulated
amortization, was DM 25,363, DM 8,049, DM 3,852 and DM 2,694, respectively.
Software is capitalized when it is purchased from a third party, either in
the ordinary course of business or, in the case of the acquisition of
subsidiaries, as allocated goodwill. It is amortized over 4 years.
Technical know-how is capitalized as allocated goodwill in the case of the
acquisition of subsidiaries. It is amortized over 4 years.
Technical know-how as of June 30, 2000 and December 31, 1999, 1998 and
1997, net of accumulated amortization, was DM 841, DM 1,245, DM 2,054 and DM
2,614, respectively.
TelDaFax evaluates the recoverability of long-lived assets by measuring the
carrying amount of the assets against the estimated undiscounted future cash
flows associated with them. At the time such evaluations indicate that the
future undiscounted cash flows of long-lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their fair
values. Based on these evaluations, there were no material adjustments to the
carrying value of long-lived assets during the six month period ended June 30,
2000 and 1999 and the years ended December 31, 1999, 1998 and 1997.
F-34
<PAGE> 285
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Telecommunication revenue is recognized as services are provided. Mobile
hardware revenue is reported when the customer takes possession of the product
and prepaid mobile calling card revenue is recorded when the minutes are used.
Advertising
TelDaFax expenses advertising costs as incurred. Total advertising costs
were DM 8,320 DM 5,041, DM 24,696, DM 12,321 and DM 3,434 for the six month
periods ended June 30, 2000 and 1999 and the years ended December 31, 1999, 1998
and 1997, respectively.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In June 1999, SFAS No.
133 was amended by SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS 133". As a result of this
amendment, SFAS No. 133 shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. In accordance with SFAS No. 133, an entity
is required to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133 requires that changes in the derivatives' fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company does not expect the
adoption of this standard to have a material effect on its consolidated
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain amounts in prior years financial statements have been reclassified
to conform with the presentation in 1999.
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- ------------
2000 1999 1998
----------- ----- ----
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................... -- -- 68
Work-in-progress............................................ -- 1,027 --
Finished goods.............................................. 4,908 3,102 --
----- ----- --
4,908 4,129 68
===== ===== ==
</TABLE>
F-35
<PAGE> 286
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- --------------
2000 1999 1998
----------- ------ -----
(UNAUDITED)
<S> <C> <C> <C>
Contractual claim of purchase reduction for traffic
services.................................................. 2,313 -- --
Prepaid income taxes........................................ 28,104 16,858 --
Short-term portion of prepaid commissions................... 8,344 5,090 --
Other....................................................... 18,818 7,474 7,843
------ ------ -----
Total............................................. 57,579 29,422 7,843
====== ====== =====
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -----------------
2000 1999 1998
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Technical equipment, plant and machinery.................. 168,573 160,723 75,755
Other equipment, operational and office equipment......... 20,042 18,769 8,657
Construction in progress.................................. 2,662 578 570
------- ------- -------
Total cost...................................... 191,277 180,070 84,982
Accumulated depreciation and amortization................. (58,078) (42,141) (17,627)
------- ------- -------
Net book value.................................. 133,199 137,929 67,355
======= ======= =======
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- -------------
2000 1999 1998
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Loan due November 2002 with a yearly principal reduction of
DM 34.787 and an interest rate of 5.5 %................... 49 72 --
Term loan due September, 2003 with interest payable at per
annum rate equal to 6.75 %................................ 1,500 1,500 --
----- ----- -----
Total............................................. 1,549 1,572 --
===== ===== =====
</TABLE>
Aggregate maturities of long-term debt as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
--------- -------- --------
<S> <C> <C> <C>
2001........................................................ 35 101 136
2002........................................................ 37 100 137
2003........................................................ 1,500 74 1,574
2004........................................................ -- -- --
Thereafter.................................................. -- -- --
----- --- -----
Total............................................. 1,572 275 1,847
===== === =====
</TABLE>
F-36
<PAGE> 287
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The loans are secured by transfers of ownership by way of security, blank
assignments as well as land charges of Demuth & Dietl.
7. CAPITAL LEASE OBLIGATIONS
The future minimum lease payments as of December 31, 1999 under capital
leases consist of the following:
<TABLE>
<CAPTION>
CAPITAL LEASES
--------------
<S> <C>
2000........................................................ 16,609
2001........................................................ 15,213
2002........................................................ 14,803
2003........................................................ 13,641
2004........................................................ 4,226
Thereafter.................................................. --
-------
Total minimum lease payments................................ 64,492
Less amount representing interests.......................... 6,480
-------
Present value of minimum lease payments..................... 58,012
Less current portion........................................ (13,761)
-------
Amounts due after one year........................ 44,251
=======
</TABLE>
8. INCOME TAXES
Income taxes are provided for in accordance with the provisions of FASB
Statement No. 109, Accounting for Income Taxes. Under this method, TelDaFax
recognizes deferred tax assets and liabilities for the expected future tax
effects of temporary differences between the carrying amounts and the tax basis
of assets and liabilities, as well as operating loss carryforwards.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current income taxes:
Payment for 1998 in 1999.................................. -- 989
Corporate tax claim from loss carryback 1999 to 1998...... -- (950)
Prepaid trade taxes....................................... (25) --
Prepaid corporate taxes................................... (475) --
Provision from trade taxes................................ (732) --
Provision from corporate taxes............................ (5,500) --
------ -----
(6,732) 39
Deferred taxes:
Provision from trade taxes................................ (1,042) 2,278
Provision from corporate taxes............................ (1,934) 4,231
------ -----
(2,976) 6,509
------ -----
Total provision for income taxes.................. (9,708) 6,548
====== =====
</TABLE>
F-37
<PAGE> 288
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1998 1999
------ -----
<S> <C> <C>
Deferred tax liabilities:
On Amortization of intangible assets........................ 2,794 1,589
Elimination of intermediate earnings
from tangible assets...................................... -- (535)
Differences in value assessment............................. -- 211
------ -----
Total deferred tax liabilities.................... 2,794 1,265
Deferred tax assets:
Tax loss carry forward...................................... -- 4,520
------ -----
Total deferred tax assets......................... -- 4,520
------ -----
Net deferred tax assets........................... (2,794) 3,255
====== =====
</TABLE>
The provision for income taxes differs from the amount of income tax
provision computed by applying the Germany federal income tax rate to income
before income taxes and minority interest. A reconciliation of the differences
is as follows:
<TABLE>
<S> <C> <C>
Loss before income taxes and minority interest:............. DM (13,486)
Income tax rate............................................. 46%
Expected income tax:........................................ DM (6,204)
Prior year payment.......................................... DM (989)
Differences in value assessment............................. DM (211)
Elimination of intermediate earnings........................ DM 535
Higher tax rate on loss carryback........................... DM 321
-------------
Total provision for income taxes.................. DM (6,548)
=============
</TABLE>
9. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------- ------- -------
DM '000 DM '000 DM '000
<S> <C> <C> <C>
Profit (loss) for the period................................ (5,854) 8,774 (5,256)
Loss of predecessor company................................. 3,663 -- --
Increase contributed capital................................ 10,787 5,000 --
Capital increase............................................ 15,468 -- --
Issue of share capital...................................... -- 157,229 --
------ ------- -------
Net changes in combined equity shareholder's funds.......... 24,064 171,003 (5,256)
Opening combined equity shareholder's funds................. (3,732) 20,332 191,335
------ ------- -------
Closing combined equity shareholder's funds....... 20,332 191,335 186,079
====== ======= =======
</TABLE>
The share capital is divided into 33,828,600 non par value bearer shares with a
theoretical nominal value of EUR 2,60.
The executive board is authorized, with the approval of the supervisory
board, to increase the share capital of TelDaFax in the period up to June 9,
2004 at one time or on several occasions by up to a total amount of EUR
42,900,000.00 through the issue of new no par value bearer shares with a
theoretical nominal value of EUR 2,60 each against payment in cash or
contribution in kind (authorized capital). Shareholder's are to be granted
subscription rights with respect thereto. However, subject to the approval of
the supervisory board may decide on the exclusion of subscription rights for
existing shareholders.
F-38
<PAGE> 289
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The executive board is authorized, with the approval of the supervisory
board, at one time or on several occasions in the period up to June 9, 2004, to
grant bearer options and/or convertible bonds with up to a total nominal amount
of EUR 858,000,000.00 and a term of no longer than 20 years and to grant option
rights to the bearers of convertible debenture stock or to grant the bearers of
convertible bonds right of conversion for new shares of TelDaFax with stake in
share capital of up to EUR 42,900,000.00 -- or up to 16,500,000 shares -- within
the limits of the conditions for options or bonds.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
Certain buildings and automobiles are under noncancellable operating lease
agreements expiring in various years. Minimum future lease obligations, by year
and in aggregate, as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
<S> <C>
2000........................................................ 2,033
2001........................................................ 1,888
2002........................................................ 1,470
2003........................................................ 1,218
2004........................................................ 1,167
Thereafter.................................................. 17,505
------
Total minimum lease payments...................... 25,281
======
</TABLE>
Legal Proceedings
TelDaFax and certain of its suppliers have entered into legal proceedings
regarding the cost, functionality and period of services provided. TelDaFax has
two such disputes outstanding which individually amount to DM 21,000 and DM
5,000, respectively. TelDaFax has refused payment of these amounts because of
defective delivery or cancellation of the supplier contracts. TelDaFax has
accrued amounts, including legal fees, which it believes reflect the amounts for
which it will ultimately settle these disputes. Although there can be no
assurance as to the ultimate disposition of these matters, it is the opinion of
TelDaFax's management, based on information available at this time, that the
expected outcome of these matters, individually, or in the aggregate, will not
have an adverse effect on the results of operations and financial condition of
TelDaFax.
11. ACQUISITIONS
On July 1, 1997, TelDaFax acquired 100% of the stock of BNC
Kommunikationssysteme GmbH & Co. KG, a router management service provider, for
DM 3,037. TelDaFax recorded the acquisition in accordance with purchase
accounting resulting in goodwill of DM 1,374 and goodwill allocated to technical
know-how of DM 2,987.
On January 1, 1998, TelDaFax acquired 100% of the stock of TelDaFax
Vertriebs GmbH, a sales organization, for DM 250. TelDaFax recorded the
acquisition in accordance with purchase accounting resulting in goodwill of DM
115.
On December 8, 1998, TelDaFax acquired 75% of the stock of GeoNet Systems
GmbH, an internet access provider, for DM 400. TelDaFax recorded the acquisition
in accordance with purchase accounting as of January 1, 1999 (the acquisition
was classified as an investment as of December 31, 1998) resulting in goodwill
of DM 1,478.
F-39
<PAGE> 290
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 4, 1999, TelDaFax acquired 51% of the stock of Demuth & Dietl +
Co. Kommunikationselektronik GmbH, a provider of mobile hardware and calling
cards, for DM 5,200. TelDaFax recorded the acquisition in accordance with
purchase accounting resulting in goodwill of DM 3,414.
Previously, the financial statements reflected the acquisition of Demuth &
Dietl from January 1, 1999 in accordance with the terms to the agreement between
TelDaFax and the sellers but, under US GAAP, the Company subsequently determined
that it did not "control" Demuth & Dietl until the transaction closed in
October, 1999.
Unaudited pro forma information with respect to TelDaFax as if the 1998,
1999 and 2000 acquisitions had occurred on January 1, 1998, is as follows:
<TABLE>
<CAPTION>
NET INCOME
YEAR ENTITY NET REVENUE (LOSS)
---- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
1999 TelDaFax................................................. 630,232 (10,911)
Demuth & Dietl........................................... 58,787 (181)
Netztel.................................................. 17,781 (613)
Eliminations............................................. (19,214) 5,579
------- -------
Combined................................................. 687,586 (6,126)
======= =======
1998 TelDaFax................................................. 292,033 16,890
Demuth & Dietl........................................... 107,204 (50)
Netztel.................................................. -- (204)
Eliminations............................................. (28,983) (8,116)
------- -------
Combined................................................. 370,254 8,520
======= =======
</TABLE>
12. RELATED PARTY TRANSACTIONS
In conjunction with TelDaFax's acquisition of Demuth & Dietl + Co.
Kommunikationselektronic GmbH, a DM 1,411 loan was made to a division of the
acquired company excluded from the transaction with payments beginning in 2000.
13. BUSINESS SEGMENT INFORMATION
TelDaFax provides telecommunication products and services to its customers
in Germany in three distinct business segments organized around the different
services provided: Fixed Network, Mobile and Internet. The Fixed Network is made
up of one operating unit: TelDaFax. TelDaFax provides fixed-to-mobile,
-international and -domestic telephony, fax and data connections to commercial
and residential customers through its communication network leased from Deutsche
Telekom AG. Mobile services, which consist of hardware sales and calling cards
provided through a distribution network consisting of over 1,500 retailer
dealers in Germany, are provided by Demuth + Dietl + Co.
Kommunikationselektronic GmbH and Netztel Plus Drillish. Internet services,
which consists of internet access, is provided by GeoNet Systems GmbH.
F-40
<PAGE> 291
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tables below present information about the business segments in which
TelDaFax operates and represent information utilized by management to evaluate
its business segments.
TELDAFAX FINANCIAL DATA PER SEGMENT
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------
FIXED CELLULAR
NETWORK INTERNET SERVICE TOTAL
------- -------- -------- -------
(IN THOUSAND DM)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers............................. 305,065 831 -- 305,896
Intersegment revenues....................................... -- -- -- --
Segment revenues............................................ 305,065 831 -- 305,896
Depreciation and amortization............................... (13,229) (61) -- (13,290)
Segment operating profit (loss)............................. 23,463 (818) -- 22,645
Segment assets.............................................. 353,992 953 -- 354,945
Expenditures for long-lived assets.......................... 28,529 530 -- 29,059
Reconciliations:
NET RESULT
Total operating result for the reportable segments........ 22,645
Other income.............................................. 829
Financial result.......................................... 1,494
Other expense, net........................................ (12,052)
Minority interest......................................... 140
Total consolidated profit (loss).................. 13,056
ASSETS
Total assets for reportable segments...................... 354,945
Elimination of intercompany receivables................... (4,191)
Total consolidated assets......................... 350,754
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------
FIXED CELLULAR
NETWORK INTERNET SERVICE TOTAL
------- -------- -------- -------
(IN THOUSAND DM)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers............................. 255,275 3,810 48,619 307,704
Intersegment revenues....................................... -- -- -- --
Segment revenues............................................ 255,275 3,810 48,619 307,704
Depreciation and amortization............................... (22,501) (460) (2,168) (25,129)
Segment operating profit (loss)............................. (24,551) (6,987) (4,204) (35,742)
Segment assets.............................................. 380,081 1,575 42,477 424,133
Expenditures for long-lived assets.......................... 36,670 144 976 37,790
Reconciliations:
NET RESULT
Total operating result for the reportable segments........ (35,742)
Other income.............................................. 2,260
Financial result.......................................... 197
Other expense, net........................................ 13,691
Minority interest......................................... 1,746
Total consolidated profit (loss).................. (17,848)
ASSETS
Total assets for reportable segments...................... 424,133
Elimination of intercompany receivables................... (29,155)
Total consolidated assets......................... 394,978
</TABLE>
F-41
<PAGE> 292
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1999, AND FOR THE YEAR
THEN ENDED
-----------------------------------
FIXED CELLULAR
NETWORK INTERNET SERVICE TOTAL
------- -------- -------- -------
(IN THOUSAND DM)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers........................... 587,299 4,124 19,595 611,018
Intersegment revenues..................................... -- -- -- --
Segment revenues.......................................... 587,299 4,124 19,595 611,018
Depreciation and amortization............................. (33,391) (183) (56) (33,630)
Segment operating profit (loss)........................... (10,279) (4,843) (34) (15,156)
Segment assets............................................ 458,507 3,587 14,154 476,248
Expenditures for long-lived assets........................ 108,185 1,367 845 110,397
Reconciliations:
NET RESULT
Total operating result for the reportable segments........ (15,156)
Other income.............................................. 791
Financial result.......................................... 764
Other expense, net........................................ 7,009
Minority interest......................................... 1,336
Total consolidated profit (loss).................. (5,256)
ASSETS
Total assets for reportable segments...................... 476,248
Elimination of intercompany receivables................... (21,077)
Total consolidated assets......................... 455,171
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998, AND FOR THE YEAR
THEN ENDED
-----------------------------------
FIXED CELLULAR
NETWORK INTERNET SERVICE TOTAL
------- -------- -------- --------
(IN THOUSAND DM)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers....................... 263,050 -- -- 263,050
Intersegment revenues................................. -- -- -- --
Segment revenues...................................... 263,050 -- -- 263,050
Depreciation and amortization......................... (18,086) -- -- (18,086)
Segment operating profit (loss)....................... 17,735 -- -- 17,735
Segment assets........................................ 314,392 -- -- 314,392
Expenditures for long-lived assets.................... 66,146 -- -- 66,146
Reconciliations:
NET RESULT
Total operating result for the reportable segments.... 17,735
Other income.......................................... 327
Financial result...................................... 425
Other expense, net.................................... (9,713)
Minority interest..................................... --
Total consolidated profit (loss).............. 8,774
ASSETS
Total assets for reportable segments.................. 314,392
Elimination of intercompany receivables............... (1,823)
Total consolidated assets..................... 312,569
</TABLE>
F-42
<PAGE> 293
TELDAFAX AG
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED
----------------------------------------------
FIXED CELLULAR
NETWORK INTERNET SERVICE TOTAL
-------- ----------- ----------- -------
(IN THOUSAND DM)
<S> <C> <C> <C> <C>
Sales to unaffiliated customers..................... 32,271 -- -- 32,271
Intersegment revenues............................... -- -- -- --
Segment revenues.................................... 32,271 -- -- 32,271
Depreciation and amortization....................... (5,040) -- -- (5,040)
Segment operating profit (loss)..................... (6,493) -- -- (6,493)
Segment assets...................................... 61,885 -- -- 61,885
Expenditures for long-lived assets.................. 30,718 -- -- 30,718
Reconciliations:
NET RESULT
Total operating result for the reportable
segments......................................... (6,493)
Other income........................................ 76
Financial result.................................... (1,104)
Other expense, net.................................. 1,667
Minority interest................................... --
Total consolidated profit (loss)............ (5,854)
ASSETS
Total assets for reportable segments................ 61,885
Elimination of intercompany receivables............. --
Total consolidated assets................... 61,885
</TABLE>
Other Information
TelDaFax is dependent upon one significant supplier for the leasing of
transmission lines and billing operations for call-by-call customers. TelDaFax's
reliance on this external source can be shifted, over a period of time, to
alternative sources should the changes be necessary. However, there may be a
material adverse effect on the business, financial and operations of TelDaFax.
14. SUBSEQUENT EVENTS
Investment in Netztel Plus Drillish AG
On February 3, 2000, TelDaFax acquired an 81.9% of the stock of Netztel
Plus Drillish AG, a mobile phone calling card provider, for DM 15,000. TelDaFax
recorded the acquisition in accordance with purchase accounting resulting in
goodwill of DM 13,658.
Investment in Internet AG
On April 5, 2000, TelDaFax acquired a 32% interest in Internet AG, a
provider of e-commerce solutions with integrated payment systems, on-line shops
and electronic market places. TelDaFax's investment totaled Euro 2,275.
F-43
<PAGE> 294
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
WORLD ACCESS, INC.
STAR TELECOMMUNICATIONS, INC.
AND
STI MERGER CO.
<PAGE> 295
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of February 11, 2000 (this
"Agreement"), is made and entered into among WORLD ACCESS, INC., a Delaware
corporation ("WAXS"), STI Merger Co., a Delaware corporation and wholly-owned
subsidiary of WAXS ("Merger Sub"), and STAR TELECOMMUNICATIONS, INC., a Delaware
corporation ("STAR").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of STAR and WAXS deem it advisable and in
the best interests of each corporation and its respective stockholders that STAR
and WAXS engage in a business combination in order to advance the long-term
strategic business interests of STAR and WAXS;
WHEREAS, the combination of STAR and WAXS shall be effected by the terms of
this Agreement through a merger as outlined below (the "Merger");
WHEREAS, in furtherance thereof, the respective Boards of Directors of
STAR, Merger Sub and WAXS have approved the Merger, upon the terms and subject
to the conditions set forth in this Agreement, pursuant to which each share of
common stock, par value $0.001 per share, of STAR ("STAR Common Stock") issued
and outstanding immediately prior to the Effective Time (as defined in Section
1.3) will be converted into the right to receive the consideration set forth in
Section 1.6;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder; and
WHEREAS, simultaneously with the execution and delivery of this Agreement,
WAXS and Christopher E. Edgecomb and Samer Tawfik (the "Principal Stockholders")
are entering into an agreement (the "Voting and Stock Transfer Restriction
Agreement") pursuant to which each Principal Stockholder will agree to, among
other things, vote in favor of the Merger and certain restrictions on the
transfer of the consideration received in the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the General Corporation Law of the State
of Delaware (the "DGCL"), STAR shall be merged with and into Merger Sub at the
Effective Time (as defined below). Following the Merger, the separate corporate
existence of STAR shall cease and Merger Sub shall continue as the surviving
corporation (the "Surviving Corporation").
1.2 Closing. Subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger and the transactions contemplated
by this Agreement (the "Closing") will take place on the second business day
following the satisfaction or waiver of such conditions, unless another time or
date is agreed to in writing by the parties hereto (the date of the Closing
being referred to herein as the "Closing Date"). The Closing shall be held at
the offices of Long Aldridge & Norman LLP, 303 Peachtree Street, Suite 5300,
Atlanta, Georgia 30303, unless another place is agreed to by the parties hereto.
1.3 Effective Time. On the Closing Date the parties shall (i) file a
certificate of merger (the "Certificate of Merger") in such form as is required
by, and executed in accordance with, the relevant provisions of the DGCL and
(ii) make all other filings or recordings required under the DGCL in
A-1
<PAGE> 296
connection with the Merger. The Merger shall become effective at such time as
the Certificate of Merger is duly filed with the Delaware Secretary of State or
at such subsequent time as WAXS and STAR shall agree and as shall be specified
in the Certificate of Merger (the date and time the Merger becomes effective
being the "Effective Time").
1.4 Effects of the Merger. At and after the Effective Time, the Merger
will have the effects set forth in the DGCL. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all the property,
rights, privileges, powers, licenses, authorizations and franchises of Merger
Sub and STAR shall be vested in the Surviving Corporation, and all debts,
liabilities and duties of Merger Sub and STAR shall become the debts,
liabilities and duties of the Surviving Corporation.
1.5 Certificate of Incorporation/Bylaws. The certificate of incorporation
and bylaws of Merger Sub, as in effect immediately prior to the Effective Time,
shall be the certificate of incorporation and bylaws of the Surviving
Corporation, until thereafter changed or amended as provided therein or by
applicable law.
1.6 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of WAXS, Merger Sub, STAR or the
holders of any of the following securities:
(a) [Intentionally omitted.]
(b) Each share of STAR Common Stock issued and outstanding and
directly or indirectly owned or held by STAR or a Subsidiary thereof at the
Effective Time shall, by virtue of the Merger, cease to be outstanding and
shall be canceled and retired and no capital stock of WAXS or other
consideration shall be delivered in exchange therefor.
(c) Subject to Section 2.4, each share of STAR Common Stock issued and
outstanding immediately prior to the Effective Time (other than the
Dissenter's Shares (as defined in Section 8.12)) shall be converted into
the right to receive, at the election of WAXS by written notice to STAR
prior to the Closing, (i) the number of shares of WAXS Common Stock
obtained by solving for "X" in the following formula (the "Exchange
Ratio"):
X = 7.81 + Z
--------
20
or (ii) such number of shares of WAXS Common Stock as shall equal sixty percent
(60%) of the Exchange Ratio and an amount in cash equal to forty percent (40%)
of the sum of $7.81 plus "Z" (as defined below); provided, however, that WAXS
and STAR expressly agree that, notwithstanding anything in this Agreement to the
contrary, in order to ensure that the Merger satisfies the continuity of
interest requirement under Treasury Regulation Section 1.368-1(e), that in no
event shall WAXS issue cash for more than forty-five percent (45%) of the
outstanding shares of STAR Common Stock, including for purposes of this
calculation cash paid for fractional shares pursuant to Section 2.4 and cash
paid for Dissenters' Shares.
For purposes of this Section 1.6, "Z" shall equal the PT-1 Excess Proceeds (as
defined in Section 8.12) divided by 62,856,702. All shares of STAR Common Stock,
at the Effective Time, shall no longer be outstanding and shall automatically be
canceled and retired and each holder of a certificate representing any such
shares (a "Certificate") shall cease to have any rights with respect thereto,
except as set forth in this Section 1.6(c), Section 2.4 or at law. The shares of
WAXS Common Stock issued pursuant to this Section 1.6(c) together with any cash
in lieu of fractional shares paid pursuant to Section 2.4 shall be referred to
herein as the "Merger Consideration."
1.7 STAR Stock Options.
(a) At the Effective Time, by virtue of the Merger and without any
further action on the part of STAR, WAXS, Merger Sub or the holder of any
outstanding option, warrant or other right to acquire STAR capital stock (a
"STAR Stock Option"), each STAR Stock Option will be automatically
converted into a WAXS Stock Option (as defined in Section 3.1(b)) to
purchase shares of WAXS Common Stock in an amount equal to the number of
shares of STAR Common Stock covered under
A-2
<PAGE> 297
such STAR Stock Option multiplied by the Exchange Ratio (rounded to the
nearest whole number of shares of WAXS Common Stock) at a price per share
of WAXS Common Stock equal to the per share option exercise price specified
in the STAR Stock Option divided by the Exchange Ratio (rounded to the
nearest whole cent). Each such WAXS Stock Option shall contain terms and
provisions which are substantially similar to those terms, conditions and
provisions governing the original STAR Stock Option, except that references
to STAR in such STAR Stock Option will be deemed to refer to WAXS and the
date of grant of the STAR Stock Option shall be deemed to be the date of
grant of such WAXS Stock Option. At the Effective Time, for purposes of
interpretation of such new WAXS Stock Option, (i) all references in any
stock option plan of STAR shall be deemed to refer to WAXS; (ii) any stock
option plan of STAR which governs the STAR Stock Option shall continue to
govern the WAXS Stock Option substituted therefor; and (iii) WAXS shall, as
soon as practicable after the Effective Time, issue to each holder of an
outstanding STAR Stock Option a document evidencing the foregoing issued
and substituted WAXS Stock Option by WAXS. It is the intention of the
parties: (1) that, subject to applicable law, STAR Stock Options assumed by
WAXS qualify, following the Effective Time, as incentive stock options, as
defined in Section 422 of the Code, to the extent that STAR Stock Options
qualified as incentive stock options prior to the Effective Time, (2) that
each holder of a STAR Stock Option shall receive a new WAXS Stock Option
which preserves (but does not increase) the excess of the fair market value
of the shares subject to such STAR Stock Option immediately before the
Effective Time over the aggregate option price of such shares immediately
before the Effective Time, if any such excess then exists, (3) that the
terms, conditions, restrictions and provisions of the WAXS Stock Option be
substantially similar to the terms, conditions, restrictions and provisions
of the STAR Stock Option, and (4) any terms conditions, restrictions or
provisions of a STAR Stock Option applicable to a number of shares rather
than a percentage or fraction of shares should be appropriately adjusted
based upon the Exchange Ratio. Without the prior written consent of WAXS
(which may be withheld in its discretion), no new options shall be issued
by STAR on or after the date hereof, including, without limitation, under
any stock option plan currently maintained by STAR.
(b) With respect to each STAR Stock Option converted into a WAXS Stock
Option pursuant to Section 1.7(a), and with respect to the shares of WAXS
Common Stock underlying such option, WAXS shall file and keep current all
requisite registration statements, on Form S-8 or other appropriate form,
for as long as such options remain outstanding, which registration
statement shall include a prospectus meeting the requirements of General
Instruction C to Form S-8 with respect to affiliates of STAR, subject at
all times to compliance with all applicable federal and state securities
laws.
(c) After the date of this Agreement, STAR agrees that it will not
grant any restricted stock, stock appreciation rights or limited stock
appreciation rights and also agrees that it will not permit cash payments
to holders of STAR Stock Options in lieu of the substitution therefor of
WAXS Stock Options, as described in this Section 1.7.
1.8 Certain Adjustments. If between the date hereof and the Effective
Time, the outstanding WAXS Common Stock or STAR Common Stock shall have been
changed into a different number of shares or different class by reason of any
reclassification, recapitalization, stock split, split-up, combination, exchange
of shares or similar capital stock event or a stock dividend or dividend payable
in any other securities shall be declared with a record date within such period,
or any similar event shall have occurred, the Exchange Ratio shall be
appropriately adjusted to provide to the holders of STAR Common Stock and the
holders of STAR Stock Options the same economic effect as contemplated by this
Agreement prior to such event.
A-3
<PAGE> 298
ARTICLE II
EXCHANGE OF CERTIFICATES
2.1 Exchange Fund. At least five (5) days prior to the mailing of the
Joint Proxy Statement/Prospectus (as defined in Section 5.1), WAXS shall appoint
a commercial bank or trust company reasonably acceptable to STAR to act as
exchange agent hereunder (the "Exchange Agent") for the purpose of exchanging
Certificates for the Merger Consideration. Immediately prior to the Effective
Time, WAXS shall deposit with the Exchange Agent, in trust for the benefit of
holders of shares of STAR Common Stock, cash payable and certificates
representing the WAXS Common Stock issuable pursuant to Section 1.6 in exchange
for outstanding shares of STAR Common Stock. WAXS agrees to deposit with the
Exchange Agent from time to time as needed, cash sufficient to pay cash in lieu
of fractional shares pursuant to Section 2.4 and any dividends and other
distributions pursuant to Section 2.3. Any cash and certificates of WAXS Common
Stock deposited with the Exchange Agent shall hereinafter be referred to as the
"Exchange Fund".
2.2 Exchange Procedures. As soon as reasonably practicable after the
Effective Time, WAXS shall cause the Exchange Agent to mail to each holder of a
Certificate (other than to holders of Dissenter's Shares) (i) a letter of
transmittal which shall advise such holder of the effectiveness of the Merger
and specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent, and which letter shall be in customary form and have such other
provisions as WAXS may reasonably specify and (ii) instructions for effecting
the surrender of such Certificates in exchange for the applicable Merger
Consideration. Upon surrender of a Certificate to the Exchange Agent together
with such letter of transmittal, duly executed and completed in accordance with
the instructions thereto, and such other documents as may reasonably be required
by the Exchange Agent, the holder of such Certificate shall be entitled to
receive in exchange therefor promptly (A) one or more shares of WAXS Common
Stock (which shall be in uncertificated book entry form unless a physical
certificate is requested) representing, in the aggregate, the whole number of
shares that such holder has the right to receive pursuant to Section 1.6 (after
taking into account all shares of STAR Common Stock then held by such holder),
and (B) a check in the amount equal to the cash that such holder has the right
to receive pursuant to the provisions of Section 1.6(c), if any, and this
Article II, including cash in lieu of any additional shares of WAXS Common Stock
pursuant to Section 2.4 and dividends and other distributions pursuant to
Section 2.3. No interest will be paid or will accrue on any cash payable
pursuant to 1.6(c), Section 2.3 or Section 2.4. In the event of transfer of
ownership of STAR Common Stock which is not registered in the transfer records
of STAR, one or more shares of WAXS Common Stock evidencing, in the aggregate,
the proper number of shares of WAXS Common Stock, a check in the proper amount
of cash in lieu of any additional shares of WAXS Common Stock pursuant to
Section 2.4, a check in the proper amount of cash pursuant to Section 1.6(c) and
any dividends or other distributions to which such holder is entitled pursuant
to Section 2.3, may be issued with respect to such STAR Common Stock to such a
transferee if the Certificate representing such shares of STAR Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
2.3 Distributions with Respect to Unexchanged Certificates. No dividends
or other distributions declared or made with respect to shares of WAXS Common
Stock with a record date after the Effective Time shall be paid to the holder of
any unexchanged Certificate with respect to the shares of WAXS Common Stock that
such holder would be entitled to receive upon surrender of such Certificate and
no cash payment in lieu of fractional shares of WAXS Common Stock shall be paid
to any such holder pursuant to Section 2.4 until such holder shall surrender
such Certificate in accordance with Section 2.2. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to such holder of shares of WAXS Common Stock issuable in exchange
therefor, without interest, (a) promptly after the time of such surrender, the
amount of any cash payable in lieu of fractional shares of WAXS Common Stock to
which such holder is entitled pursuant to Section 2.4 and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of WAXS Common Stock, and (b)
at the appropriate payment date, the amount of
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dividends or other distributions with a record date after the Effective Time but
prior to such surrender and a payment date subsequent to such surrender payable
with respect to such shares of WAXS Common Stock.
2.4 No Fractional Shares of WAXS Common Stock.
(a) No certificates or scrip or shares of WAXS Common Stock
representing fractional shares of WAXS Common Stock or book-entry credit of
the same shall be issued upon the surrender for exchange of Certificates
and such fractional share interests will not entitle the owner thereof to
vote or to have any rights of a stockholder of or a holder of shares of
WAXS Common Stock.
(b) Notwithstanding any other provision of this Agreement, each holder
of shares of STAR Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of WAXS
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to the product of (i) such fractional part of a share of WAXS
Common Stock multiplied by (ii) the average of the daily closing price for
a share of WAXS Common Stock on the Nasdaq for the ten (10) consecutive
trading days in which such shares are traded on the Nasdaq, ending at the
close of trading on the date of the Effective Time or, if such date is not
a business day, the business day immediately preceding the date on which
the Effective Time occurs. As promptly as practicable after the
determination of the amount of cash, if any, to be paid to holders of
fractional interests, the Exchange Agent shall so notify WAXS, and WAXS
shall promptly deposit such amount with the Exchange Agent and shall cause
the Exchange Agent to promptly forward payments to such holders of
fractional interests subject to and in accordance with the terms hereof.
2.5 No Further Ownership Rights in STAR Common Stock. As applicable, all
shares of WAXS Common Stock issued and cash paid upon conversion of shares of
STAR Common Stock in accordance with the terms of Article I and this Article II
(including any cash paid pursuant to Section 2.4) shall be deemed to have been
issued or paid in full satisfaction of all rights pertaining to the shares of
STAR Common Stock.
2.6 Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates for six (6) months after
the Effective Time shall be delivered to the Surviving Corporation or otherwise
on the instruction of the Surviving Corporation, and any holders of the
Certificates who have not theretofore complied with this Article II shall
thereafter look only to the Surviving Corporation and WAXS for the Merger
Consideration with respect to the shares of STAR Common Stock formerly
represented thereby to which such holders are entitled pursuant to Section 1.6
and Section 2.2, any cash in lieu of fractional shares of WAXS Common Stock to
which such holders are entitled pursuant to Section 2.4 and any dividends or
distributions with respect to shares of WAXS Common Stock to which such holders
are entitled pursuant to Section 2.3. Any such portion of the Exchange Fund
remaining unclaimed by holders of shares of STAR Common Stock five (5) years
after the Effective Time (or such earlier date immediately prior to such time as
such amounts would otherwise escheat to or become property of any Governmental
Entity (as defined in Section 3.1(c)(3)) shall, to the extent permitted by law,
become the property of the Surviving Corporation free and clear of any claims or
interest of any Person previously entitled thereto.
2.7 No Liability. None of WAXS, Merger Sub, STAR, the Surviving
Corporation or the Exchange Agent shall be liable to any Person in respect of
any Merger Consideration from the Exchange Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
2.8 Investment of the Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund as directed by the Surviving Corporation on a
daily basis. Any interest and other income resulting from such investments shall
promptly be paid to the Surviving Corporation.
2.9 Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such Person of a bond in such reasonable
amount as
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the Surviving Corporation may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange Agent will
deliver in exchange for such lost stolen or destroyed Certificate the applicable
Merger Consideration with respect to the shares of STAR Common Stock formerly
represented thereby, any cash in lieu of fractional shares of WAXS Common Stock,
and unpaid dividends and distributions on shares of WAXS Common Stock
deliverable in respect thereof, pursuant to this Agreement.
2.10 Withholding Rights. Each of the Surviving Corporation and WAXS shall
be entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of STAR Common Stock such
amounts as it is required to deduct and withhold with respect to the making of
such payment under the Code and the rules and regulations promulgated
thereunder, or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by the Surviving Corporation or WAXS, as the case
may be, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the shares of STAR Common Stock
in respect of which such deduction and withholding was made by the Surviving
Corporation or WAXS, as the case may be.
2.11 Stock Transfer Books. The stock transfer books of STAR shall be
closed immediately upon the Effective Time and there shall be no further
registration of transfers of shares of STAR Common Stock thereafter on the
records of STAR. On or after the Effective Time, any Certificates presented to
the Exchange Agent or WAXS for any reason shall be converted as provided in
Articles I and II hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of WAXS and Merger Sub. Except as set
forth in the WAXS SEC Reports (as defined below) filed and publicly available
prior to the date hereof or the WAXS Disclosure Schedule delivered by WAXS to
STAR prior to the execution of this Agreement (the "WAXS Disclosure Schedule")
(each section of which qualifies the correspondingly numbered representation and
warranty or covenant to the extent specified therein), WAXS and Merger Sub
represent and warrant to STAR as follows:
(a) Organization; Standing and Power; Subsidiaries.
(1) Each of WAXS, its Subsidiaries (as defined in Section 8.12) and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or
organization, has the requisite power and authority to own, lease and
operate its properties and to carry on its business as now being
conducted, except where the failure to be so organized, existing and in
good standing or to have such power and authority would not have a
Material Adverse Effect on WAXS, and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification necessary other than in such jurisdictions where the
failure to so qualify or to be in good standing would not have a
Material Adverse Effect on WAXS. The copies of the certificate of
incorporation and bylaws of WAXS and Merger Sub which were previously
furnished or made available to STAR are true, complete and correct
copies of such documents as in effect on the date of this Agreement.
(2) Exhibit 21.1 to WAXS's Annual Report on Form 10-K for the year
ended December 31, 1998 includes all the Subsidiaries of WAXS which as
of the date of this Agreement are Significant Subsidiaries (as defined
in Rule 1-02 of Regulation S-X of the SEC). All the outstanding shares
of capital stock of, or other equity interests in, each such Significant
Subsidiary have been validly issued and are fully paid and nonassessable
and are owned directly or indirectly by WAXS, free and clear of all
pledges, claims, liens, charges, encumbrances and security interests of
any kind or nature whatsoever (collectively "Liens") and free of any
other restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other ownership
interests). Neither WAXS nor any of its Subsidiaries directly or
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indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or
similar interest in, any corporation, partnership, joint venture or
other business association or entity (other than the Subsidiaries of
WAXS) that is or would reasonably be expected to be material to WAXS and
its Subsidiaries taken as a whole.
(b) Capital Structure. As of February 7, 2000:
(1) The authorized capital stock of WAXS consists of (A)
150,000,000 shares of WAXS Common Stock, of which 53,787,805 shares are
outstanding and no shares are held in the treasury of WAXS and (B)
10,000,000 shares of Preferred Stock, par value $.01 per share, of which
50,000 shares designated as 4.25% Cumulative Senior Perpetual
Convertible Preferred Stock, Series A, par value $.01 per share (the
"Series A Preferred Stock"), and 350,259.875 shares designated as
Convertible Preferred Stock, Series C (the "Series C Preferred Stock"),
are outstanding. WAXS has reserved or has available 4,347,827 shares of
WAXS Common Stock for issuance upon conversion of the Series A Preferred
Stock and 18,027,478 shares of WAXS Common Stock for issuance upon
conversion of the Series C Preferred Stock. All issued and outstanding
shares of the capital stock of WAXS are duly authorized, validly issued,
fully paid and nonassessable, and no class of capital stock is entitled
to preemptive rights. In addition to the rights described in Section
3.1(b) of the WAXS Disclosure Schedule, there are outstanding options,
warrants or other rights (a "WAXS Stock Option") to acquire 13,133,837
shares of capital stock from WAXS.
(2) No bonds, debentures, notes or other indebtedness of WAXS
having the right to vote on any matters on which holders of capital
stock of WAXS may vote ("WAXS Voting Debt") are issued or outstanding.
(3) Except as otherwise set forth in this Section 3.1(b) and as
contemplated by Section 1.5 and Section 1.6, there are no securities,
options, warrants, calls, rights, commitments, agreements, arrangements
or undertakings of any kind to which WAXS or any of its Subsidiaries is
a party or by which any of them is bound obligating WAXS or any of its
Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other voting securities
of WAXS or any of its Subsidiaries or obligating WAXS or any of its
Subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call right, commitment, agreement, arrangement or
undertaking. There are no outstanding obligations of WAXS or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of WAXS or any of its Subsidiaries.
(c) Authority; No Conflicts.
(1) WAXS and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the Merger and
the other transactions contemplated hereby, subject, in the case of
WAXS, to the approval by the stockholders of WAXS by the Required WAXS
Vote (as defined in Section 3.1(g)) of this Agreement, the Merger and
the other transactions contemplated hereby and, in the case of Merger
Sub, the affirmative vote of WAXS, as sole stockholder thereof, of this
Agreement, the Merger and the other transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
Merger and the other transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of WAXS and
Merger Sub, subject, in the case of WAXS, to the approval by the
stockholders of WAXS of this Agreement, the Merger and the transactions
contemplated hereby by the Required WAXS Vote and subject, in the case
of Merger Sub, to the affirmative vote of WAXS, as sole stockholder
thereof, of this Agreement, the Merger and the other transactions
contemplated hereby. This Agreement has been duly executed and delivered
by WAXS and Merger Sub and constitutes a valid and binding agreement of
each of WAXS and Merger Sub, enforceable against it in accordance with
its terms, except to the extent that its enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors' rights
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generally or by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(2) Subject, in the case of WAXS, to the approval by the
stockholders of WAXS of this Agreement, the Merger and the transactions
contemplated hereby by the Required WAXS Vote and, in the case of Merger
Sub, the affirmative vote of WAXS, as sole stockholder thereof, of this
Agreement, the Merger and the other transactions contemplated hereby,
the execution and delivery of this Agreement by WAXS and Merger Sub does
not, and the consummation by WAXS and Merger Sub of the Merger and the
other actions contemplated hereby will not, conflict with, or result in
any violation of, or constitute a default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
amendment, cancellation or acceleration of any obligation or the loss of
a material benefit under, or the creation of a Lien on any assets (any
such conflict, violation, default, right of termination, amendment,
cancellation or acceleration, loss or creation, a "Violation") of: (A)
any provision of the certificate of incorporation or bylaws of WAXS, any
Subsidiary of WAXS or Merger Sub, or (B) except as would not have a
Material Adverse Effect on WAXS and subject to obtaining or making the
consents, approvals, orders, authorizations, registrations, declarations
and filings referred to in paragraph (3) below, any loan or credit
agreement, note, mortgage, bond, indenture, lease, or other agreement,
obligation, instrument, permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to WAXS, any Subsidiary of WAXS or their respective
properties or assets.
(3) No consent, approval, order or authorization of, or
registration, declaration or filing with, any supranational, national,
state, municipal, local or foreign government, any instrumentality,
subdivision, court, administrative agency or commission or other
authority thereof, or any quasi-governmental or private body exercising
any supranational, national, state, municipal, local or foreign
regulatory, taxing, importing or other governmental or
quasi-governmental authority (a "Governmental Entity"), is required by
or with respect to WAXS, any Subsidiary of WAXS or Merger Sub in
connection with the execution and delivery of this Agreement by WAXS or
Merger Sub or the consummation of the Merger and the other transactions
contemplated hereby, except for those required under or in relation to
(A) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), (B) state securities or "blue sky" laws (the "Blue Sky
Laws"), (C) the Communications Act of 1996, as amended (the
"Communications Act"), and all applicable state public utilities laws,
(D) the Securities Act, (E) the Exchange Act, (F) the DGCL with respect
to the filing of the Certificate of Merger, (G) rules and regulations of
Nasdaq, (H) antitrust or other competition laws of other jurisdictions,
(I) such consents, approvals, orders, authorizations, registrations,
declarations and filings as are required by applicable laws, regulations
and rules governing the telecommunications business including, without
limitation, those of the United States Federal Communication Commission
(the "FCC"), (J) any filings and approvals expressly contemplated by
this Agreement, and (K) such consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of
which to make or obtain would not have a Material Adverse Effect on
WAXS. Consents, approvals, orders, authorizations, registrations,
declarations and filings required under or in relation to any of the
foregoing clauses (A) through (K) are hereinafter referred to as
"Necessary Consents".
(d) Reports and Financial Statements.
(1) WAXS has filed all required registration statements,
prospectuses, reports, schedules, forms, statements and other documents
required to be filed by it under the federal securities laws with the
SEC since January 1, 1998 (collectively, including all exhibits thereto,
the "WAXS SEC Reports"). No Subsidiary of WAXS, including, without
limitation Merger Sub, is required to file any form, report,
registration statement, prospectus or other document with the SEC not
otherwise filed with a WAXS SEC Report. As of the respective times such
documents were filed or, as applicable, became effective, or as
subsequently amended, the WAXS SEC Reports
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complied as to form and content, in all material respects, with the
requirements of the Securities Act and the Exchange Act, as the case may
be, and the rules and regulations promulgated thereunder and, taken as a
whole, the WAXS SEC Reports do not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Each of the
financial statements (including the related notes) included in the WAXS
SEC Reports (or, if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) presents fairly, in
all material respects, the consolidated financial position and
consolidated results of operations and cash flows of WAXS and its
Subsidiaries as of the respective dates or for the respective periods
set forth therein all in conformity with GAAP consistently applied
during the periods involved except as otherwise noted therein, and
subject, in the case of the unaudited interim financial statements, to
normal and recurring year-end adjustments that have not been and are not
expected to be material in amount. All of such WAXS SEC Reports, as of
their respective dates (or as of the date of any amendment to the
respective WAXS SEC Report filed prior to the date of this Agreement),
complied or will comply as to form in all material respects with the
applicable requirements of the Securities Act and the Exchange Act and
the rules and regulations promulgated thereunder.
(2) Since December 31, 1998, WAXS and its Subsidiaries have not
incurred any liabilities that are of a nature that would be required to
be disclosed on a balance sheet of WAXS and its Subsidiaries or the
footnotes thereto prepared in conformity with GAAP, other than (A)
liabilities incurred in the ordinary course of business or (B)
liabilities that would not have a Material Adverse Effect on WAXS.
(e) Information Supplied. None of the information supplied or to be
supplied by WAXS for inclusion or incorporation by reference in the Joint
Proxy Statement/Prospectus (as defined herein) will, on the date it is
first mailed to WAXS's and STAR's stockholders, as applicable, or at the
time of the WAXS Stockholders Meeting or the STAR Stockholders Meeting, as
applicable, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Joint Proxy Statement/Prospectus will,
on the date it is first mailed to WAXS's and STAR's stockholders and at the
time of the WAXS Stockholders Meeting and the STAR Stockholders Meeting,
comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder.
(f) WAXS Board Approval. The Board of Directors of WAXS, by
resolutions duly adopted by unanimous vote at a meeting duly called and
held and not subsequently rescinded or modified in any way (the "WAXS Board
Approval"), has duly (i) determined that this Agreement, the Merger and the
other transactions contemplated hereby are fair to and in the best
interests of WAXS and its stockholders, (ii) approved this Agreement, the
Merger and the other transactions contemplated hereby and (iii) declared
the advisability of this Agreement, the Merger and the other transactions
contemplated hereby, and, further, (iv) recommended that the stockholders
of WAXS approve and adopt this Agreement, the Merger and the other
transactions contemplated hereby and directed that this Agreement and the
transactions contemplated hereby be submitted for consideration by WAXS's
stockholders at the WAXS Stockholders Meeting.
(g) Required WAXS Stockholder Vote. The affirmative vote of holders
of shares of WAXS Common Stock, Series A Preferred Stock and Series C
Preferred Stock, voting together as a single class, representing a majority
of the outstanding shares of WAXS Common Stock, Series A Preferred Stock
and Series C Preferred Stock (the "Required WAXS Vote"), is the only vote
of the holders of any class or series of WAXS capital stock necessary to
adopt this Agreement and approve the Merger and the other transactions
contemplated hereby.
(h) Required Merger Sub Board Approval. The Board of Directors of
Merger Sub, by resolutions duly adopted by a unanimous written consent and
not subsequently rescinded or modified
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in any way, has duly (i) determined that this Agreement, the Merger and the
other transactions contemplated hereby are fair to and in the best
interests of Merger Sub and its sole stockholder, WAXS, (ii) approved this
Agreement, the Merger and the other transactions contemplated hereby and
(iii) declared the advisability of this Agreement, the Merger and the other
transactions contemplated hereby, and, further, (iv) recommended that WAXS
adopt this Agreement and approve the Merger and the other transactions
contemplated hereby and directed that this Agreement and the transactions
contemplated hereby be submitted for consideration by WAXS at a meeting
duly called.
(i) Required Merger Sub Stockholder Vote. The affirmative vote of
WAXS, as sole stockholder of Merger Sub, is the only vote of the holders of
any class or series of Merger Sub capital stock necessary to adopt this
Agreement and approve the Merger and the other transactions contemplated
hereby.
(j) Litigation: Compliance with Laws.
(1) There is no suit, investigation, action or proceeding pending
or, to the Knowledge of WAXS, threatened, against or affecting WAXS or
any Subsidiary of WAXS having, or which would have a Material Adverse
Effect on WAXS, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against WAXS
or any Subsidiary of WAXS having, or which would have a Material Adverse
Effect on WAXS.
(2) Except as would not have a Material Adverse Effect on WAXS,
WAXS and its Subsidiaries hold all permits, licenses, variances,
authorizations, exemptions, orders and approvals of all Governmental
Entities including, without limitation, the FCC and state public
utilities commissions, which are necessary for the operation of the
businesses of WAXS and its Subsidiaries (the "WAXS Permits"). Such WAXS
permits are valid and in full force and effect and WAXS and its
Subsidiaries are in compliance with the terms of the WAXS Permits,
except where the failure to be valid and in full force and effect or to
so comply would not have a Material Adverse Effect on WAXS. The
businesses of WAXS and its Subsidiaries are not being conducted in
violation of, and WAXS has not received any notices of violations with
respect to, any law, ordinance or regulation of any Governmental Entity,
except for possible violations which would not have a Material Adverse
Effect on WAXS. WAXS is not aware of any threatened suspension,
cancellation or invalidation of any such WAXS Permit. Except as set
forth in the WAXS SEC Reports or except as would not have a Material
Adverse Effect on WAXS, neither WAXS nor any of its Subsidiaries has
received notice from either the FCC or any state public utilities
commissions of any complaint filed therewith concerning WAXS or any of
its Subsidiaries, operations or services.
(k) Absence of Certain Changes or Events. Except for liabilities
incurred in connection with this Agreement or the transactions contemplated
hereby, and except as permitted by Section 4.1, since December 31, 1998
through and including the date hereof, (i) WAXS and its Subsidiaries have
conducted, in all material respects, their business only in the ordinary
course and (ii) there has not been any change, circumstance or event which
has had, or would reasonably be expected to have, a Material Adverse Effect
on WAXS, other than any change, circumstance or effect relating (A) to the
economy or financial markets in general, or (B) in general to the
industries in which WAXS and its Subsidiaries operate and not specifically
relating to WAXS and its Subsidiaries.
(l) Intellectual Property. Except as would not have a Material
Adverse Effect on WAXS: (i) WAXS and each of its Subsidiaries owns, or is
licensed to use (in each case, free and clear of any Liens, or claim of
rights therein by any third party) all Intellectual Property (as defined
below) used in or necessary for the conduct of its business as currently
conducted, (ii) the use of any Intellectual Property by WAXS and its
Subsidiaries does not infringe on or otherwise violate the rights of any
Person and is in accordance with any applicable license pursuant to which
WAXS or any Subsidiary acquired the right to use any Intellectual Property;
(iii) to the Knowledge of WAXS, no Person is challenging, infringing on or
otherwise violating any right of WAXS or any of its Subsidiaries with
respect to any Intellectual Property owned by and/or licensed to WAXS or
its
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Subsidiaries; and (iv) neither WAXS nor any of its Subsidiaries has
received any written notice of any pending claim with respect to any
Intellectual Property used by WAXS and its Subsidiaries and to WAXS's
Knowledge no Intellectual Property owned and/or licensed by WAXS or its
Subsidiaries is being used or enforced in a manner that would result in the
abandonment, cancellation or unenforceability of such Intellectual
Property. For purposes of this Agreement, "Intellectual Property" shall
mean trademarks, service marks, brand names, certification marks, trade
dress and other indications of origin, the goodwill associated with the
foregoing and registrations in any jurisdiction of, and applications in any
jurisdiction to register, the foregoing, including any extension,
modification or renewal of any such registration or application;
inventions, discoveries and ideas, whether patentable or not, in any
jurisdiction; patents, applications for patents (including, without
limitation, divisions, continuations, continuations in part and renewal
applications), and any renewals, extensions or reissues thereof, in any
jurisdiction; non-public information, trade secrets and confidential
information and rights in any jurisdiction to limit the use or disclosure
thereof by any person; writings and other works, whether copyrightable or
not, in any jurisdiction; registrations or applications for registration of
copyrights in any jurisdiction, and any renewals or extensions thereof; any
similar intellectual property or proprietary rights; and any claims or
causes of action arising out of or relating to any infringement or
misappropriation of any of the foregoing.
(m) Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any
broker's or finder's fee or any other similar commission or fee in
connection with any of the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of WAXS, except Donaldson,
Lufkin & Jenrette Securities Corporation (the "WAXS Financial Advisor"),
whose fees and expenses will be paid by WAXS in accordance with WAXS's
agreement with such firm, a copy of which has been, or will be promptly
when available, provided to STAR.
(n) Opinion of WAXS Financial Advisor. WAXS has received the opinion
of the WAXS Financial Advisor, dated the date of this Agreement, to the
effect that as of such date, the Merger Consideration is fair, from a
financial point of view, to WAXS and its stockholders, a copy of which has
been provided to STAR.
(o) Taxes.
(1) (i) All material Tax Returns of WAXS and each of its
Subsidiaries have been filed, or requests for extensions have been
timely filed and have not expired; (ii) all Tax Returns filed by WAXS
and its Subsidiaries are complete and accurate in all material respects;
(iii) all Taxes shown to be due on such Tax Returns or on subsequent
assessments with respect thereto have been paid or adequate reserves
have been established for the payment of such Taxes, and no other
material Taxes are payable by WAXS or any of its Subsidiaries with
respect to items or periods covered by such Tax Returns (whether or not
shown on or reportable on such Tax Returns) or with respect to any
period prior to the date of this Agreement; (iv) there are no material
liens on any of the assets of WAXS or any of its Subsidiaries with
respect to Taxes, other than liens for Taxes not yet due and payable or
for Taxes that WAXS and its Subsidiaries is contesting in good faith
through appropriate proceedings and for which appropriate reserves have
been established; and (v) there is no audit, examination, deficiency or
refund litigation or matter in controversy with respect to any Taxes of
WAXS and its Subsidiaries that might reasonably be expected to result in
a Tax determination which would have a Material Adverse Effect on WAXS.
(2) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering
any employee or former employee of WAXS or any of its Subsidiaries that,
individually or collectively, could give rise to the payment of any
amount (or portion thereof) that would not be deductible pursuant to
Sections 280G, 404, or 162 of the Code.
(3) Neither WAXS nor any of its Subsidiaries is a party to a Tax
Sharing Agreement.
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(p) Certain Contracts. Neither WAXS nor any of its Subsidiaries is a
party to or bound by (i) any "material contract" (as such term is defined
in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any noncompetition
agreement or any other agreement or arrangement that limits or otherwise
restricts WAXS or any of its Subsidiaries or any successor thereto, from
engaging or competing in any line of business or in any geographic area,
which agreement or arrangement would have a Material Adverse Effect on WAXS
or the Surviving Corporation after giving effect to the Merger, or (iii)
any agreement or arrangement between WAXS or any of its Subsidiaries, on
the one hand, and any affiliates, directors or officers of WAXS or its
Subsidiaries, on the other hand, that is not on arm's-length terms. All
contracts filed with the WAXS SEC Reports and the contracts listed on
Section 3.1(p) of the WAXS Disclosure Schedule are valid, binding and are
in full force and effect and enforceable in accordance with their
respective terms, except to the extent that such enforceability may be
subject to applicable bankruptcy, insolvency, moratorium, reorganization,
or other laws affecting the enforcement or creditors' rights generally or
by general equitable principles, and other than such contracts which by
their terms are no longer in force or effect. Neither WAXS nor its
Subsidiaries are in violation or breach of or default under any such
contract, nor to WAXS's and its Subsidiaries' Knowledge, is any other party
to any such contract in violation or breach or other default under any such
contract, except for any such violation, breach or default which would not
have a Material Adverse Effect on WAXS.
3.2 Representations and Warranties of STAR. Except as set forth in the
STAR SEC Reports (as defined below) filed and publicly available prior to the
date hereof or the STAR Disclosure Schedule delivered by STAR to WAXS prior to
the execution of this Agreement (the "STAR Disclosure Schedule") (each section
of which qualifies the correspondingly numbered representation and warranty or
covenant to the extent specified therein), STAR represents and warrants to WAXS
as follows:
(a) Organization; Standing and Power; Subsidiaries.
(1) Each of STAR and its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has the requisite power
and authority to own, lease and operate its properties and to carry on
its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power and
authority would not have a Material Adverse Effect on STAR, and is duly
qualified and in good standing to do business in each jurisdiction in
which the nature of its business or the ownership or leasing of its
properties makes such qualification necessary, other than in such
jurisdictions where the failure to so qualify or to be in good standing
would not have a Material Adverse Effect on STAR. The copies of the
certificate of incorporation and bylaws of STAR which were previously
furnished or made available to WAXS are true, complete and correct
copies of such documents as in effect on the date of this Agreement.
(2) Exhibit 21.1 to STAR's Annual Report on Form 10-K for the year
ended December 31, 1998 includes all the Subsidiaries of STAR which as
of the date of this Agreement are Significant Subsidiaries (as defined
in Rule 1-02 of Regulation S-X of the SEC). All the outstanding shares
of capital stock of, or other equity interests in, each such Significant
Subsidiary have been validly issued and are fully paid and nonassessable
and are owned directly or indirectly by STAR, free and clear of all
Liens and free of any other restriction (including any restriction on
the right to vote, sell or otherwise dispose of such capital stock or
other ownership interests). Neither STAR nor any of its Subsidiaries
directly or indirectly owns any equity or similar interest in, or any
interest convertible into or exchangeable or exercisable for any equity
or similar interest in, any corporation, partnership, joint venture or
other business association or entity (other than the Subsidiaries of
STAR), that is or would reasonably be expected to be material to STAR
and its Subsidiaries taken as a whole.
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(b) Capital Structure.
(1) The authorized capital stock of STAR consists of (A) 50,000,000
shares of STAR Common Stock, of which 58,683,131 shares are outstanding
and no shares are held in the treasury of STAR and (B) 5,000,000 shares
of preferred stock, par value $0.001 per share, of which no shares are
outstanding. All issued and outstanding shares of the capital stock of
STAR are duly authorized, validly issued, fully paid and nonassessable,
and no class of capital stock is entitled to preemptive rights. There
are outstanding options, warrants or other rights to acquire 4,173,571
shares of capital stock from STAR. Section 3.2(b) of the STAR Disclosure
Schedule lists the exercise price and vesting schedule for each STAR
Stock Option.
(2) No bonds, debentures, notes or other indebtedness of STAR
having the right to vote on any matters on which holders of capital
stock of STAR may vote ("STAR Voting Debt") are issued or outstanding.
(3) Except as otherwise set forth in this Section 3.2(b), there are
no securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which STAR or
any of its Subsidiaries is a party or by which any of them is bound
obligating STAR or any of its Subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital
stock or other voting securities of STAR or any of its Subsidiaries or
obligating STAR or any of its Subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. There are no outstanding
obligations of STAR or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of STAR or any of its
Subsidiaries.
(c) Authority; No Conflicts.
(1) STAR has all requisite corporate power and authority to enter
into this Agreement and to consummate the Merger and the other
transactions contemplated hereby, subject to the approval by the
stockholders of STAR by the Required STAR Vote (as defined in Section
3.2(g)) of this Agreement, the Merger and the other transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the Merger and the other transactions contemplated
hereby have been duly authorized by all necessary corporate action on
the part of STAR, subject to the approval by the stockholders of STAR of
this Agreement and the Merger and the other transactions contemplated
hereby by the Required STAR Vote. This Agreement has been duly executed
and delivered by STAR and constitutes a valid and binding agreement of
STAR, enforceable against it in accordance with its terms, except to the
extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally or by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(2) Subject to the approval by the stockholders of STAR of this
Agreement, the Merger and the other transactions contemplated hereby by
the Required STAR Vote, the execution and delivery of this Agreement by
STAR does not, and the consummation by STAR of the Merger and the other
actions contemplated hereby will not, conflict with, or result in a
Violation of: (A) any provision of the certificate of incorporation or
bylaws of STAR or a Shareholder or any Subsidiary of STAR or (B) except
as would not have a Material Adverse Effect on STAR, subject to
obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings referred to in paragraph (3)
below, any loan or credit agreement, note, mortgage, bond, indenture,
lease, or other agreement, obligation, instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to STAR, any Subsidiary of STAR or their
respective properties or assets.
(3) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to STAR or any Subsidiary of
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STAR in connection with the execution and delivery of this Agreement by
STAR, or the consummation of the Merger and the other transactions
contemplated hereby, except the Necessary Consents and such consents,
approvals, orders, authorizations, registrations, declarations and
filings the failure of which to make or obtain would not have a Material
Adverse Effect on STAR.
(d) Reports and Financial Statements.
(1) STAR has filed all required registration statements,
prospectuses, reports, schedules, forms, statements and other documents
required to be filed by it under the federal securities laws with the
SEC since January 1, 1998 (collectively, including all exhibits thereto,
the "STAR SEC Reports"). No Subsidiary of STAR is required to file any
form, report, registration statement or prospectus or other document
with the SEC not otherwise filed with an STAR SEC Report. As of the
respective times such documents were filed or, as applicable, became
effective, or as subsequently amended, the STAR SEC Reports complied as
to form and content, in all material respects, with the requirements of
the Securities Act and the Exchange Act, as the case may be, and the
rules and regulations promulgated thereunder, and, taken as a whole, the
STAR SEC Reports do not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Each of the financial
statements (including the related notes) included in the STAR SEC
Reports (or, if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) presents fairly, in all
material respects, the consolidated financial position and consolidated
results of operations and cash flows of STAR and its Subsidiaries as of
the respective dates or for the respective periods set forth therein,
all in conformity with GAAP consistently applied during the periods
involved except as otherwise noted therein, and subject, in the case of
the unaudited interim financial statements, to normal and recurring
year-end adjustments that have not been and are not expected to be
material in amount. All of such STAR SEC Reports, as of their respective
dates (or as of the date of any amendment to the respective STAR SEC
Report filed prior to the date of this Agreement), complied or will
comply as to form in all material respects with the applicable
requirements of the Securities Act and the Exchange Act and the rules
and regulations promulgated thereunder.
(2) Since December 31, 1998, STAR and its Subsidiaries have not
incurred any liabilities that are of a nature that would be required to
be disclosed on a balance sheet of STAR and its Subsidiaries or the
footnotes thereto prepared in conformity with GAAP, other than (A)
liabilities incurred in the ordinary course of business or (B)
liabilities that would not have a Material Adverse Effect on STAR.
(e) Information Supplied. None of the information supplied or to be
supplied by STAR for inclusion or incorporation by reference in the Joint
Proxy Statement/Prospectus will, on the date it is first mailed to WAXS's
or STAR's stockholders, as applicable, or at the time of the WAXS
Stockholders Meeting (as defined in Section 5.1) or the STAR Stockholders
Meeting, as applicable, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(f) Board Approval. The Board of Directors of STAR, by resolutions
duly adopted by unanimous vote at a meeting duly called and held and not
subsequently rescinded or modified in any way (the "STAR Board Approval"),
has duly (i) determined that this Agreement, the Merger and the other
transactions contemplated hereby are fair to and in the best interests of
STAR and its stockholders, (ii) approved this Agreement, the Merger and the
other transactions contemplated hereby and (iii) declared the advisability
of this Agreement, the Merger and the other transactions contemplated
hereby, and, further, (iv) recommended that the stockholders of STAR
approve and adopt this Agreement, the Merger and the other transactions
contemplated hereby and directed that
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this Agreement and the transactions contemplated hereby be submitted for
consideration by STAR's stockholders.
(g) Required Stockholder Vote. The affirmative vote of the holders of
a majority of the outstanding shares of STAR Common Stock (the "Required
STAR Vote") is the only vote of the holders of any class or series of STAR
capital stock necessary to adopt this Agreement and approve the Merger and
the other transactions contemplated hereby.
(h) Litigation: Compliance with Laws.
(1) There is no suit, investigation, action or proceeding pending
or, to the Knowledge of STAR, threatened, against or affecting STAR or
any Subsidiary of STAR having, or which would have a Material Adverse
Effect on STAR, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against STAR
or any Subsidiary of STAR having, or which would have a Material Adverse
Effect on STAR.
(2) Except as would not have a Material Adverse Effect on STAR,
STAR and its Subsidiaries hold all permits, licenses, variances,
authorizations, exemptions, orders and approvals of all Governmental
Entities including, without limitation, the FCC and state public
utilities commissions, necessary for the operation of the businesses of
STAR and its Subsidiaries (the "STAR Permits"). Such STAR permits are
valid and in full force and effect and STAR and its Subsidiaries are in
compliance with the terms of the STAR Permits, except where the failure
to be valid and in full force and effect or to so comply would not have
a Material Adverse Effect on STAR. The businesses of STAR and its
Subsidiaries are not being conducted in violation of, and STAR has not
received any notices of violations with respect to, any law, ordinance
or regulation of any Governmental Entity, except for possible violations
which would not have a Material Adverse Effect on STAR. STAR is not
aware of any threatened suspension, cancellation or invalidation of any
STAR Permit. Except as set forth in the STAR SEC Reports or except as
would not have a Material Adverse Effect on STAR, STAR has not received
notice from either the FCC or any state public utilities commissions of
any complaint filed therewith concerning STAR or any of its
Subsidiaries, operations or services.
(i) Absence of Certain Changes or Events. Except for liabilities
incurred in connection with this Agreement or the transactions contemplated
hereby, except as disclosed in the STAR SEC Reports filed prior to the date
of this Agreement, and except as permitted by Section 4.2, since December
31, 1998 through and including the date hereof, (i) STAR and its
Subsidiaries have conducted, in all material respects, their business only
in the ordinary course and (ii) there has not been any change, circumstance
or event which has had, or would reasonably be expected to have, a Material
Adverse Effect on STAR, other than any change, circumstance or effect
relating (A) to the economy or financial markets in general, or (B) in
general to the industries in which STAR and its Subsidiaries operate and
not specifically relating to STAR and its Subsidiaries.
(j) Employee Benefits Matters.
(1) Section 3.2(j)(l) of the STAR Disclosure Schedule sets forth a
list of all material agreements, arrangements, commitments, and policies
(i) which relate to employee benefits; (ii) which pertain to present or
former employees, retirees, directors or independent contractors (or
their beneficiaries, dependents or spouses) of STAR; and (iii) which are
currently or expected to be adopted, maintained by, sponsored by, or
contributed to by STAR or any other employer (a "STAR Affiliate") which,
under Section 414 of the Code, would constitute a single employer with
STAR (collectively referred to as "STAR Employee Benefit Plans"),
including, but not limited to, all: (A) employee benefit plans as
defined in Section 3(3) of ERISA; and (B) all other deferred
compensation, incentive, profit-sharing, thrift, stock ownership, stock
appreciation rights, bonus, stock option, stock purchase, vacation, or
other benefit plans or arrangements.
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(2) STAR and all STAR Affiliates have complied with their
respective substantive obligations with respect to all STAR Employee
Benefit Plans (including, but not limited to, (i) filing or distributing
all reports or notices required by ERISA or the Code and (ii) complying
with all requirements of Part 6 of Title I of ERISA and Code Section
4980B) and have maintained the STAR Employee Benefit Plans in compliance
with all applicable laws and regulations (including, but not limited to,
ERISA and the Code), except where the failure to comply with such
obligations would not result in a Material Adverse Effect on STAR. Each
STAR Employee Benefit Plan that is intended to qualify under Code
Section 401(a) has received a favorable determination letter (or other
ruling indicating its tax-qualified status) from the IRS, and the IRS
has not threatened or taken any action to revoke any favorable
determination letter issued with respect to any such STAR Employee
Benefit Plan. No statement, either oral or written, has been made by
STAR or any STAR Affiliate (or any agent of either) to any Person
regarding any STAR Employee Benefit Plans that is not in accordance with
the terms of that plan that would have a Material Adverse Effect on
STAR.
(3) STAR has made available to WAXS true, correct and complete
copies of all of the current documents relating to the STAR Employee
Benefit Plans, including, but not limited to: (i) all plan texts
(including any subsequent amendments), trust instruments and other
funding arrangements adopted or entered into in connection with each of
the STAR Employee Benefit Plans; (ii) the notices and election forms
used to notify employees and their dependents of their continuation
coverage rights under group health plans (under Code Section 4980B(f)
and ERISA Section 606), if applicable; and (iii) the most recent Form
5500 annual reports (including all schedules thereto), summary plan
descriptions and favorable determination letters, if applicable, for
Employee Benefit Plans. Since the date such documents were supplied to
WAXS, no plan amendments have been adopted and no such amendments or
changes shall be adopted or made prior to the Closing Date without
WAXS's approval, except as required by applicable law after the date
hereof.
(4) Neither STAR nor any STAR Affiliate has any agreement,
arrangement, commitment or understanding to create any additional STAR
Employee Benefit Plans or to continue, modify, change or terminate any
existing STAR Employee Benefit Plans that could have a Material Adverse
Effect on STAR.
(5) None of the STAR Employee Benefit Plans (i) is currently under
investigation, audit or review by the U.S. Department of Labor, the IRS,
the Pension Benefit Guaranty Corporation or any other federal or state
agency or (ii) is liable for any federal, state, local or foreign taxes
that would have a Material Adverse Effect on STAR. Except for such
liabilities that would not have a Material Adverse Effect on STAR, there
is no transaction in connection with which STAR or any STAR Affiliate
could be subject to either a civil penalty assessed pursuant to ERISA
Section 502, a tax imposed by Code Section 4975 or liability for a
breach of fiduciary responsibility under ERISA.
(6) Other than routine claims for benefits payable to participants
or beneficiaries in accordance with the terms of the STAR Employee
Benefit Plans, or relating to qualified domestic relations orders (as
defined in Section 414(p) of the Code), there are no claims, pending or
threatened, by any participant or beneficiary against any of the STAR
Employee Benefit Plans or any fiduciary of any of the STAR Employee
Benefit Plans that could have a Material Adverse Effect on STAR.
(7) Neither STAR nor any STAR Affiliate has at any time maintained,
sponsored or contributed to any "pension plan" as defined in ERISA
Section 3(2) which is subject to Title IV of ERISA or contributed to any
pension plan which is a "multiemployer plan" as defined in ERISA Section
3(37)(A).
(8) Section 3.2(j)(8) of the STAR Disclosure Schedule sets forth a
list of all agreements, arrangements, commitments and STAR Employee
Benefit Plans, under which (i) any benefits
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will be increased, (ii) the vesting or exercisability of benefits will
be accelerated, (iii) amounts will become immediately payable, and/or
(iv) the immediate funding for any benefits is required, upon the
occurrence of the transaction contemplated by this Agreement. Section
3.2(j)(8) of the STAR Disclosure Schedule sets forth an estimate of the
total value and/or cost of any such change in control benefits and/or
funding and the time periods in which such payments must be made and/or
funding obligations must be met, including but not limited to the value
and/or costs of any gross up payments for tax purposes.
(9) To the Knowledge of STAR, no key employee, or group of
employees of STAR has any plans to terminate employment with STAR other
than employees with plans to retire. STAR has complied in all material
respects with all laws relating to the employment of labor, including
provisions thereof relating to wages, hours and equal opportunity, and
it does not have any material labor relations problems (including
threatened or actual strikes or work stoppages or material grievances).
(10) Neither STAR nor any of its Subsidiaries is a party to any
collective bargaining agreement.
(k) Intellectual Property. Except as would not have a Material
Adverse Effect on STAR: (i) STAR and each of its Subsidiaries owns, or is
licensed to use (in each case, free and clear of any Liens, or claims of
rights therein by any third party), all Intellectual Property used in or
necessary for the conduct of its business as currently conducted, (ii) the
use of any Intellectual Property by STAR and its Subsidiaries does not
infringe on or otherwise violate the rights of any Person and is in
accordance with any applicable license pursuant to which STAR or any
Subsidiary acquired the right to use any Intellectual Property; (iii) to
the Knowledge of STAR, no Person is challenging, infringing on or otherwise
violating any right of STAR or any of its Subsidiaries with respect to any
Intellectual Property owned by and/or licensed to STAR or its Subsidiaries;
and (iv) neither STAR nor any of its Subsidiaries has received any written
notice of any pending claim with respect to any Intellectual Property used
by STAR and its Subsidiaries and to STAR's Knowledge, no Intellectual
Property owned and/or licensed by STAR or its Subsidiaries is being used or
enforced in a manner that would result in the abandonment, cancellation or
unenforceability of such Intellectual Property.
(l) Brokers or Finders. No agent, broker, investment banker,
financial advisor or other firm or Person is or will be entitled to any
broker's or finder's fee or any other similar commission or fee in
connection with any of the transactions contemplated by this Agreement,
based upon arrangements made by or on behalf of STAR except Deutsche Bank
Alex Brown (the "STAR Financial Advisor"), whose fees and expenses will be
paid by STAR in accordance with STAR's agreement with such firm, a copy of
which has been, or will be promptly when available, provided to WAXS.
(m) Opinion of STAR Financial Advisor. STAR has received the opinion
of the STAR Financial Advisor, dated the date of this Agreement, to the
effect that as of such date, the Merger Consolidation is fair, from a
financial point of view, to STAR and its stockholders, a copy of which has
been provided to WAXS.
(n) Taxes.
(1) (i) All material Tax Returns of STAR and each of its
Subsidiaries have been filed, or requests for extensions have been
timely filed and have not expired; (ii) all Tax Returns filed by STAR
and its Subsidiaries are complete and accurate in all material respects;
(iii) all Taxes shown to be due on such Tax Returns or on subsequent
assessments with respect thereto have been paid or the STAR SEC Reports
reflect that adequate reserves have been established for the payment of
such Taxes, and no other material Taxes are payable by STAR and its
Subsidiaries with respect to items or periods covered by such Tax
Returns (whether or not shown on or reportable on such Tax Returns) or
with respect to any period prior to the date of this Agreement; (iv)
STAR and each of its Subsidiaries have disclosed on its federal income
Tax Return all positions taken therein that could give rise to a
substantial understatement of income
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Tax within the meaning of Section 6662 of the Code; (v) there are no
material liens on any of the assets of STAR or any of its Subsidiaries
with respect to Taxes, other than liens for Taxes not yet due and
payable or for Taxes that STAR or any of its Subsidiaries is contesting
in good faith through appropriate proceedings and for which the STAR SEC
Reports reflect that appropriate reserves have been established; (vi) no
power of attorney to deal with Tax matters or waiver or extension of any
statute of limitations with respect to Taxes has been granted by STAR or
any of its Subsidiaries; and (vii) there is no (X) audit, examination,
deficiency or refund litigation or matter in controversy with respect to
any Taxes of STAR and its Subsidiaries nor (Y) has the IRS nor any other
Tax authority asserted any claim for Taxes in writing, or to the
knowledge of STAR, is threatening to assert any claim for Taxes, that
might reasonably be expected to result in a Tax determination which
would have a Material Adverse Effect on STAR.
(2) [Intentionally omitted.]
(3) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering
any employee or former employee of STAR or any of its Subsidiaries that,
individually or collectively, could give rise to the payment of any
amount (or portion thereof) that would not be deductible pursuant to
Sections 280G, 404, or 162 of the Code.
(4) Neither STAR nor any of its Subsidiaries is a party to (A) a
Tax Sharing Agreement, (B) transactions which have produced deferred
intercompany gains, losses or other intercompany items or excess loss
accounts (within the meaning of Treas. Reg. sec. 1.1502-13 or 1.1502-19,
respectively, or any predecessor regulations or any comparable items for
state, local or non-United States Tax purposes), or (C) any joint
venture, partnership, limited liability company or other arrangement or
contract that should be treated as a partnership for federal income Tax
purposes or as to which, an election has been made under Treas. Reg.
sec. 301.7701-3 to have the entity disregarded for federal income Tax
purposes as an entity separate from its owner.
(5) None of STAR and its Subsidiaries (A) has or has had operations
or assets outside the United States taxable as a "branch" by the United
States or as a "permanent establishment" by any foreign country, (B) has
received written notice of any claim made by a Tax authority in a
jurisdiction where STAR or any of its Subsidiaries does not file Tax
Returns that it is or may be subject to Taxes in such jurisdiction, (C)
does business in or derives income from any state, local territorial or
non-United States taxing jurisdiction other than those for which Tax
Returns have been filed and made available to WAXS pursuant to Section
3.2 (n)(6) hereof, (D) is a "passive foreign investment company" within
the meaning of the Code, (E) has participated in or cooperated with an
international boycott or has been requested to do so in connection with
any prior transaction or the transactions contemplated by this
Agreement, and (F) has availed itself of any Tax amnesty, Tax holiday or
similar relief in any jurisdiction.
(6) STAR has made available to WAXS true copies of (A) all material
Tax Returns that STAR or its Subsidiaries have filed since January 1,
1994 and (B) all material correspondence, including without limitation,
closing agreements, private letter rulings, advance pricing agreements
and gain recognition agreements and other written submissions to or
communications with any Tax authorities.
(o) Certain Contracts. Neither STAR nor any of its Subsidiaries is a
party to or bound by (i) any "material contract" (as such term is defined
in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any noncompetition
agreement or any other agreement or arrangement that limits or otherwise
restricts STAR or any of its Subsidiaries or any successor thereto or that
would, after the Effective Time, limit or restrict WAXS or the Surviving
Corporation or any of its affiliates or any successor thereto, from
engaging or competing in any line of business or in any geographic area,
which agreement or arrangement would have a Material Adverse Effect on WAXS
or the Surviving Corporation, (iii) any agreement or arrangement between
STAR or any of its Subsidiaries, on the one hand, and any affiliates,
directors or officers of STAR or its Subsidiaries, on the other hand, that
is
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not on arm's-length terms or (iv) any agreement or arrangement that may
require the payment of money or provision of services in excess of $500,000
annually or $1,000,000 over the term of such agreement or arrangement. All
contracts filed with the STAR SEC Reports and the contracts listed on
Section 3.2(o) of the STAR Disclosure Schedule are valid binding and are in
full force and effect and enforceable in accordance with their respective
terms, except to the extent that such enforceability may be subject to
applicable bankruptcy, insolvency, moratorium, reorganization, or other
laws affecting the enforcement of creditors' rights generally or by general
equitable principles, and other than such contracts which by their terms
are no longer in force or effect. Neither STAR nor its Subsidiaries are in
violation or breach of or default under any such contract, nor to STAR's
Knowledge, is any other party to any such contract in violation or breach
or other default under any such contract, except for any such violation,
breach or default which would not have a Material Adverse Effect on STAR.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of STAR. During the period from the date of this Agreement
and continuing until the Effective Time, STAR agrees as to itself and its
Subsidiaries that (except as expressly required, contemplated or permitted by
this Agreement or the STAR Disclosure Schedule or as required by a Governmental
Entity of competent jurisdiction or any law or regulation or to the extent that
WAXS shall otherwise consent in writing, which consent shall not be unreasonably
withheld, delayed or conditioned):
(a) Ordinary Course. STAR and its Subsidiaries shall carry on their
respective businesses in the usual, regular and ordinary course in all
material respects, in substantially the same manner as heretofore
conducted, and shall use all reasonable efforts to preserve intact their
present lines of business, maintain their rights and franchises and
preserve their relationships with customers, suppliers and others having
significant business dealings with them.
(b) Dividends; Changes in Share Capital. STAR shall not, and shall
not permit any of its Subsidiaries to, and shall not propose to, (i)
declare or pay any dividends on or make other distributions in respect of
any of its capital stock, except for dividends by wholly-owned Subsidiaries
of STAR, (ii) split, combine or reclassify any of its capital stock or
issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for, shares of its capital stock,
except for any such action by a wholly-owned Subsidiary of STAR which
remains a wholly-owned Subsidiary after consummation of such transaction,
or (iii) repurchase, redeem or otherwise acquire any shares of capital
stock of STAR or any of its Subsidiaries or any securities convertible into
or exercisable for any shares of such capital stock except for the purchase
from time to time by STAR of STAR Common Stock in the ordinary course of
business consistent with past practice in connection with the STAR Employee
Benefit Plans.
(c) Issuance of Securities. STAR shall not, and shall not permit any
of its Subsidiaries to, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of any
class, any STAR Voting Debt or any securities convertible into or
exercisable for, or any rights, warrants or options to acquire, any such
shares or STAR Voting Debt, or enter into any agreement with respect to any
of the foregoing, other than (i) the issuance of STAR Common Stock upon the
exercise of STAR Stock Options or in connection with other stock-based
Benefits Plans outstanding on the date hereof, in each case in accordance
with their present terms, or (ii) issuances by a wholly-owned Subsidiary of
STAR of capital stock to such Subsidiary's parent or another wholly-owned
subsidiary of STAR.
(d) Governing Documents. Except to the extent required by the rules
and regulations of the Nasdaq, neither STAR nor any of its Subsidiaries
shall amend or propose to amend their respective certificates of
incorporation, by-laws or other governing documents.
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(e) Acquisitions. STAR shall not, and shall not permit any of its
Subsidiaries to acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets (other
than the acquisition of assets used in the operations of the business of
STAR and its Subsidiaries in the ordinary course).
(f) Sales. Except as set forth in Section 4.1(f) of the STAR
Disclosure Schedule, STAR shall not, and shall not permit any of its
Subsidiaries to, sell or agree to sell by merging or consolidating with, or
by selling or substantial equity interest in or a substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise sell or agree to sell any assets (other than the sale of
assets used in the operations of the business of STAR and its Subsidiaries
in the ordinary course; provided, however, STAR may enter into a definitive
agreement for (and consummate) the PT-1 Sale on terms and conditions which
would satisfy the condition set forth in Section 6.2(h) hereof).
(g) Investments; Indebtedness. STAR shall not, and shall not permit
any of its Subsidiaries to, (i) make any loans, advances or capital
commitments to, or investments in, any other Person, other than (x) by STAR
or a Subsidiary of STAR to or in STAR or in any Subsidiary of STAR or (y)
pursuant to any contract or other legal obligation of STAR or any of its
Subsidiaries existing at the date hereof or (ii) create, incur, assume or
suffer to exist any indebtedness, issuances of debt or securities,
guarantees, loans or advances not in existence as of the date hereof except
pursuant to credit facilities, indentures and other arrangements in
existence on the date hereof or in the ordinary course of business
consistent with past practice, in each case as such credit facilities,
indentures and other arrangements may be amended, extended, modified,
refunded, renewed or refinanced after the date hereof.
(h) Compensation. Other than as contemplated by Section 4.1(h) of the
STAR Disclosure Schedule, STAR shall not increase the amount of
compensation of any director or executive officer except in the ordinary
course of business consistent with past practice or as required by an
existing agreement, make any increase in or commitment to increase any
employee benefits, issue any additional STAR Stock Options, adopt or make
any commitment to adopt any additional employee benefit plan or make any
contribution, other than regularly scheduled contributions, to any Employee
Benefit Plan.
(i) Accounting Methods; Income Tax Matters. STAR shall not change its
methods of accounting in effect on December 31, 1998, except as required by
changes in GAAP as concurred in by STAR's independent auditors. STAR shall
not (i) change its fiscal year, (ii) make any material tax election, (iii)
adopt or change any Tax accounting method, (iv) enter into any closing
agreement, (v) settle or compromise a Tax liability with a Tax authority,
(vi) surrender any right to claim a refund of Taxes, or (vii) take (or
permit any Subsidiary of STAR to take) any other action which would have
the effect of materially increasing the Tax liability or materially
decreasing any Tax Asset of STAR or any of its Subsidiaries, other than in
the ordinary course of business consistent with past practice.
(j) Certain Agreements. STAR shall not, and shall not permit any of
its Subsidiaries to, enter into any agreement or arrangement that limits or
otherwise restricts STAR or any of its Subsidiaries or any of their
respective affiliates or any successor thereto, or that could, after the
Effective Time, limit or restrict WAXS or the Surviving Corporation or any
of their respective affiliates or any successor thereto, from engaging or
competing in any line of business or, in any geographic area which
agreement or arrangement would reasonably be expected to have a Material
Adverse Effect on WAXS or the Surviving Corporation.
(k) Other Actions. Notwithstanding the fact that STAR may take
certain actions as permitted under Article IV hereof, STAR agrees not to
take any action which could reasonably be expected to
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cause the Merger to fail to qualify as a reorganization within the meaning
of Section 368(a) of the Code.
(l) Litigation. STAR shall not and shall not permit any of its
Subsidiaries to settle or, compromise any litigation, except where the
amount paid or payable, in each case, does not exceed $200,000.
4.2 Control of STAR's Business. Except as provided in Section 5.9, nothing
contained in this Agreement shall give WAXS, directly or indirectly, the right
to control or direct STAR's operations prior to the Effective Time. Prior to the
Effective Time, STAR shall exercise, consistent with the terms and conditions of
this Agreement, complete control and supervision over its operations.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Proxy Statement: Stockholders Meetings.
(a) As promptly as reasonably practicable following the date hereof,
WAXS and STAR shall prepare (in form and substance reasonably satisfactory
to each of WAXS and STAR) and file with the SEC proxy materials which shall
constitute the joint proxy statement and prospectus in connection with the
WAXS Stockholders Meeting and the STAR Stockholders Meeting (such proxy
statement and prospectus, and any amendments or supplements thereto, the
"Joint Proxy Statement/Prospectus") and WAXS shall prepare (in form and
substance reasonably satisfactory to each of WAXS and STAR) and file a
registration statement on Form S-4 with respect to the issuance of WAXS
Common Stock in the Merger (the "Registration Statement"). The Joint Proxy
Statement/Prospectus will be included in and will constitute a part of the
Registration Statement as WAXS's prospectus. The Registration Statement and
the Joint Proxy Statement/Prospectus shall comply as to form in all
material respects with the applicable provisions of the Securities Act and
the Exchange Act and the rules and regulations thereunder. Each of WAXS and
STAR shall use reasonable efforts to have the Registration Statement
declared effective by the SEC as promptly as reasonably practicable after
filing with the SEC and to keep the Registration Statement effective as
long as is necessary to consummate the Merger and the actions contemplated
thereby. WAXS and STAR shall, as promptly as practicable after receipt
thereof, provide the other party copies of any written comments and advise
the other party of any oral comments, with respect to the Joint Proxy
Statement/Prospectus received from the SEC. WAXS will provide STAR with a
reasonable opportunity to review and comment on any amendment or supplement
to the Registration Statement prior to filing such with the SEC, and will
provide STAR with a copy of all such filings made with the SEC.
Notwithstanding any other provision herein to the contrary, no amendment or
supplement (including by incorporation by reference) to the Joint Proxy
Statement/Prospectus or the Registration Statement shall be made without
the approval of both parties, which approval shall not be unreasonably
withheld or delayed; provided, that with respect to documents filed by a
party which are incorporated by reference in the Registration Statement or
Joint Proxy Statement/Prospectus, this right of approval shall apply only
with respect to information relating to the other party or its business,
financial condition or results of operations. WAXS will use reasonable
efforts to cause the Joint Proxy Statements/Prospectus to be mailed to
WAXS's stockholders, and STAR will use reasonable efforts to cause the
Joint Proxy Statement/Prospectus to be mailed to STAR's stockholders, in
each case as promptly as practicable after the Registration Statement is
declared effective under the Securities Act. WAXS shall also take any
action (other than qualifying to do business in any jurisdiction in which
it is not now so qualified or to file a general consent to service of
process) required to be taken under any applicable state securities laws in
connection with the issuance of WAXS Common Stock and STAR shall furnish
all information concerning STAR and the holders of STAR Common Stock as may
be reasonably requested in connection with any such action. Each party will
advise the other party, promptly after it receives notice thereof, of the
time when the Registration Statement has become effective, the issuance of
any stop order, the suspension
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of the qualification of the WAXS Common Stock issuable in connection with
the Merger for offering or sale in any jurisdiction, or any request by the
SEC for amendment of the Joint Proxy Statement/Prospectus or the
Registration Statement. If at any time prior to the Effective Time any
information relating to WAXS or STAR, or any of their respective
affiliates, officers or directors, should be discovered by WAXS or STAR
which should be set forth in an amendment or supplement to any of the
Registration Statement or the Joint Proxy Statement/Prospectus so that any
of such documents would not include any misstatement of a material fact or
omit to state any material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
the party which discovers such information shall promptly notify the other
party hereto and, to the extent required by law, rules or regulations, an
appropriate amendment or supplement describing such information shall be
promptly filed with the SEC and disseminated to the stockholders of WAXS
and STAR.
(b) Subject to Section 5.4, STAR shall, as promptly as reasonably
practicable following the execution of this Agreement, duly take all lawful
action to call, give notice of, convene and hold a meeting of its
stockholders (the "STAR Stockholders Meeting") (which meeting the parties
intend to be held no later than thirty (30) days following the date on
which the Registration Statement has been declared effective by the SEC)
for the purpose of obtaining the Required STAR Vote with respect to the
actions contemplated by this Agreement and shall take all lawful action to
solicit the adoption of this Agreement by the Required STAR Vote. Subject
to Section 5.4, the Board of Directors of STAR shall recommend adoption of
this Agreement by the stockholders of STAR to the effect as set forth in
Section 3.2(f), and shall not withdraw, modify or materially qualify in any
manner adverse to WAXS such recommendation or take any action or make any
statement in connection with the STAR Stockholders Meeting materially
inconsistent with such recommendation (collectively, an "Adverse Change in
the STAR Recommendation"); provided, however, that the foregoing shall not
prohibit accurate disclosure of factual information regarding the business,
financial condition or results of operations of WAXS or STAR or the fact
that an Acquisition Proposal has been made, the identity of the party
making such proposal or the material terms of such proposal (provided, that
the Board of Directors of STAR does not withdraw, modify or materially
qualify in any manner adverse to WAXS its recommendation) in the
Registration Statement or the Joint Proxy Statement/Prospectus, to the
extent such information, facts, identity or terms is required to be
disclosed therein under applicable law.
(c) WAXS shall, as promptly as reasonably practicable following the
execution of this Agreement, duly take all lawful action to call, give
notice of, convene and hold a meeting of its stockholders (the "WAXS
Stockholders Meeting") (which meeting the parties intend to be held no
later than thirty (30) days following the date on which the Registration
Statement has been declared effective by the SEC) for the purpose of
obtaining the Required WAXS Vote with respect to the transactions
contemplated by this Agreement and shall take all lawful action to solicit
the approval of the transactions contemplated hereby by the Required WAXS
Vote. The Board of Directors of WAXS shall recommend approval of the
transactions contemplated hereby by the stockholders of WAXS to the effect
as set forth in Section 3.1(f), and shall not withdraw, modify or
materially qualify in any manner adverse to STAR such recommendation or
take any action or make any statement in connection with the WAXS
Stockholders Meeting materially inconsistent with such recommendation;
provided, however, that the foregoing shall not prohibit accurate
disclosure of factual information regarding the business, financial
condition or operations of WAXS or STAR.
5.2 Access to Information. Upon reasonable notice, each of STAR and WAXS
shall (and shall cause its Subsidiaries to) afford to the officers, employees,
accountants, counsel, financial advisors and other representatives of the other
party hereto reasonable access during normal business hours, during the period
prior to the Effective Time, to all its properties, books, contracts,
commitments, records, officers and employees and, during such period, each of
STAR and WAXS shall (and shall cause its Subsidiaries to) furnish promptly to
the other party hereto (a) a copy of each report, schedule, registration
statement and other document filed, published, announced or received by it
during such period pursuant to the
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requirements of federal or state securities laws, as applicable (other than
documents which such party is not permitted to disclose under applicable law),
and (b) consistent with its legal obligations, all other information concerning
it and its business, properties and personnel as such other party may reasonably
request; provided, however, that either STAR or WAXS may restrict the foregoing
access to the extent that any law, treaty, rule or regulation of any
Governmental Entity applicable to such party requires such party or its
Subsidiaries to restrict access to any properties or information. The parties
will hold any such information which is non-public in confidence to the extent
required by, and in accordance with, the provisions of the Confidentiality
Agreement, dated December 17, 1999, between STAR and WAXS (the "Confidentiality
Agreement"). Any investigation by WAXS or STAR shall not affect the
representations and warranties made herein of STAR or WAXS, as the case may be.
5.3 Reasonable Efforts.
(a) Subject to the terms and conditions of this Agreement, each party
will use reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the Merger and the other
transactions contemplated by this Agreement as soon as practicable after
the date hereof, including (i) preparing and filing as promptly as
practicable all documentation to effect all necessary applications,
notices, petitions, filings, and other documents and to obtain as promptly
as practicable all consents, waivers, licenses, orders, registrations,
approvals, permits and authorizations necessary or advisable to be obtained
from any third party and/or any Governmental Entity in order to consummate
the Merger or any of the other transactions contemplated by this Agreement
and (ii) taking all reasonable steps as may be necessary to obtain all such
material consents, waivers, licenses, registrations, permits,
authorizations, tax rulings, orders and approvals. The parties each shall
keep the other apprised of the status of matters relating to completion of
the transactions contemplated hereby, including promptly furnishing the
other with copies of notices or other communications received by it or any
of its Subsidiaries or affiliates from any Governmental Entity or third
party with respect to the Merger or any of the other transactions
contemplated by this Agreement, in each case, to the extent permitted by
law or regulation or any applicable confidentiality agreements existing on
the date hereof.
(b) Promptly following execution of this Agreement, STAR and WAXS
shall promptly prepare and file any required notifications with the United
States Department of Justice and the Federal Trade Commission as required
by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"). The parties shall cooperate with each other in connection
with the preparation of such notifications and related matters, including
sharing information concerning sales and ownership and such other
information as may be needed to complete such notification, and providing a
copy of such notifications to the other prior to filing; provided, that
WAXS and STAR shall have the right to redact any dollar revenue information
from the copies of such notifications provided to the other parties. The
parties shall keep all information about the other obtained in connection
with the preparation of such notification confidential pursuant to the
terms of the Confidentiality Agreement. Each Person shall pay the filing
fee required under the regulations promulgated pursuant to the HSR Act with
respect to its own filing thereunder.
5.4 Acquisition Proposals. Without the prior written consent of WAXS,
pending the Effective Time or earlier termination of this Agreement pursuant to
Section 7.1, STAR agrees that neither it nor any of its Subsidiaries shall, and
that it shall use its reasonable efforts to cause its employees, officers,
directors, affiliates, agents and representatives (including any investment
banker, financial advisor, attorney or accountant retained by any of them) not
to, directly or indirectly, initiate, solicit, encourage or knowingly facilitate
(including by way of furnishing information or engaging in discussions or
negotiations) any inquiries or the making of any proposal or offer with respect
to a merger, reorganization, share exchange, consolidation, business
combination, recapitalization, liquidation, dissolution or similar action
involving STAR, or any purchase or sale of a material portion of the assets of
(including stock of Subsidiaries) of STAR, taken as a whole, or any purchase or
sale of, or tender or exchange offer for, a material portion of the equity
securities of STAR (any such proposal or offer being hereinafter referred to as
an "Acquisition Proposal"). STAR further agrees that neither it nor any of its
Subsidiaries shall, and that it shall use its
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reasonable efforts to cause it and its Subsidiaries' officers, directors,
affiliates, employees, agents and representatives (including any investment
banker, financial advisor, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, have any discussion with or
provide any confidential information or data to any Person relating to an
Acquisition Proposal, or engage in any negotiations concerning an Acquisition
Proposal, or knowingly facilitate any effort or attempt to make or implement an
Acquisition Proposal or accept an Acquisition Proposal. STAR agrees that it and
its Subsidiaries will, and will cause its officers, directors, affiliates,
employees, agents and representatives to, immediately cease and cause to be
terminated any activities, discussions or negotiations existing as of the date
of this Agreement with any parties conducted heretofore with respect to any
Acquisition Proposal. STAR agrees that it will promptly inform its directors,
officers, affiliates, key employees, agents and representatives of the
obligations undertaken in this Section 5.4. Notwithstanding anything contained
in this Section 5.4 or otherwise in this Agreement to the contrary, STAR or its
Board of Directors shall be permitted to (A) in response to an unsolicited bona
fide written Acquisition Proposal by any Person, recommend approval of such an
unsolicited bona fide written Acquisition Proposal to its stockholders or effect
an Adverse Change in the STAR Recommendation or (B) engage in any discussions or
negotiations with, or provide any information to, any person in response to an
unsolicited bona fide written Acquisition Proposal by any such Person, if and
only to the extent that, in any such case as is referred to in clause (A) or
(B), (i) the STAR Stockholders Meeting shall not have occurred, (ii) its Board
of Directors (x) in the case of clause (A) above, concludes in good faith that
such Acquisition Proposal constitutes a Superior Proposal (as defined in Section
8.12) and terminates this Agreement pursuant to Section 7.1 (h) or (y) in the
case of clause (B) above concludes in good faith that such Acquisition Proposal
could reasonably be expected to result in a Superior Proposal, (iii) prior to
providing any information or data to any Person in connection with an
Acquisition Proposal by any such Person, its Board of Directors receives from
such Person an executed confidentiality agreement containing confidentiality
terms at least as stringent as those contained in the Confidentiality Agreement,
and (iv) prior to providing any information or data to any Person or entering
into discussions or negotiations with any such Person regarding such Acquisition
Proposal, its Board of Directors notifies WAXS promptly of such inquiries,
proposals or offers received by, any such information requested from, or any
such discussions or negotiations sought to be initiated or continued with, any
of its representatives indicating, in connection with such notice, the name of
such Person and the material terms and conditions of any inquiries, proposals or
offers. STAR agrees that it will promptly keep WAXS informed of the status and
terms of any such proposals or offers and the status and terms of any such
discussions or negotiations. STAR agrees that it will, and will cause its
officers, directors and representatives to, immediately cease and cause to be
terminated any activities, discussions or negotiations existing as of the date
of this Agreement with any parties conducted heretofore with respect to any
Acquisition Proposal. STAR agrees that it will promptly inform its directors,
officers, key employees, agents and representative of the obligations undertaken
in this Section 5.4. Nothing in this Section 5.4 shall (x) permit STAR or WAXS
to terminate this Agreement (except as specifically provided in Article VII
hereof) or (y) affect any other obligation of STAR or WAXS under this Agreement.
5.5 Fees and Expenses. All Expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such Expenses. As used in this Agreement, "Expenses" includes all
out-of-pocket expenses (including all fees and expenses of counsel, accountants,
investment bankers, experts and consultants to a party hereto and its
affiliates) incurred by a party or on its behalf in connection with or related
to the authorization, preparation, negotiation, execution and performance of
this Agreement and the transactions contemplated hereby.
5.6 Public Announcements. Neither WAXS nor STAR shall, without the prior
consent of the other party, issue a press release or any other public statement
with respect to this Agreement or the transactions contemplated hereby except
pursuant to a joint communications plan, unless otherwise required by applicable
law or by obligations pursuant to any listing agreement with, or rules of, any
securities exchange, in which case the parties shall use reasonable efforts to
consult with each other before issuing any press release or otherwise making any
public statement with respect to this Agreement or the transactions contemplated
hereby.
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5.7 Listing. So long as WAXS Common Stock is quoted on the Nasdaq or
listed on any national securities exchange, WAXS, prior to the Effective Time,
will cause to be quoted or listed, upon official notice of issuance, and keep
quoted or listed on such system or exchange, all WAXS Common Stock issuable
pursuant to Article I hereof.
5.8 Termination of Tax Sharing Agreement. As of the Effective Time, STAR
shall cause all Tax Sharing Agreements to which STAR or any of its Subsidiaries
is a party to be terminated and of no further force and effect after the
Effective Time, thereby extinguishing any rights or obligations of any party
thereunder.
5.9 Management Services. Subject to obtaining any necessary regulatory or
third party consents and to the extent permitted under applicable law, WAXS and
STAR intend to enter into a management agreement pursuant to which WAXS will
provide, under the supervision and direction of the STAR board of directors,
certain management services to STAR. Neither party shall have any obligation
under this Section 5.9 and the provision of the foregoing services shall be
subject to the negotiation of a definitive agreement satisfactory to each of
WAXS and STAR in its sole discretion.
5.10 New Director of WAXS. WAXS shall take all appropriate action such
that, immediately following the Effective Time, and without further action by
WAXS, one (1) designee of STAR shall be elected to the Board of Directors of
WAXS. Such STAR designee shall be Christopher E. Edgecomb, or such other person
designated by STAR and agreed to by WAXS prior to the Effective time.
5.11 Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of STAR or Merger Sub, any deeds, bills of
sale, assignments or assurances and to take and do, in the name and on behalf of
STAR or Merger Sub, any other actions and things to vest, perfect or confirm of
record or otherwise in the Surviving Corporation any and all rights, properties,
or assets acquired or to be acquired by the Surviving Corporation as a result
of, or in connection with, the Merger.
5.12 Directors' and Officers' Indemnification and Insurance.
(a) From the Effective Time through the sixth (6th) anniversary of the
date on which the Effective Time occurs, WAXS shall indemnify and hold
harmless each present (as of the Effective Time) or former officer or
director of STAR and its Subsidiaries (the "Indemnified Parties"), against
all claims, losses, liabilities, damages, judgments, fines and reasonable
fees, costs and expenses, including attorneys' fees and disbursements
(collectively, "Costs"), incurred in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative
or investigative, arising out of or pertaining to (i) the fact that the
Indemnified Party is or was an officer or director of STAR or any of its
Subsidiaries or (ii) matters existing or occurring at or prior to the
Effective Time (including this Agreement and the transactions and actions
contemplated hereby), whether asserted or claimed prior to, at or after the
Effective Time, to the fullest extent permitted under applicable law;
provided that no Indemnified Party may settle any such claim without the
prior approval of WAXS (which approval shall not be unreasonably withheld
or delayed). Each Indemnified Party will be entitled to advancement of
expenses incurred in the defense of any claim, action, suit, proceeding or
investigation from WAXS within ten (10) business days of receipt by WAXS
from the Indemnified Party of a request therefor; provided that any person
to whom expenses are advanced provides an undertaking, to the extent
required by the DGCL, to repay such advances if it is ultimately determined
that such person is not entitled to indemnification.
(b) WAXS shall maintain, at no expense to the beneficiaries, in effect
for six years from the Effective Time the current policies of the
directors' and officers' liability insurance maintained by STAR with
respect to matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement); provided that
WAXS may substitute therefor policies of at least the same coverage
containing terms and conditions which are not materially less advantageous
to any beneficiary thereof; and provided, further, that in no event shall
WAXS be
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required to pay annual premiums for such insurance in excess of 125% of the
annual premiums currently paid by STAR for such insurance.
(c) Notwithstanding anything herein to the contrary, if any claim,
action, suit, proceeding or investigation (whether arising before, at or
after the Effective Time) is made against any Indemnified Party, on or
prior to the sixth (6th) anniversary of the Effective Time, the provisions
of this Section 5.12 shall continue in effect until the final disposition
of such claim, action, suit, proceeding or investigation.
(d) The covenants contained in this Section 5.12 are intended to be
for the benefit of, and shall be enforceable by, each of the Indemnified
Parties and their respective heirs and legal representatives and shall not
be deemed exclusive of any other rights to which an Indemnified Party is
entitled, whether pursuant to law, contract or otherwise.
(e) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other Person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers or conveys all or substantially
all of its properties and assets to any Person, then, and in each such
case, proper provision shall be made so that the successors or assigns of
the Surviving Corporation or the purchaser of such properties and assets
shall succeed to the obligations set forth in this Section 5.12.
5.13 Confidentiality. The parties each agree that the Confidentiality
Agreement shall continue in full force and effect until the Effective Time, and
if this Agreement is terminated or if the Merger is not consummated for any
reason whatsoever, such Confidentiality Agreement shall thereafter remain in
full force and effect in accordance with its terms.
5.14 Compliance with Dissenters' Rights Statute. STAR shall comply with
all procedures and requirements applicable to it under Section 262 of the DGCL.
5.15 Interim Financing. The parties have agreed that WAXS will make
available up to $25,000,000 in secured financing to STAR and up to $10,000,000
in secured financing to STAR's subsidiary, STAR Telecommunications GmbH,
(collectively, the "Interim Financing") pursuant to the terms of the Loan
Documents (as defined below). The Interim Financing will mature at the earlier
of one year from the date hereof and ninety (90) days after any termination of
this Agreement (other than a termination due to STAR's breach or default under
this Agreement which will result in the Interim Financing becoming immediately
due and payable). The Interim Financing will be made pursuant to, and subject to
the finalization of, appropriate loan and security documents (the "Loan
Documents") substantially in the form of, and as contemplated by, the draft Loan
Documents distributed to STAR on or prior to the date hereof.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of STAR and WAXS to effect the Merger are subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired.
(b) Stockholder Approval. WAXS shall have obtained the Required WAXS
Vote in connection with the approval of this Agreement and the Merger and
STAR shall have obtained the Required STAR Vote in connection with the
approval of this Agreement and the Merger.
(c) Registration Statement. The Registration Statement shall have
been declared effective by the SEC under the Securities Act. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and no proceedings for that purpose shall have been
initiated or, to the Knowledge of WAXS or STAR, threatened by the SEC.
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6.2 Additional Conditions to Obligations of WAXS. The obligations of WAXS
to effect the Merger are subject to the satisfaction of, or waiver by WAXS, on
or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of STAR set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent in either case that such
representations and warranties speak as of another date, in which case any
such representations and warranties shall be true and correct as of such
date), except where any failures to be true and correct would not have a
Material Adverse Effect on WAXS or the Surviving Corporation, and WAXS
shall have received a certificate of the chief executive officer and the
chief financial officer of STAR to such effect.
(b) Performance of Obligations of STAR. STAR shall have performed or
complied in all material respects with all material agreements and
covenants required to be performed by it under this Agreement at or prior
to the Closing Date, and WAXS shall have received a certificate of the
chief executive officer and the chief financial officer of STAR to such
effect.
(c) Consents and Approvals. Other than the filing provided for under
Section 1.3, all consents, approvals and actions of, filings with and
notices to any Governmental Entity required to consummate the Merger and
the other transactions contemplated hereby, or of any other third party
required of STAR or any of its Subsidiaries to consummate the Merger and
the other transactions contemplated hereby, the failure of which to be
obtained or taken would have a Material Adverse Effect on WAXS or the
Surviving Corporation, shall have been obtained; provided, however, that
the provisions of this Section 6.2(c) shall not be available to WAXS, if
its failure to fulfill its obligations pursuant to Section 5.3 shall have
been the cause of, or shall have resulted in, the failure to obtain such
consent or approval.
(d) No Material Change. STAR and its Subsidiaries, taken as a whole,
shall not have suffered, since the date hereof, a Material Adverse Effect,
other than any change, circumstance or effect relating (i) to the economy
or financial markets in general, (ii) in general to the industries in which
STAR operates and not specifically relating to STAR or (iii) the trading
price of STAR Common Stock.
(e) Opinion of Counsel to STAR. WAXS shall have received from Riordan
& McKinzie an opinion, dated the Closing Date, in form and substance
reasonably satisfactory to WAXS.
(f) No Injunctions or Restraints; Illegality. No laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other Governmental
Entity of competent jurisdiction shall be in effect (i) having the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger or (ii) which otherwise would have a Material Adverse Effect on WAXS
or the Surviving Corporation; provided, however, that the provisions of
this Section 6.2(f) shall not be available to WAXS if its failure to
fulfill its obligations pursuant to Section 5.3 shall have been the cause
of, or shall have resulted in any such order or injunction.
(g) Dissenters' Rights. STAR shall have complied with all procedures
and requirements applicable to it under Section 262 of the DGCL, the period
for exercising dissenters' rights of appraisal pursuant to the DGCL in
connection with the Merger shall have expired, and holders of less than one
percent (1%) of the shares of STAR Common Stock issued and outstanding
immediately prior to the Closing shall have exercised such dissenters'
rights of appraisal, and WAXS shall have received a certificate from an
officer of STAR to all such effects.
(h) Sale of PT-1. STAR shall have consummated the sale of the capital
stock of PT-1 Communications, Inc. ("PT-1"), or the assets of PT-1 on a
substantially equivalent basis, for Net PT-1 Sale Proceeds (as defined in
Section 8.12 ) of at least $150,000,000 pursuant to an agreement in form
and substance reasonably satisfactory to WAXS (the "PT-1 Sale"); provided,
however, if
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(i) the PT-1 Sale has not been consummated prior to the Closing Date, (but
STAR has entered into a definitive agreement, in form and substance
satisfactory to WAXS, for the PT-1 Sale) and (ii) WAXS determines in its
sole discretion to waive compliance with this Section 6.2(h) and proceed
with the Merger, then WAXS and STAR agree that in such event, they shall
amend this Agreement to provide that (A) the formula used to determine the
Exchange Ratio shall be modified by deleting "Z" therefrom and (B) a holder
of STAR Common Stock and STAR Stock Options immediately prior to the
Effective Time shall have a right to receive such holder's pro rata share
of an aggregate number of additional "contingent" shares of WAXS Common
Stock, if and when the PT-1 Sale is consummated pursuant to such definitive
agreement (or, in the case of a holder of STAR Stock Option, when such
option is exercised), equal to the PT-1 Excess Proceeds divided by twenty
(20) (the "Contingent Shares") and that the provisions of any such
amendment to this Agreement concerning the issuance of such Contingent
Shares will satisfy the requirements of Section 3.03 of IRS Revenue
Procedure 77-37, as it has been amplified and superseded, which established
the circumstances under which the Internal Revenue Service previously
issued advanced rulings on contingent stock arrangements in mergers
intended to qualify as "reorganizations" under Section 368(a) of the Code.
(i) STAR shall have provided evidence satisfactory to WAXS that any
and all obligations of STAR (or any of its affiliates) relating to or
arising in connection with the China-U.S. Cable Network were fully
satisfied by the reclamation of STAR's capacity in such network and neither
STAR nor any of its affiliates has any further obligation or liability with
respect thereto, including without limitation payment of the amounts
claimed and owing by STAR according to that letter dated January 11, 2000
from Kou Yinsen, Director, CBP to Jim Kolsrud.
6.3 Additional Conditions to Obligations of STAR. The obligations of STAR
to effect the Merger are subject to the satisfaction of, or waiver by STAR, on
or prior to the Closing Date of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of WAXS set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent in either case that such
representations and warranties speak as of another date, in which case any
such representations and warranties shall be true and correct as of such
date), except where any failures to be true and correct would not have a
Material Adverse Effect on WAXS, and STAR shall have received a certificate
of the chief executive officer and the chief financial officer of WAXS to
such effect.
(b) Performance of Obligations of WAXS. WAXS shall have performed or
complied in all material respects with all material agreements and
covenants required to be performed by it under this Agreement at or prior
to the Closing Date, and STAR shall have received a certificate of the
chief executive officer and the chief financial officer of WAXS to such
effect.
(c) Consents and Approvals. Other than the filing provided for under
Section 1.3, all consents, approvals and actions of, filings with and
notices to any Governmental Entity required to consummate the Merger and
the other transactions contemplated hereby, or of any other third party
required of WAXS or any of its Subsidiaries to consummate the Merger and
the transactions contemplated hereby, the failure of which to be obtained
or taken would have a Material Adverse Effect on WAXS, shall have been
obtained; provided, however, that the provisions of this Section 6.3(c)
shall not be available to STAR if its failure to fulfill any of its
obligations pursuant to Section 5.3 shall have been the cause of, or shall
have resulted in, the failure to obtain such consent or approval.
(d) No Material Change. WAXS shall not have suffered, since the date
hereof, a Material Adverse Effect, other than any change, circumstance or
effect relating (i) to the economy or financial markets in general, (ii) in
general to the industries in which WAXS operates and not specifically
relating to WAXS or (iii) the trading price of WAXS Common Stock.
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(e) Opinion of Counsel to WAXS. STAR shall have received from Long
Aldridge & Norman LLP an opinion, dated the Closing Date, in form and
substance reasonably satisfactory to STAR.
(f) No Injunctions or Restraints; Illegality. No laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other Governmental
Entity of competent jurisdiction shall be in effect (i) having the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger or (ii) which otherwise would have a Material Adverse Effect on WAXS
after giving effect to the Merger; provided, however, that the provisions
of this Section 6.3(g) shall not be available to STAR if its failure to
fulfill its obligations pursuant to Section 5.3 shall have been the cause
of, or shall have resulted in any such order or injunction.
(g) Exchange Fund. An officer of the Exchange Agent shall have
certified in writing to STAR that the deposit required to be made by WAXS
into the Exchange Fund pursuant to Section 2.1 has been made in connection
with the establishment thereof.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, by action taken or authorized by the Board of Directors of the
terminating party or parties:
(a) By mutual written consent of WAXS and STAR;
(b) By either WAXS or STAR, if the other party shall have failed to
comply in any material respect with any of its material covenants or
agreements contained in this Agreement, which failure to so comply has not
been cured within ten (10) business days following receipt by such other
party of written notice of such failure to comply; provided, however, that
if any such breach is curable by the breaching party through the exercise
of the breaching party's reasonable efforts and for so long as the
breaching party shall be so using its reasonable efforts to cure such
breach, the non-breaching party may not terminate this Agreement pursuant
to this paragraph; and provided, further, that no party shall have the
right to terminate this Agreement pursuant to this Section 7.1(b) if such
party is then failing to comply in any material respect with any of its
covenants or agreements contained in this Agreement;
(c) By either WAXS or STAR, if there has been a breach by the other
party of any representations or warranties, which breach has not been cured
within ten (10) business days following receipt by such other party of
written notice of such failure to comply; provided, however, that if any
such breach is curable by the breaching party through the exercise of the
breaching party's reasonable efforts and for so long as the breaching party
shall be so using reasonable efforts to cure such breach, the non-breaching
party may not terminate this Agreement pursuant to this paragraph; and
provided further, that this provision shall not apply to such breaches
which would not have a Material Adverse Effect on WAXS or the Surviving
Corporation;
(d) By either STAR or WAXS, if the Effective Time shall not have
occurred on or before September 30, 2000 (the "Termination Date");
provided, however, that the right to terminate this Agreement under this
Section 7.1(d) shall not be available to any party whose action or failure
to fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before the
Termination Date and any such action or failure constitutes a breach of
this Agreement by such party;
(e) By either STAR or WAXS if any Governmental Entity (i) shall have
issued an order, decree or ruling or taken any other action (which the
parties shall have used their reasonable efforts to resist, resolve or
lift, as applicable, in accordance with Section 5.3) permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling, or other
action shall have become final and nonappealable or (ii) shall have failed
to
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issue an order, decree or ruling or to take any other action (which order,
decree, ruling or other action the parties shall have used their reasonable
efforts to obtain, in accordance with Section 5.3), which, in the case of
each of (i) and (ii) is necessary to fulfill the conditions set forth in
Section 6.2(f) with respect to WAXS or Section 6.3(g) with respect to STAR,
and such denial of a request to issue such order, decree, ruling or take
such other action shall have become final and nonappealable; provided,
however, that the right to terminate this Agreement under this Section
7.1(e) shall not be available to any party whose action or failure to
fulfill any obligation under this Agreement has been the cause of such
action or inaction and any such action or failure constitutes a breach of
this Agreement by such party;
(f) By WAXS or STAR if the adoption of this Agreement by the
stockholders of WAXS or the stockholders of STAR shall not have been
obtained by reason of the failure to obtain the Required WAXS Vote or the
Required STAR Vote, as applicable, in each case upon the taking of such
vote at a duly held meeting of stockholders of WAXS or STAR, or at any
adjournment thereof;
(g) By WAXS if the Board of Directors of STAR, prior to the Required
STAR Vote, shall make an Adverse Change in the STAR Recommendation (other
than in connection with STAR's termination of this Agreement pursuant to
Section 7.1(b)) or approve or recommend a Superior Proposal pursuant to
Section 5.4 or shall resolve to take any such actions;
(h) By STAR, at any time prior to the Required STAR Vote upon three
(3) business days' prior notice to WAXS, if its Board of Directors shall
have determined as of the date of such notice that an Acquisition Proposal
is a Superior Proposal; provided, however, that (i) STAR shall have
complied with Section 5.4, (ii) prior to such termination, STAR shall, if
requested by WAXS in connection with a revised proposal by it, negotiate in
good faith for such three (3) business day period with WAXS and (iii) the
Board of Directors of STAR shall have concluded in good faith, as of the
effective date of such termination, after taking into account any revised
proposal by WAXS during such three (3) business day period, that an
Acquisition Proposal is a Superior Proposal; and provided, further, that it
shall be a condition to termination by STAR pursuant to this Section 7.1(h)
that STAR shall have made the payment of the fee to WAXS pursuant to
Section 7.2(b);
(i) By WAXS, if (X) either STAR or any of its material Subsidiaries
(1) commences a voluntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or consents to the entry
of an order for relief in an involuntary case under any such law, (2)
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of STAR or any of its Subsidiaries or for all or a material portion of the
property or assets of STAR or any of its Subsidiaries or (3) effects any
general assignment for the benefit of creditors or (Y) a Governmental
Entity having jurisdiction enters a decree or order for (a) relief in
respect of STAR or any of its material Subsidiaries in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (b) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of STAR or any of its
Subsidiaries or for all or a material portion of the property and assets of
STAR or any of its Subsidiaries or (c) the winding up or liquidation of the
affairs of STAR or any of its material Subsidiaries and, in each case, such
decree or order shall remain unstayed and in effect for a period of 30
consecutive days; or
(j) By WAXS if there has been an Event of Default under the Credit
Agreement, of even date herewith, between WAXS and STAR.
7.2 Effect of Termination.
(a) In the event of any termination of this Agreement by either STAR
or WAXS, as provided in Section 7.1, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of WAXS or
STAR or their respective officers or directors except with respect to
Section 3.1(m), Section 3.2(l), the second sentence of Section 5.2, Section
5.5, Section 5.6, this Section 7.2, and Article VIII, which provisions
shall survive such termination and except that,
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notwithstanding anything to the contrary contained in this Agreement,
neither WAXS nor STAR shall be relieved or released from any liabilities or
damages arising out of its breach of this Agreement;
(b) If this Agreement is terminated by STAR pursuant to Section
7.1(h), STAR shall, prior to such termination, pay to WAXS $14,000,000 in
immediately available funds (the "Termination Fee");
(c) If this Agreement is terminated by WAXS pursuant to Section
7.1(g), STAR shall, within three (3) days following such termination, pay
to WAXS the Termination Fee; and
(d) If this Agreement is terminated by WAXS or STAR pursuant to
Section 7.1(f) because STAR's stockholders have failed to adopt this
Agreement by the Required Star Vote and STAR enters into a definitive
agreement with respect to a Business Combination within twelve (12) months
following such termination, then STAR shall pay to WAXS the Termination Fee
prior to or at the consummation thereof.
7.3 Amendment. This Agreement may be amended by STAR and WAXS, by action
taken or authorized by their respective Boards of Directors or representatives
or authorized officers, at any time before or after approval of the matters
presented in connection with the Merger by the stockholders of STAR and WAXS
(including, without limitation, an amendment as described in Section 6.2(h)),
but, after any such approval, no amendment shall be made which by law or in
accordance with the rules of any relevant stock exchange or automatic quotations
system requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of STAR and WAXS.
7.4 Extension, Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, representatives or authorized officers, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and other agreements in this
Agreement or in any instrument delivered pursuant to this Agreement including
any rights arising out of any breach of such representations, warranties,
covenants and other agreements, shall survive the Effective Time, except for
those covenants and agreements contained herein and therein that by their terms
apply or are to be performed in whole or in part after the Effective Time and
this Article VIII.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed duly given (a) on the date of delivery if delivered
personally, or by telecopy or facsimile, upon confirmation of receipt, (b) on
the first business day following the date of dispatch if delivered by a
recognized next day courier service, or (c) on the tenth business day following
the date of mailing if delivered by registered or certified mail return receipt
requested, postage prepaid All notices hereunder
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shall be delivered as set forth below, or pursuant to such other instructions as
may be designated in writing by the party to receive such notice:
(a) If to WAXS or Merger Sub, to:
World Access, Inc.
Resurgens Plaza, Suite 2210
945 East Paces Ferry Road
Atlanta, Georgia 30326
Facsimile No.: (404) 233-2280
Attention: John D. Phillips
with a copy to
Long Aldridge & Norman LLP
303 Peachtree Street, Suite 5300
Atlanta, Georgia 30308
Facsimile No.: (404) 527-4198
Attention: H. Franklin Layson
(b) If to STAR to:
STAR Telecommunications, Inc.
223 East De La Guerra
Santa Barbara, California 93101
Facsimile No.: (805) 884-1137
Attention: Christopher E. Edgecomb
with a copy to
Riordan & McKinzie
Twenty-Ninth Floor
300 South Grand Avenue
Los Angeles, California 90071
Facsimile No.: (213) 229-8550
Attention: Richard J. Welch
8.3 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits, the WAXS Disclosure Schedule or the STAR Disclosure
Schedule, such reference shall be to a Section of or Exhibit or schedule to this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". All Exhibits, the WAXS
Disclosure Schedule and the STAR Disclosure Schedule are incorporated herein and
made a part hereof.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that both
parties need not sign the same counterpart.
8.5 Entire Agreement; No Third Party Beneficiaries.
(a) This Agreement and the Confidentiality Agreement constitute the
entire agreement and supersede all prior agreements and understandings,
both written and oral, including, without limitation, that certain Letter
of Intent, dated December 17, 1999, between WAXS and STAR, among the
parties with respect to the subject matter hereof.
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(b) This Agreement shall be binding upon and inure solely to the
benefit of each party hereto, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other Person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement, except as provided for in Section 5.12.
8.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware (without giving effect to
choice of law principles thereof).
8.7 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the actions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
8.8 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto, in whole
or in part (whether by operation of law or otherwise), without the prior written
consent of the other parties, and any attempt to make any such assignment
without such consent shall be null and void. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and assigns.
8.9 Submission to Jurisdiction; Waivers. Each of WAXS and STAR irrevocably
agrees that any legal action or proceeding with respect to this Agreement or for
recognition and enforcement of any judgment in respect hereof brought by the
other party hereto or its successors or assigns may be brought and determined in
the Chancery or other Courts of the State of Delaware, and each of WAXS and STAR
hereby irrevocably submits with regard to any such action or proceeding for
itself and in respect to its property, generally and unconditionally, to the
nonexclusive jurisdiction of the aforesaid courts. Each of WAXS and STAR hereby
irrevocably waives, and agrees not to assert, by way of motion, as a defense,
counterclaim or otherwise, in any action or proceeding with respect to this
Agreement, (i) any right to trial by jury with respect to any action, suit or
proceeding arising out of or relating to this Agreement, the Merger or any other
transaction contemplated hereby, (ii) any claim that it is not personally
subject to the jurisdiction of the above named courts for any reason other than
the failure to lawfully serve process, (iii) that it or its property is exempt
or immune from jurisdiction of any such court or from any legal process
commenced in such courts (whether through service of notice, attachment prior to
judgment, attachment in aid of execution of judgment, execution of judgment or
otherwise), and (iv) to the fullest extent permitted by applicable law, that (a)
the suit, action or proceeding in any such court is brought in an inconvenient
forum, (b) the venue of such suit, action or proceeding is improper and (c) this
Agreement, or the subject matter hereof, may not be enforced in or by such
courts.
8.10 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
8.11 Headings. The headings contained in this Agreement are inserted for
convenience only and do not constitute a part of this Agreement.
8.12 Definitions. As used in this Agreement:
(a) "beneficial ownership" or "beneficially own" shall have the
meaning under Section 13(d) of the Exchange Act and the rules and
regulations thereunder.
(b) "Board of Directors" means the Board of Directors of any specified
Person and any committees thereof.
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(c) "Business Combination" means (i) a merger, reorganization,
consolidation, share exchange, business combination, recapitalization,
liquidation, dissolution or similar transaction involving a party as a
result of which either (A) such party's stockholders prior to such
transaction (by virtue of their ownership of such party's shares) in the
aggregate cease to own at least 65% of the voting securities of the entity
surviving or resulting from such transaction (or the ultimate parent entity
thereof) or, regardless of the percentage of voting securities held by such
stockholders, if any Person shall beneficially own, directly or indirectly,
at least 20% of the voting securities of such ultimate parent entity, or
(B) the individuals comprising the board of directors of such party prior
to such transaction do not constitute a majority of the board of directors
of such ultimate parent entity, (ii) a sale, lease, exchange, transfer or
other disposition of at least 50% of the assets of such party and its
Subsidiaries, taken as whole, in a single transaction or a series of
related transactions, or (iii) the acquisition, directly or indirectly, by
a Person of beneficial ownership of 20% or more of the common stock of such
party whether by merger, consolidation, share exchange, business
combination, tender or exchange offer or otherwise.
(d) "Dissenters' Shares" means shares of STAR Common Stock for which
dissenter's rights of appraisal have been exercised pursuant to the DGCL.
(e) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(f) "GAAP" means United States generally accepted accounting
principles.
(g) "Known" or "Knowledge" means, with respect to any party, the
knowledge of such party's executive officers after reasonable inquiry.
(h) "Material Adverse Effect" means, with respect to any entity, any
change, circumstance or effect or any breach of the provisions of this
Agreement that, individually or in the aggregate with all other changes,
circumstances and effects or breaches, is or would reasonably be expected
to be materially adverse to (i) the business, financial condition or
results of operations of such entity and its Subsidiaries taken as a whole,
or (ii) the ability of such entity (or the party owning such entity) to
consummate the transactions contemplated by this Agreement.
(i) "Nasdaq" means the National Market System of the NASDAQ Stock
Market.
(j) "Net PT-1 Proceeds" means the cash proceeds received by STAR at
the consummation of the PT-1 Sale, net of all Taxes, fees, expenses and
costs incurred in connection with the PT-1 Sale, including, without
limitation:
(1) fees or expenses for investment banking or other financial
services;
(2) agency, brokerage, finder's or other similar fees or
commissions;
(3) legal, accounting, consulting or other professional fees or
expenses;
(4) the cost of any remedial or corrective actions or measures;
(5) the costs associated with the transfer or termination of any
PT-1 employees; or
(6) the costs of any right or obligation the vesting of which is
accelerated by the PT-1 Sale.
(k) "Person" means an individual, corporation, limited liability
company, partnership, association, trust, unincorporated organization,
other entity or group (as defined in the Exchange Act).
(l) "Pre-Closing Price" means the closing price of WAXS Common Stock
as reported on the Nasdaq for the trading day (in which such shares are
traded on the Nasdaq) ending at the close of trading on the second (2nd)
trading day preceding the Closing.
(m) "PT-1 Excess Proceeds" means the Net PT-1 Proceeds in excess of
$150,000,000.
(n) "SEC" means the Securities and Exchange Commission.
(o) "Securities Act" means the Securities Act of 1933, as amended.
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(p) "Subsidiary", when used with respect to any party means any
corporation or other organization, whether incorporated or unincorporated,
(i) of which such party or any other Subsidiary of such party is a general
partner (excluding partnerships, the general partnership interests of which
held by such party or any Subsidiary of such party do not have a majority
of the voting interests in such partnership) or (ii) at least a majority of
the securities or other interests of which having by their terms ordinary
voting power to elect a majority of the Board of Directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or
by any one or more of its Subsidiaries, or by such party and one or more of
its Subsidiaries.
(q) "Superior Proposal" means a written proposal made by a Person
unaffiliated with STAR which is for (I) (i) a merger, reorganization,
consolidation, share exchange, business combination, recapitalization,
liquidation, dissolution or similar transaction involving STAR as a result
of which either (A) STAR's stockholders prior to such action (by virtue of
their ownership of STAR's shares) in the aggregate cease to own at least
50% of the voting securities of the entity surviving or resulting from such
transaction (or the ultimate parent entity thereof) or (B) the individuals
comprising the board of directors of STAR prior to such transaction do not
constitute a majority of the board of directors of such ultimate parent
entity, (ii) a sale, lease, exchange, transfer or other disposition of at
least 50% of the assets of STAR and its Subsidiaries, taken as a whole, in
a single transaction or a series of related transactions, or (iii) the
acquisition, directly or indirectly, by a Person of beneficial ownership of
50% or more of the common stock of STAR whether by merger, consolidation,
share exchange, business combination, tender or exchange offer or
otherwise, and which is (II) otherwise on terms which the Board of
Directors of STAR in good faith concludes (after consultation with its
financial advisors and outside legal counsel), taking into account among
other things, all legal, financial, regulatory and other aspects of the
proposal and the Person making the proposal, (i) would, if consummated,
result in a transaction that is more favorable to its stockholders (in
their capacities as stockholders), from a financial point of view, than the
transactions contemplated by this Agreement and (ii) is reasonably capable
of being completed.
(r) "Tax" (and, with correlative meaning, "Taxes" shall mean: (i) all
taxes, charges, fees, levies or other assessments, however denominated,
including any interest, penalties or other additions to tax that may become
payable in respect thereof, imposed by any federal, territorial, state,
local or foreign government or any agency or political subdivision of any
such government, which taxes shall include, without limiting the generality
of the foregoing, all income or profits taxes (including, but not limited
to, federal income taxes and state income taxes), payroll and employee
withholding taxes, unemployment insurance, social security taxes, sales and
use taxes, ad valorem taxes, excise taxes, employer tax, estimated,
severance, telecommunications, occupation, goods and services, capital,
profits, value added taxes, franchise taxes, gross receipts taxes, business
license taxes, occupation taxes, real and personal property taxes, stamp
taxes, environmental taxes, transfer taxes, workers' compensation, Pension
Benefit Guaranty Corporation premiums and other governmental charges, and
other obligations of the same or of a similar nature to any of the
foregoing, which the Person is required to pay, withhold or collect; and
(ii) any liability for the payment of any amounts described in clause (i)
as a result of being a successor to or transferee of any individual or
entity or a member of an affiliated, consolidated or unitary group for any
period (including pursuant to Treas. Reg. sec. 1.1502-6 or comparable
provisions of state, local or foreign tax law); and (iii) any liability for
the payment of amounts described in clause (i) or clause (ii) as a result
of any express or implied obligation to indemnify any Person or as a result
of any obligations under agreements or arrangements with any Person.
(s) "Tax Asset" means any net operating loss, net capital loss,
investment tax credit, foreign tax credit, charitable deduction or any
other credit or tax attribute which could reduce Taxes (including, without
limitation, credits related to alternative minimum Taxes).
(t) "Tax Return" shall mean all reports, estimates, declarations of
estimated tax, information statements and returns (including any attached
schedules) or similar statement relating to, or required
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<PAGE> 330
to be filed in connection with, any Taxes, including information returns or
reports with respect to backup withholding and other payments to third
parties.
(u) "Tax Sharing Agreement" shall mean any and all existing Tax
sharing agreements, or arrangements written or unwritten, express or
implied, binding two or more Persons with respect to the payment of Taxes,
including any agreements or arrangements which afford any other Person the
right to receive any payment from one or more other Persons in respect to
any Taxes or the benefit of any Tax Asset of one or more other Persons or
require or permit the transfer or assignment of any income, revenue,
receipts or gains.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
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<PAGE> 331
IN WITNESS WHEREOF, WAXS, Merger Sub and STAR have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first above written.
WAXS:
WORLD ACCESS, INC.
By: /s/ John D. Phillips
------------------------------------
Name: John D. Phillips
Title: Chairman and Chief
Executive Officer
STAR:
STAR TELECOMMUNICATIONS, INC.
By: /s/ Christopher E. Edgecomb
------------------------------------
Name: Christopher E. Edgecomb
Title: President
MERGER SUB:
STI MERGER CO.
By: /s/ John D. Phillips
------------------------------------
Name: John D. Phillips
Title: Chairman and Chief
Executive Officer
A-37
<PAGE> 332
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Amendment"), dated as
of June 7, 2000, by and among World Access, Inc., a Delaware corporation
("WAXS"), STI Merger Co., a Delaware corporation and wholly-owned subsidiary of
WAXS ("Merger Sub"), and STAR Telecommunications, Inc., a Delaware corporation
("STAR").
WITNESSETH:
WHEREAS, WAXS, Merger Sub and STAR are parties to that certain Agreement
and Plan of Merger, dated as of February 11, 2000 (the "Merger Agreement"),
pursuant to which STAR will merge with and into Merger Sub;
WHEREAS, the parties have agreed to make certain amendments to the Merger
Agreement; and
WHEREAS, capitalized terms used, but not otherwise defined herein, shall
have the meanings given to such terms in the Merger Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to hereby mutually agree as follows:
1. Section 1.6(c) of the Merger Agreement is hereby deleted in its
entirety and replaced with the following:
"Subject to Section 2.4, each share of STAR Common Stock issued and
outstanding immediately prior to the Effective Time (other than the
Dissenter's Shares (as defined in Section 8.12)) shall be converted into
the right to receive, at the election of WAXS by written notice to STAR
prior to the Closing, (i) the number of shares of WAXS Common Stock
obtained by solving for "X" in the following formula (the "Exchange
Ratio"):
<TABLE>
<S> <C> <C> <C> <C>
X = 7.7319 + Z
-------------
20
</TABLE>
or (ii) such number of shares of WAXS Common Stock as shall equal up to
sixty percent (60%) of the Exchange Ratio and an amount in cash equal up
to forty percent (40%) of the average closing price of the WAXS Common
Stock on Nasdaq for the ten (10) trading day period ending at the close
of trading on the trading day immediately preceding the Closing Date
multiplied by "X"; provided, however, that WAXS and STAR expressly agree
that, notwithstanding anything in this Agreement to the contrary, in
order to ensure that the Merger satisfies the continuity of interest
requirement under Treasury Regulation Section 1.368-l(e), in no event
shall WAXS issue cash for more than forty-five percent (45%) of the
outstanding shares of STAR Common Stock, including for purposes of this
calculation cash paid for fractional shares pursuant to Section 2.4 and
cash paid for Dissenters' Shares.
For purposes of this Section 1.6, "Z" shall equal the PT-1 Excess
Proceeds (as defined in Section 8.12) divided by 62,856,702. All shares
of STAR Common Stock, at the Effective Time, shall no longer be
outstanding and shall automatically be canceled and retired and each
holder of a certificate representing any such shares (a "Certificate")
shall cease to have any rights with respect thereto, except as set forth
in this Section 1.6(c), Section 2.4 or at law. The shares of WAXS Common
Stock issued pursuant to this Section 1.6(c) together with any cash in
lieu of fractional shares paid pursuant to Section 2.4 shall be referred
to herein as the "Merger Consideration."
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<PAGE> 333
2. Section 5.15 of the Merger Agreement is hereby amended by appending
the following to the end of such section:
"Notwithstanding the foregoing, the amount of the Interim Financing
available to STAR and STAR Telecommunications GmbH shall be reduced on a
dollar-for-dollar basis for each dollar of additional financing provided
to STAR or its Subsidiaries by MCI WorldCom Network Services, Inc., or
any of its affiliates, from the date hereof, up to an aggregate of
$30,000,000."
3. Section 6.2(d) of the Merger Agreement is hereby amended by
deleting the word "or" prior to "(iii)"; and by appending the following to
the end of such section:
"or (iv) to an action taken by STAR at the specific request of
World Access."
4. Section 6.2(h) of the Merger Agreement is hereby amended by
appending the following sentence to the end of such section:
"The condition set forth in this Section 6.2(h) shall be deemed
satisfied provided that (a) STAR shall have consummated the sale of the
assets of PT-1 pursuant to the terms and conditions of that certain
Asset Purchase Agreement, dated as of June 6, 2000, between Counsel
Communications LLC, a Delaware limited liability company, PT-1, and
STAR, set forth as Schedule 6.2(h) hereto (the "Sale to Counsel") and
(b) the Sale to Counsel shall have resulted in the Net PT-1 Sale
Proceeds of at least $120,000,000. Solely for the purposes of
determining whether the Sale to Counsel results in Net PT-1 Sale
Proceeds of at least $120,000,000, the parties have agreed that with
respect to the following items (and not to any other Tax, fee, expense
or cost for which no agreement has been reached, including, without
limitation, Taxes due with respect to the Sale to Counsel) the cost
attributable to such items will be fixed at the amounts set forth below:
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<C> <S> <C>
(i) Switch Partition Services Agreement
Credit............................... $1,000,000
(ii) Tax refunds forgone in order to apply
1999 net operating losses against any
gain which results from the Sale to
Counsel.............................. $6,700,000"
</TABLE>
5. Section 6.2(i) of the Merger Agreement is hereby deleted in its
entirety and replaced with the following:
"STAR (or any of its affiliates) shall not have received
notification, and WAXS shall not have any reasonable reason to believe,
that any and all obligations of STAR (or any of its affiliates) relating
to or arising in connection with the China-U.S. Cable Network were not
fully satisfied by the reclamation of STAR's capacity in such network
and that neither STAR nor any of its affiliates has any further
obligation or liability with respect thereto."
6. Except as expressly set forth in this Amendment, the Merger
Agreement shall remain in full force and effect and shall not be deemed to
have been modified or amended by this Amendment.
7. This Amendment constitutes the entire understanding of the parties
with respect to the subject matter hereof, and any other prior or
contemporaneous agreements, whether written or oral, with respect thereto
are expressly superseded hereby.
8. This Amendment may be executed in two or more counterparts, each of
which shall for all purposes be deemed to be an original and all of which
shall constitute the same instrument.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
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<PAGE> 334
IN WITNESS WHEREOF, WAXS, Merger Sub and STAR have caused this Amendment to
be signed by their respective officers thereunto duly authorized, all as of the
date first above written.
WAXS:
WORLD ACCESS, INC.
By: /s/ W. TOD CHMAR
------------------------------------
Name: W. Tod Chmar
Title: Executive Vice President
STAR:
STAR TELECOMMUNICATIONS, INC.
By: /s/ CHRISTOPHER E. EDGECOMB
------------------------------------
Name: Christopher E. Edgecomb
Title: Chief Executive Officer
MERGER SUB:
STI MERGER CO.
By: /s/ W. TOD CHMAR
------------------------------------
Name: W. Tod Chmar
Title: President
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<PAGE> 335
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is
entered into this 6th day of October, 2000 by and among World Access, Inc., a
Delaware corporation ("WAXS"), STI Merger Co., a Delaware corporation ("Merger
Sub"), and STAR Telecommunications, Inc., a Delaware corporation ("STAR").
WITNESSETH:
WHEREAS, the parties hereto have previously entered into an Agreement and
Plan of Merger, dated as of February 11, 2000, as amended by that certain First
Amendment to Agreement and Plan of Merger among such parties, dated as of June
7, 2000 (as so amended, the "Merger Agreement"); and
WHEREAS, WAXS, Merger Sub and STAR have agreed to further amend the Merger
Agreement, as provided in this Amendment;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which is hereby acknowledged
by each of the parties hereto, the parties agree as follows:
1. Section 7.1(d) of the Merger Agreement is hereby amended by changing the
date "September 30, 2000" therein to "December 31, 2000".
2. Except as expressly set forth in this Amendment, the Merger Agreement
shall not be amended, revised or changed in any respect whatsoever and shall
remain in full force and effect.
3. This Amendment constitutes the entire understanding of the parties with
respect to the subject matter hereof, and any other prior or contemporaneous
agreements, whether written or oral, with respect thereto are expressly
superseded hereby.
4. This Amendment may be executed in two or more counterparts, each of
which shall for all purposes be deemed an original and all of which shall
constitute the same instrument.
[Signatures appear on the following page]
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<PAGE> 336
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
duly executed on its behalf as of the date indicated on the first page hereof.
WAXS:
WORLD ACCESS, INC.
By: /s/ W. TOD CHMAR
------------------------------------
Name: W. Tod Chmar
Title: Executive Vice President
MERGER SUB:
STI MERGER CO.
By: /s/ W. TOD CHMAR
------------------------------------
Name: W. Tod Chmar
Title: President
STAR:
STAR TELECOMMUNICATIONS, INC.
By: /s/ MARY CASEY
------------------------------------
Name: Mary Casey
Title: President
A-42
<PAGE> 337
ANNEX B
AGREEMENT AND PLAN OF MERGER
AMONG
WORLD ACCESS, INC.
COMMUNICATION TELESYSTEMS INTERNATIONAL D/B/A
WORLDXCHANGE COMMUNICATIONS
<PAGE> 338
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of February 11, 2000 (this
"Agreement"), by and among World Access, Inc., a Delaware corporation ("WAXS"),
CTI Merger Co., a Delaware corporation and wholly-owned subsidiary of WAXS
("Merger Sub"), and Communication TeleSystems International d/b/a WorldxChange
Communications, a California corporation ("CTI").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of CTI and WAXS deem it advisable and in
the best interests of each corporation and its respective stockholders that CTI
and WAXS engage in a business combination in order to advance the long-term
strategic business interests of CTI and WAXS;
WHEREAS, the combination of CTI and WAXS shall be effected by the terms of
this Agreement through a merger as outlined below (the "Merger");
WHEREAS, in furtherance thereof, the respective Boards of Directors of CTI,
Merger Sub and WAXS have approved the Merger, upon the terms and subject to the
conditions set forth in this Agreement, pursuant to which each share of common
stock, par value $.01 per share, of CTI ("CTI Common Stock"), each share of
preferred stock, Series A, no par value per share, of CTI (the "CTI Series A
Preferred Stock") and each share of preferred stock, Series B, no par value per
share, of CTI (the "CTI Series B Preferred Stock") (the CTI Series A Preferred
Stock and the CTI Series B Preferred Stock are collectively referred to herein
as the "CTI Preferred Stock" and the CTI Preferred Stock and the CTI Common
Stock are collectively referred to herein as the "CTI Capital Stock") issued and
outstanding immediately prior to the Effective Time (as defined in Section 1.3)
will be converted into the right to receive the consideration set forth in
Section 1.7;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder; and
WHEREAS, simultaneously with the execution and delivery of this Agreement,
WAXS is entering into an agreement with each of Roger Abbott and Rosalind
Abbott, Atocha, L.P., Gold & Appel Transfer S.A. and Edward Soren (the
"Principal Stockholders") pursuant to which each Principal Stockholder will
agree to, among other things, vote in favor of the Merger and certain
restrictions on the transfer of the consideration received in the Merger.
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<PAGE> 339
NOW, THEREFORE, in consideration of the mutual representations, warranties
and covenants contained herein, and upon and subject to the terms and the
conditions hereinafter set forth, the parties do hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Delaware General Corporation Law (the
"DGCL") and the California General Corporation Law (the "CGCL"), CTI shall be
merged with and into Merger Sub at the Effective Time (as defined below).
Following the Merger, the separate corporate existence of CTI shall cease and
Merger Sub shall continue as the surviving corporation (the "Surviving
Corporation").
1.2 Closing. Subject to the satisfaction or waiver of the conditions set
forth in Article VII, the closing of the Merger and the transactions
contemplated by this Agreement (the "Closing") will take place on the second
business day following the satisfaction or written waiver of such conditions,
unless another time or date is agreed to in writing by the parties hereto (the
date of the Closing being referred to herein as the "Closing Date"). The Closing
shall be held at the offices of Long Aldridge & Norman LLP, 303 Peachtree
Street, Suite 5300, Atlanta, Georgia 30303.
1.3 Effective Time. On the Closing Date the parties shall (i) file a
certificate of merger in such form as is required by, and executed in accordance
with, the relevant provisions of the DGCL (the "Delaware Certificate of Merger")
and an agreement of merger in such form as is required by, and executed in
accordance with, the relevant provisions of the CGCL (the "California Agreement
of Merger") and (ii) make all other filings or recordings required under the
DGCL and the CGCL in connection with the Merger. The Merger shall become
effective at such time as the Delaware Certificate of Merger and the California
Agreement of Merger are duly filed with the Delaware Secretary of State and the
California Secretary of State, respectively, or at such subsequent time as WAXS
and CTI shall agree and as shall be specified in the Delaware Certificate of
Merger and the California Agreement of Merger (the date and time the Merger
becomes effective being the "Effective Time").
1.4 Effects of the Merger. At and after the Effective Time, the Merger
will have the effects set forth in the DGCL and the CGCL. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time all the
property, rights, privileges, powers, licenses, authorizations and franchises of
Merger Sub and CTI shall be vested in the Surviving Corporation, and all debts,
liabilities and duties of Merger Sub and CTI shall become the debts, liabilities
and duties of the Surviving Corporation.
1.5 Articles of Incorporation/Bylaws. The articles of incorporation and
bylaws of Merger Sub, as in effect immediately prior to the Effective Time,
shall be the articles of incorporation and bylaws of the Surviving Corporation,
until thereafter changed or amended as provided therein or by applicable law.
1.6 New Directors of WAXS. Immediately following the Effective Time, WAXS
shall cause one (1) designee of CTI to be elected to the Board of Directors of
WAXS. Such CTI designee shall be Walt Anderson, or such other person designated
by Gold & Appel Transfer S.A. and reasonably acceptable to WAXS.
1.7 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of WAXS, Merger Sub, CTI or the
holders of any of the following securities:
(a) [Intentionally Omitted.]
(b) Each share of CTI Capital Stock issued and outstanding and
directly or indirectly owned or held by CTI or a Subsidiary (as defined in
Section 3.1(b)) thereof at the Effective Time shall, by virtue of the
Merger, cease to be outstanding and shall be canceled and retired and no
capital stock of WAXS or other consideration shall be delivered in exchange
therefor.
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<PAGE> 340
(c) Subject to Sections 2.4, 2.5 and 2.14 hereof, each share of CTI
Capital Stock issued and outstanding immediately prior to the Effective
Time shall be converted into the right to receive 0.6583 (the "Exchange
Ratio") shares of common stock, par value $.01 per share, of WAXS ("WAXS
Common Stock"). All shares of CTI Capital Stock, as of the Effective Time,
shall no longer be outstanding and shall automatically be canceled and
retired and each holder of a certificate representing any such shares (a
"Certificate") shall cease to have any rights with respect thereto, except
as set forth in this Section 1.7(c), Section 2.4, Section 2.5 and/or
Section 2.14 and as provided under applicable law. The shares of WAXS
Common Stock issuable pursuant to Section 1.7(c) and, if applicable, the
Contingent Shares issuable pursuant to Section 1.7(d), together with any
cash in lieu of fractional shares paid pursuant to Section 2.4, shall be
referred to herein collectively as the "Merger Consideration."
(d) In the event that the average of the closing prices of WAXS Common
Stock as reported on the National Market System of the Nasdaq Stock Market
(the "Nasdaq") for the ten (10) trading-day period ending at the close of
trading on the second (2nd) trading day preceding the Closing (the
"Averaging Period") is less than $20.38, then in addition to the shares of
WAXS Common Stock issued pursuant to Section 1.7(c), each CTI stockholder
who receives shares of WAXS Common Stock pursuant to Section 1.7(c) shall
be entitled to receive, subject to Section 2.5, the amount, if any (the
"Contingent Amount"), by which the Target Price (as defined below) exceeds
the greater of (X) the Current Market Price (as defined below) on the first
anniversary of the Effective Time (the "Maturity Date") and (Y) the Floor
Price (as defined below), multiplied by the number of shares of WAXS Common
Stock issued to such holder pursuant to Section 1.7(c). The maximum number
of Contingent Shares that may be issued to CTI stockholders pursuant to
this Section 1.7(d) shall in all events be less than fifty percent (50%) of
the sum of the shares of WAXS Common Stock issued pursuant to Section
1.7(c) plus the number of Contingent Shares issued pursuant to this Section
1.7(d). The Contingent Amount shall only be paid in shares of WAXS Common
Stock (the "Contingent Shares"), which shares shall be valued for purposes
hereof at the greater of the Current Market Price as of the Maturity Date
and the Floor Price and rounded to the nearest whole share. Notwithstanding
anything to the contrary contained in this Agreement, any and all rights
in, or to receive, the Contingent Amount shall terminate and be of no
further force or effect if, at any time on or prior to the Maturity Date,
the Current Market Price is greater than the Target Price. The parties
further acknowledge and agree that if any shares of WAXS Common Stock
constituting part of the Escrow Fund (as defined in Section 2.5) are
released to WAXS in accordance with the Escrow Agreement (as defined in
Section 7.1(e)), then the right to receive the Contingent Amount with
respect to such shares of WAXS Common Stock shall terminate and be of no
further force or effect. Neither the right to receive the Contingent Shares
nor any interest therein shall be transferable or assignable by a holder of
CTI Capital Stock except by operation of law. The terms and conditions
relating to the Contingent Shares have been negotiated by WAXS and CTI so
as to satisfy, to the extent possible, the specific requirements of Section
3.03 of the IRS Revenue Procedure 77-37, as it has been amplified and
superseded, which established the circumstances under which the Internal
Revenue Service (the "IRS") previously issued advance rulings on contingent
stock arrangements in mergers intended to qualify as "reorganizations"
under Section 368(a) of the Code. Solely for purposes of this Agreement's
compliance with such Revenue Procedure, the maximum number of shares of
WAXS Common Stock issuable pursuant to Sections 1.7(c) and 2.6(b), and as
Contingent Shares pursuant to this Section 1.7(d) is 58,146,739 shares of
WAXS Common Stock.
For purposes hereof, (a) the "Target Price" means $20.38 per share of
WAXS Common Stock; provided, however, that if the Nasdaq Composite Index
(the "IXIC") at the close of trading on the Maturity Date is eighty-five
percent (85%), or less, of the IXIC at the close of trading on the date of
the Effective Time (the difference between one hundred percent (100%) and
such percentage being referred to as the "Market Correction Percentage"),
then the Target Price shall be reduced by a percentage equal to that
portion of the Market Correction Percentage in excess of fifteen percent
(15%); (b) the "Current Market Price" means, as of any date specified
herein, the average of the daily closing trading prices of WAXS Common
Stock, as reported on the Nasdaq, for the
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<PAGE> 341
twenty (20) consecutive trading days (in which such shares are traded on
the Nasdaq) ending at the close of trading on such date; (c) the "Floor
Price" means $11.50 per share of WAXS Common Stock; and (d) references to
the "close of trading" as of or on a particular date shall mean such date,
or if such date is not a trading day or no shares of WAXS Common stock are
traded on the Nasdaq on such date, the last trading day preceding such date
on which shares of WAXS Common Stock were traded on the Nasdaq.
1.8 CTI Stock Options.
(a) At the Effective Time, by virtue of the Merger and without any
further action on the part of CTI, WAXS, Merger Sub or the holder of any
outstanding CTI Stock Option (as defined in Section 3.2), each CTI Stock
Option will be automatically converted into (i) an option to purchase
shares of WAXS Common Stock (a "WAXS Stock Option") in an amount equal to
the number of shares of CTI Common Stock covered under such CTI Stock
Option multiplied by the Exchange Ratio (rounded to the nearest whole
number of shares of WAXS Common Stock) at a price per share of WAXS Common
Stock equal to the per share option exercise price specified in the CTI
Stock Option divided by the Exchange Ratio (rounded to the nearest whole
cent) and (ii) if applicable, the right to acquire for no additional
consideration such number of Contingent Shares as is equal to the number of
Contingent Shares the holder of such CTI Stock Option would be entitled to
receive pursuant to Section 1.7(d) if such CTI Stock Option had been
exercised immediately prior to the Effective Time. Each WAXS Stock Option
shall contain terms and provisions which are substantially similar to those
terms, conditions and provisions governing the original CTI Stock Option,
except that references to CTI in such CTI Stock Option will be deemed to
refer to WAXS and the date of grant of the CTI Stock Option shall be deemed
to be the date of grant of such WAXS Stock Option. At the Effective Time,
for purposes of interpretation of such new WAXS Stock Option, (i) all
references in any stock option plan of CTI (including, without limitation,
CTI's 1996 and 1999 Stock Option/Stock Purchase Plans) shall be deemed to
refer to WAXS; (ii) any stock option plan of CTI which governs the CTI
Stock Option shall continue to govern the WAXS Stock Option substituted
therefor; and (iii) WAXS shall, as soon as practicable after the Effective
Time, issue to each holder of an outstanding CTI Stock Option such
documentation as appropriately evidences the foregoing issued and
substituted WAXS Stock Option by WAXS. It is the intention of the parties:
(1) that, subject to applicable law, CTI Stock Options assumed by WAXS
qualify, following the Effective Time, as incentive stock options, as
defined in Section 422 of the Code, to the extent that CTI Stock Options
qualified as incentive stock options prior to the Effective Time, (2) that
each holder of a CTI Stock Option shall receive a new WAXS Stock Option
which preserves (but does not increase) the excess of the fair market value
of the shares subject to such CTI Stock Option immediately before the
Effective Time over the aggregate option price of such shares immediately
before the Effective Time, if any such excess then exists, (3) that the
terms, conditions, restrictions and provisions of the WAXS Stock Option be
substantially similar to the terms, conditions, restrictions and provisions
of the applicable CTI Stock Option, including without limitation, the same
vesting schedule (other than to the extent accelerated pursuant to the
existing terms of such CTI Stock Option or plan under which such Stock
Option was granted), and (4) any terms conditions, restrictions or
provisions of a CTI Stock Option applicable to a number of shares rather
than a percentage or fraction of shares should be appropriately adjusted
based upon the Exchange Ratio.
(b) With respect to each CTI Stock Option converted into a WAXS Stock
Option pursuant to Section 1.8(a), and with respect to the shares of WAXS
Common Stock and Contingent Shares, if any, in respect of such shares of
WAXS Common Stock underlying such option, WAXS shall file and keep current
all requisite registration statements, on Form S-8 or other appropriate
form(s), and comply in all other material respects with applicable state
and federal requirements for as long as such options remain outstanding.
(c) After the date of this Agreement, CTI agrees that it will not (x)
grant any options, warrants or other rights to acquire any shares of CTI
Capital Stock (except as set forth on SCHEDULE 5.1(C)),
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including any restricted stock, stock appreciation rights, limited stock
appreciation rights or any other stock rights, (y) permit cash payments to
holders of CTI Stock Options in lieu of the substitution therefor of WAXS
Stock Options, as described in this Section 1.8 or (z) modify the vesting
rules under any CTI Stock Option outstanding on the date hereof or take any
other action (other than the transactions contemplated in this Agreement)
which in any way would have the effect of accelerating the vesting of the
options granted thereunder.
(d) A holder of a WAXS Stock Option into which a CTI Stock Option has
been converted in accordance with this Section 1.8 may exercise such option
in whole or in part in accordance with its terms by delivering a properly
executed notice of exercise to WAXS, together with the consideration
therefor and the federal withholding tax information, if any, required in
accordance with the related stock option plan.
1.9 Certain Adjustments. If between the date hereof and the Effective
Time, the outstanding WAXS Common Stock or CTI Capital Stock shall have been
changed into a different number of shares or different class by reason of any
reclassification, recapitalization, stock split, split-up, combination or
exchange of shares or a stock dividend or dividend payable in any other
securities shall be declared with a record date within such period, or any
similar event shall have occurred, the Exchange Ratio shall be appropriately
adjusted to provide to the holders of CTI Capital Stock and CTI Stock Options
the same economic effect as contemplated by this Agreement prior to such event.
ARTICLE II
EXCHANGE OF CERTIFICATES
2.1 Exchange Fund. Prior to the Effective Time, WAXS shall appoint a
commercial bank or trust company reasonably acceptable to CTI to act as exchange
agent hereunder (the "Exchange Agent") for the purpose of exchanging
Certificates for the Merger Consideration. At or prior to the Effective Time,
WAXS shall deposit with the Exchange Agent, in trust for the benefit of holders
of shares of CTI Capital Stock, certificates representing the WAXS Common Stock
issuable pursuant to Section 1.7 in exchange for outstanding shares of CTI
Capital Stock. WAXS agrees to make available to the Exchange Agent from time to
time as needed, cash sufficient to pay cash in lieu of fractional shares
pursuant to Section 2.4 and any dividends and other distributions pursuant to
Section 2.3. Any cash, certificates of WAXS Common Stock deposited with the
Exchange Agent shall hereinafter be referred to as the "Exchange Fund".
2.2 Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail
to each holder of a Certificate (i) a letter of transmittal which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent, and
which letter shall be in customary form and have such other provisions as WAXS
may reasonably specify and (ii) instructions for effecting the surrender of such
Certificates in exchange for the applicable Merger Consideration. Upon surrender
of a Certificate to the Exchange Agent together with such letter of transmittal,
duly executed and completed in accordance with the instructions thereto, and
such other documents as may reasonably be required by the Exchange Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor (A)
one or more shares of WAXS Common Stock (which shall be in uncertificated book
entry form unless a physical certificate is requested) representing, in the
aggregate, the whole number of shares that such holder has the right to receive
pursuant to Section 1.7 (after taking into account all shares of CTI Capital
Stock then held by such holder), and (B) a check in the amount equal to the cash
that such holder has the right to receive pursuant to this Article II, including
cash in lieu of any additional shares of WAXS Common Stock pursuant to Section
2.4 and dividends and other distributions pursuant to Section 2.3. No interest
will be paid or will accrue on any cash payable pursuant to Section 2.3 or
Section 2.4. In the event of transfer of ownership of CTI Capital Stock which is
not registered in the transfer records of CTI, one or more certificates
evidencing, in the aggregate, the proper number of shares of WAXS Common Stock,
a check in the proper amount of cash in lieu of any additional shares of
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WAXS Common Stock pursuant to Section 2.4, and any dividends or other
distributions to which such holder is entitled pursuant to Section 2.3, may be
issued with respect to such CTI Capital Stock to such a transferee if the
Certificate representing such shares of CTI Capital Stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable stock transfer taxes have been
paid.
2.3 Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made with respect to shares of WAXS Common Stock
with a record date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of WAXS Common Stock that
such holder would be entitled to receive upon surrender of such Certificate and
no cash payment in lieu of fractional shares of WAXS Common Stock shall be paid
to any such holder pursuant to Section 2.4 until such holder shall surrender
such Certificate in accordance with Section 2.2. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to such holder of shares of WAXS Common Stock issuable in exchange
therefor, without interest, (a) promptly after the time of such surrender, the
amount of any cash payable in lieu of fractional shares of WAXS Common Stock to
which such holder is entitled pursuant to Section 2.4 and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of WAXS Common Stock, and (b)
at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to such surrender and a
payment date subsequent to such surrender payable with respect to such shares of
WAXS Common Stock.
2.4 No Fractional Shares of WAXS Common Stock.
(a) No certificates or scrip or shares of WAXS Common Stock
representing fractional shares of WAXS Common Stock or book-entry credit of
the same shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests will not entitle the owner thereof to
vote or to have any rights of a stockholder of WAXS.
(b) Except for Contingent Shares, if any, notwithstanding any other
provision of this Agreement, each holder of a Certificate exchanged for
Merger Consideration who would otherwise have been entitled to receive a
fraction of a share of WAXS Common Stock (after taking into account all
Certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to the product of (i) such fractional
part of a share of WAXS Common Stock multiplied by (ii) the average closing
price of WAXS Common Stock on the Nasdaq over the Averaging Period. As
promptly as practicable after the determination of the amount of cash, if
any, to be paid to holders of fractional interests, the Exchange Agent
shall so notify WAXS, and WAXS shall cause the Surviving Corporation to
deposit such amount with the Exchange Agent and shall cause the Exchange
Agent to forward payments to such holders of fractional interests subject
to and in accordance with the terms hereof.
2.5 Escrow of Shares.
(a) At the Closing, 2,453,385 of the shares of WAXS Common Stock to be
issued to CTI's stockholders pursuant to Section 1.7(c) (collectively, the
"Escrow Fund") shall be delivered to SunTrust Bank, Atlanta (the "Escrow
Agent"), which Escrow Fund shall serve as the sole and exclusive source of
recovery for any WAXS Protected Party (as defined in Section 8.1) for any
indemnification claims hereunder. The Escrow Fund shall be held in escrow
and released pursuant to the terms and conditions of the Escrow Agreement
(as defined in Section 7.1(e)). The terms and conditions of the Escrow
Agreement have been structured by WAXS and CTI so as to satisfy the
specific requirements of Section 3.06 of IRS Revenue Procedure 77-37, as it
has been amplified and superseded, which established the circumstances
under which the IRS previously issued advance rulings on the escrow of
stock in mergers intended to qualify as "reorganizations" under Section
368(a) of the Code.
(b) If any Contingent Shares are issued at a time that shares of WAXS
Common Stock remain in escrow pursuant to the Escrow Agreement (as defined
in Section 7.1(d)), then any Contingent
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Shares that are issued with respect to such shares of WAXS Common Stock
shall be delivered to the Escrow Agent and shall be held and released in
accordance with the terms and conditions of Section 4 of the Escrow
Agreement.
2.6 No Further Ownership Rights in CTI Capital Stock.
(a) All shares of WAXS Common Stock issued and cash paid upon
conversion of shares of CTI Capital Stock in accordance with the terms of
this Article II (including any cash paid pursuant to Section 2.4) shall be
deemed to have been issued or paid in full satisfaction of all rights
pertaining to the shares of CTI Capital Stock.
(b) Any accrued and unpaid dividends owed upon consummation of the
Merger to any holder of CTI Preferred Stock in connection with the
automatic conversion of such CTI Preferred Stock under the articles of
incorporation of CTI shall be paid, at the Closing, solely in shares of
WAXS Common Stock (valued at $20.38 per share). Any such shares so issued
to any holder of CTI Preferred Stock shall not affect the Exchange Ratio.
2.7 Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Certificates for six months after the
Effective Time shall be delivered to the Surviving Corporation or otherwise on
the instruction of the Surviving Corporation, and any holders of the
Certificates who have not theretofore complied with this Article II shall
thereafter look only to the Surviving Corporation and WAXS for the Merger
Consideration with respect to the shares of CTI Capital Stock formerly
represented thereby to which such holders are entitled pursuant to Section 1.7
and Section 2.2, any cash in lieu of fractional shares of WAXS Common Stock to
which such holders are entitled pursuant to Section 2.4 and any dividends or
distributions with respect to shares of WAXS Common Stock to which such holders
are entitled pursuant to Section 2.3. Any such portion of the Exchange Fund
remaining unclaimed by holders of shares of CTI Capital Stock five years after
the Effective Time (or such earlier date immediately prior to such time as such
amounts would otherwise escheat to or become property of any Governmental Entity
(as defined in Section 3.6) shall, to the extent permitted by law, become the
property of the Surviving Corporation free and clear of any claims or interest
of any person previously entitled thereto.
2.8 No Liability. None of WAXS, Merger Sub, CTI, the Surviving Corporation
or the Exchange Agent shall be liable to any person in respect of any Merger
Consideration from the Exchange Fund delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
2.9 Investment of the Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund as directed by the Surviving Corporation on a
daily basis. Any interest and other income resulting from such investments shall
promptly be paid to the Surviving Corporation.
2.10 Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will deliver in exchange for such lost stolen or destroyed Certificate the
applicable Merger Consideration with respect to the shares of CTI Capital Stock
formerly represented thereby, any cash in lieu of fractional shares of WAXS
Common Stock, and unpaid dividends and distributions on shares of WAXS Common
Stock deliverable in respect thereof, pursuant to this Agreement.
2.11 Withholding Rights. Each of the Surviving Corporation and WAXS shall
be entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of CTI Capital Stock such
amounts as it is required to deduct and withhold with respect to the making of
such payment under the Code and the rules and regulations promulgated
thereunder, or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by the Surviving Corporation or WAXS, as the case
may be, such withheld amounts shall be treated for all purposes of this
Agreement as
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having been paid to the holder of the shares of CTI Capital Stock in respect of
which such deduction and withholding was made by the Surviving Corporation or
WAXS, as the case may be.
2.12 Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of CTI or Merger Sub, any deeds, bills of
sale, assignments or assurances and to take and do, in the name and on behalf of
CTI or Merger Sub, any other actions and things to vest, perfect or confirm of
record or otherwise in the Surviving Corporation any and all right, title and
interest in, to and under any of the rights, properties or assets acquired or to
be acquired by the Surviving Corporation as a result of, or in connection with,
the Merger.
2.13 Stock Transfer Books. The stock transfer books of CTI shall be closed
immediately upon the Effective Time and there shall be no further registration
of transfers of shares of CTI Capital Stock thereafter on the records of CTI. On
or after the Effective Time, any Certificates presented to the Exchange Agent or
WAXS for any reason shall be converted into the Merger Consideration with
respect to the shares of CTI Capital Stock formerly represented thereby, any
cash in lieu of fractional shares of WAXS Common Stock to which the holders
thereof are entitled pursuant to Section 2.4 and any dividends or other
distributions to which the holders thereof are entitled pursuant to Section 2.3.
2.14 Further Holdback. At the Closing, separately from the shares of WAXS
Common Stock comprising the Escrow Fund (which shall be deposited with the
Escrow Agent pursuant to the Escrow Agreement), a total of 49,068 of the shares
of WAXS Common Stock to be issued to CTI's stockholders pursuant to Section
1.7(c) (the "Expense Fund") shall be deemed delivered to each CTI stockholder
and at the deemed direction of each such stockholder delivered to an escrow
agent to be designated in writing by CTI not less than five (5) days prior to
the Closing Date. Any and all escrow provisions with respect to the Expense Fund
shall in all aspects satisfy the specific requirements of Section 3.06 of IRS
Revenue Procedure 77-37, as it has been amplified and superseded by the IRS. The
CTI stockholders as of immediately prior to the Effective Time shall be the
holders of record with full voting rights to all of the shares of WAXS Common
Stock held in the Expense Fund. The CTI stockholders as of immediately prior to
the Effective Time shall be entitled to exercise such voting rights until such
time, if any, as such shares of WAXS Common Stock are sold to pay
Representative's Costs pursuant to this Section 2.14. The escrow agent shall
deliver to the CTI stockholders as of immediately prior to the Effective Time
such proxies or other documents as may be necessary to enable such CTI
stockholders to exercise such voting rights. Further, the CTI stockholders as of
immediately prior to the Effective Time shall be entitled to promptly receive
any dividend distribution with respect to the shares of WAXS Common Stock held
in the Expense Fund. Any such dividends paid with respect to such shares shall
be distributed by the escrow agent to the CTI stockholders as of immediately
prior to the Effective Time as holders of record of such shares. The Expense
Fund shall be available in the good faith discretion of the Shareholder
Representative to pay the costs and expenses, if any, incurred by the
Shareholder Representative in defending (including, without limitation, assuming
the defense of any third party claims pursuant to Section 8.5) or otherwise
responding to, on behalf of the stockholders of CTI, any claims for
indemnification by any WAXS Protected Party pursuant to Article VIII hereof, or
otherwise in the performance of its duties hereunder, including, without
limitation, the reasonable fees, costs and expenses of attorneys, accountants
and other professionals engaged by the Shareholder Representative for such
purpose (collectively, the "Representative Costs"). The Shareholder
Representative shall have the authority to direct the sale from time to time of
such number of shares from the Expense Fund as may be necessary to reimburse the
Shareholder Representative for any Representative's Costs, which shall be
reimbursed to the Shareholder Representative from the Expense Fund promptly
after the escrow agent's receipt of a request therefor. The Shareholder
Representative shall also be entitled to have any Representative's Costs
advanced to the Shareholder Representative from the Expense Fund upon request
therefor, provided that any such advanced amounts not actually expended by the
Shareholder Representative to pay Representative's Costs shall be promptly
returned to the Expense Fund or returned to the stockholders of CTI as of
immediately prior to the Effective Time on a pro rata basis. All shares of WAXS
Common Stock or any cash amounts returned to the Expense Fund pursuant to the
immediately preceding sentence which are remaining in the
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Expense Fund at the later to occur of (i) the expiration of the period for
asserting claims pursuant to Section 8.2(b) or (ii) the first date on which
there are no pending claims from any WAXS Protected Party shall be distributed
by the escrow agent to the stockholders of CTI as of immediately prior to the
Effective Time on a pro rata basis. CTI shall have authority to negotiate, and
the Shareholder Representative shall have authority to enter into an agreement
with the escrow agent designated by CTI, which shall effectuate the foregoing.
WAXS agrees that, notwithstanding any contrary provision of this Agreement, any
voting agreement between WAXS and any Principal Stockholder or any other
agreement entered into in connection herewith or therewith, any shares of WAXS
Common Stock comprising the Expense Fund may be sold from time to time at the
discretion of the Shareholder Representative as contemplated hereby. The
provisions of Section 8.7 shall apply to all actions taken by the Shareholder
Representative as contemplated hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CTI
CTI hereby represents and warrants to WAXS as follows:
3.1 Organization and Authorization.
(a) Each of CTI and its Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation or organization, as applicable, and has the corporate
power and authority to carry on and conduct its business as it is now being
conducted and to own or lease its properties and assets, and is duly
qualified and in good standing. Each of CTI and its Subsidiaries is duly
qualified and in good standing in every state of the United States and in
such other jurisdictions (within or outside of the United States) in which
the conduct of its business or the ownership of its properties and assets
requires it to be so qualified except where the failure to be so qualified
would not have a Material Adverse Effect (as defined in Section 3.6) on
CTI.
(b) SCHEDULE 3.1(B) sets forth (i) every entity in which CTI owns
fifty percent (50%) or more of the outstanding equity, directly or
indirectly (each a "Subsidiary" and collectively, the "Subsidiaries"), and
(ii) the equity interest in such entity that is owned by CTI. Except as
noted on SCHEDULE 3.1(B), all outstanding shares of capital stock of the
Subsidiaries (the "Subsidiary Shares") are owned by CTI, directly or
indirectly, free and clear of all liens, restrictions, claims, equities,
charges, options, rights of first refusal or encumbrances. Except as set
forth on SCHEDULE 3.1(B), CTI has full power, right and authority to vote
all of the shares of capital stock of each Subsidiary which are owned or
held by CTI. Except as set forth on SCHEDULE 3.1(B), CTI is not a party to
or bound by any agreement prohibiting or restricting its right to transfer
or vote the shares of capital stock of any Subsidiary which are owned or
held by CTI.
(c) Subject to the approval of this Agreement, the Merger and the
other transactions contemplated hereby by the stockholders of CTI by the
Required CTI Stockholder Vote, CTI has the corporate power to execute,
deliver and perform this Agreement and to consummate the transactions and
perform its obligations contemplated hereby. The execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, have been duly and validly authorized by all necessary
action on the part of CTI, subject to the approval of this Agreement, the
Merger and the other transactions contemplated hereby by the stockholders
of CTI by the Required CTI Stockholder Vote. This Agreement has been duly
and validly executed and delivered by CTI and constitutes CTI's legal,
valid and binding obligation, enforceable in accordance with its terms,
except to the extent such enforcement may be limited by applicable
bankruptcy, reorganization, moratorium or other such laws affecting the
enforcement of creditors' rights generally.
3.2 Authorized and Outstanding Stock. The authorized capital stock of CTI,
the number of issued and outstanding shares thereof and the record holders of
such issued and outstanding shares of CTI's capital stock are set forth on
SCHEDULE 3.2. All of such issued and outstanding shares of capital stock of CTI
are validly issued, fully paid and nonassessable. There are outstanding options,
warrants or other
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rights, to acquire an aggregate of 4,029,110 shares of capital stock of CTI
(each, a "CTI Stock Option"). SCHEDULE 3.2 lists the exercise price and vesting
schedule for each CTI Stock Option.
3.3 Absence of Other Claims. Except as set forth on SCHEDULE 3.2, there is
not outstanding, nor is CTI bound by, any subscriptions, options, preemptive
rights, warrants, calls, commitments or agreements or rights of any character
requiring CTI to issue or entitling any person or entity to acquire any
additional shares of capital stock or any other equity security of CTI,
including any right of conversion or exchange under any outstanding security or
other instrument, and CTI is not obligated to issue or transfer any shares of
its capital stock for any purpose. There are no outstanding obligations of CTI
to repurchase, redeem or otherwise acquire any outstanding shares of capital
stock of CTI.
3.4 Financial Statements. SCHEDULE 3.4 contains true, correct and complete
copies of (i) the audited consolidated balance sheet of CTI as of September 30,
1998, and the related audited statement of income, retained earnings, and cash
flows for the year then ended, and the related notes thereto; (ii) the audited
consolidated balance sheet of CTI as of September 30, 1999, and the related
audited statement of income, retained earnings, and cash flows for the year then
ended, and the related notes thereto; and (iii) the unaudited consolidated
balance sheet of CTI for the three (3) month period ending December 31, 1999,
and the related unaudited statement of income, retained earnings, and cash flows
for the period then ended (the "Interim Financial Statements") (collectively,
the "Financial Statements"). The Financial Statements present fairly, in all
material respects, the consolidated financial position of CTI, as of the dates
thereof, and the related results of its operations for the periods then ended.
Except as set forth on SCHEDULE 3.4, the Financial Statements have been prepared
in accordance with GAAP on a basis consistent with prior periods subject, in the
case of the Interim Financial Statements, to the absence of any notes thereto
and to normal and recurring year-end adjustments, which adjustments will not,
individually or in the aggregate, be material in amount.
3.5 No Undisclosed Liabilities. Except (i) as and to the extent reflected
and adequately reserved against in the Financial Statements, (ii) for
liabilities and obligations of a type not required under GAAP to be disclosed in
the Financial Statements and which were incurred in the ordinary course of
business, consistent with past practice or (iii) as shown on SCHEDULE 3.5, as of
September 30, 1999, CTI had no liabilities or obligations whatsoever, whether
accrued, absolute, contingent or otherwise. Since September 30, 1999, CTI has
not incurred any liability or obligation whatsoever, except for (i) liabilities
and obligations incurred in the ordinary course of business consistent with past
practice or (ii) as reflected on SCHEDULE 3.5.
3.6 No Violation of Law. Except as set forth on SCHEDULE 3.6, neither CTI
nor any of its Subsidiaries is or has been (by virtue of any past or present
action, omission to act, contract to which it is a party or any occurrence or
state of facts whatsoever) in violation of, or has received any notices of
violation with respect to, any applicable local, state, federal or international
law, ordinance, regulation, order, injunction or decree, or any other
requirement of any supranational, national, state, municipal, local or foreign
government, instrumentality, subdivision, court, administrative agency,
commission or authority thereof, or any quasi-governmental or private body
exercising any supranational, national, state, municipal, local or foreign
regulatory, taxing, importing or other governmental or quasi-governmental
authority (a "Governmental Entity") binding on it, or relating to its assets or
business, except where such violation or loss, liability, penalty or expense by
virtue thereof would not have a Material Adverse Effect on CTI. For purposes of
this Agreement, "Material Adverse Effect" means, with respect to any specified
entity, any change, circumstance or effect or breach of any of the provisions of
this Agreement that, individually or in the aggregate with all other changes,
circumstances and effects or breaches, is or would reasonably be expected to be
materially adverse to (i) the business, financial condition or results of
operations of such entity and its Subsidiaries taken as a whole, or (ii) the
ability of such entity (or the party owning such entity) to consummate the
transactions contemplated by this Agreement.
3.7 Property. Except where it would not have a Material Adverse Effect on
CTI:
(a) Each of CTI and its Subsidiaries (i) has marketable fee simple
title to all of its material real property and has valid title to all
personal and mixed, tangible and intangible properties and
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assets which it purports to own, including all such real and personal
properties and assets reflected, but not shown as leased or encumbered, in
the Financial Statements (except for inventory and assets sold in the
ordinary course of business consistent with past practice and supplies
consumed in the ordinary course of business consistent with past practice);
and (ii) except for Permitted Liens (as defined hereafter), owns such real
and personal property free and clear of objections, liens, restrictions,
claims, charges, security interests, easements or other encumbrances of any
nature whatsoever, including any mortgages, leases, chattel mortgages,
conditional sales contracts, collateral security arrangements and other
title or interest retention arrangements. "Permitted Liens" shall mean (x)
the security interests, easements or other encumbrances described in
SCHEDULE 3.7 and (y) liens for Taxes not yet due and payable. All
properties and assets of CTI and its Subsidiaries are in the possession or
control of CTI or its Subsidiaries, as applicable.
(b) Except as would not have a Material Adverse Effect on CTI, the
plants, structures and equipment owned or leased by CTI or any of its
Subsidiaries are structurally sound with no known defects, are in good and
safe operating condition and repair and are adequate for the uses to which
they are being put.
(c) Except as would not have a Material Adverse Effect on CTI, the
rights, properties and other assets presently owned, leased or licensed by
CTI or any of its Subsidiaries include all rights, properties and other
assets necessary to permit CTI and its Subsidiaries to conduct their
business in the same manner as their business has been conducted in prior
periods, without any need for replacement, refurbishment or extraordinary
repair.
3.8 [Intentionally Omitted.]
3.9 [Intentionally Omitted.]
3.10 Intellectual Property.
(a) Generally. SCHEDULE 3.10(A) sets forth a complete and accurate
list of (i) all material patents, trademarks, service marks, trademark and
service mark registrations, trademark and service mark registration
applications, label filings, copyrights, inventions, patents and patent
applications owned by CTI or any of its Subsidiaries and all agreements
with respect thereto, (ii) all material trade names owned by CTI or any of
its Subsidiaries and (iii) all contracts, agreements or understandings
pursuant to which CTI or any of its Subsidiaries has authorized any person
to use or any person has the right to use, in any business or commercial
activity, any of the items listed in clauses (i) and (ii) above that are
owned by CTI or any of its Subsidiaries. Except as would not have a
Material Adverse Effect on CTI or as set forth on SCHEDULE 3.10(A), neither
CTI nor any of its Subsidiaries has heretofore infringed upon, and is not
now infringing upon, any patent, service mark, trade name, trademark,
copyright, trade secret, or other intellectual property belonging to any
other person. Except as would not have a Material Adverse Effect on CTI or
as set forth on SCHEDULE 3.10(A), CTI does not know of any person
infringing upon any of CTI's or its Subsidiaries' patents, service marks,
trademarks, copyrights, trade secrets, or other intellectual property. CTI
has made available to Buyer true, correct and complete copies of each
trademark and service mark registration or application therefor, patent or
patent application or other item listed in SCHEDULE 3.10(A) and each
assignment or license with respect to any thereof.
(b) Computer Software and Databases. SCHEDULE 3.10(B) accurately
identifies all material proprietary computer software and databases
internally developed or acquired by CTI or any of its Subsidiaries
(excluding generally available "shrink wrap" software and databases).
Except as would not have a Material Adverse Effect on CTI, CTI and its
Subsidiaries have all computer software and databases that are necessary to
conduct the business of CTI and its Subsidiaries as presently conducted and
all documentation relating to all such computer software and databases.
Except as would not have a Material Adverse Effect on CTI, all such
computer software and databases perform in accordance with the
documentation related thereto or used in connection therewith and are free
of defects in programming and operation. SCHEDULE 3.10(B) identifies each
person to whom CTI or any
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of its Subsidiaries, in the last two (2) years, has sold, licensed, leased
or otherwise transferred or granted any interest or rights to any of the
computer software and databases described above and the date of each such
sale, license, lease or other transfer or grant. CTI has made available to
WAXS true, correct and complete copies of all documents relating to each
such sale, license, lease or other transfer or grant.
(c) Year 2000 Compliance. Except as would not have a Material Adverse
Effect on CTI, all computer hardware and software (including all computer
hardware and software contained in imbedded systems) used in the business
of CTI and its Subsidiaries or included in products previously or currently
manufactured by CTI or any of its Subsidiaries (whether such hardware and
software is owned by CTI or any of its Subsidiaries or is licensed from
third parties) (collectively, the "Technology Systems") is designed to be
used during and after the calendar year 2000 and such hardware and software
will continue to operate during each such time period to accurately process
date data (including, but not limited to calculating, comparing and
sequencing) from, into and between the twentieth and twenty-first
centuries, including leap year calculations ("Year 2000 Compliance").
Except as would not have a Material Adverse Effect on CTI, the occurrence
of the calendar year 2000 will not adversely affect the Technology Systems
of CTI or any of its Subsidiaries or of third parties using products
manufactured, or services provided, by CTI or any of its Subsidiaries. No
expenditures in excess of currently budgeted items are necessary to cause
Technology Systems to operate properly during and after the calendar year
2000. CTI and its Subsidiaries have taken reasonable steps to determine
whether the failure of any third parties with which CTI or any of its
Subsidiaries has a relationship to achieve Year 2000 Compliance could have
a Material Adverse Effect on CTI. Except as would not have a Material
Adverse Effect on CTI, all computer hardware and software embedded in
products manufactured, or services provided, by CTI or any of its
Subsidiaries, when used in combination with, or interfacing with computer
hardware and software of any other person, shall accurately accept, release
and exchange date data, and shall continue to function in the same manner
as it performs today and shall not otherwise impair the accuracy or
function ability of such person's computer hardware or software.
3.11 Litigation. SCHEDULE 3.11 sets forth all litigation, claims, suits,
actions, investigations, indictments or informations, proceedings or
arbitrations, grievances or other procedures (including grand jury
investigations, actions or proceedings, and product liability and workers'
compensation suits, actions or proceedings) pending, or to the knowledge of CTI,
threatened, before any court, commission, arbitration tribunal, or judicial,
governmental or administrative department, body, agency, administrator or
official, grand jury, or any other forum for the resolution of grievances,
against CTI or any of its Subsidiaries or involving any of its or their assets
or business, except for such matters as would not have a Material Adverse Effect
on CTI. Further, except as set forth in SCHEDULE 3.11 and for matters which
would not have a Material Adverse Effect on CTI, there are no material
judgments, orders, writs, injunctions, decrees, indictments or informations,
grand jury subpoenas or civil investigative demands, plea agreements,
stipulations or awards (whether rendered by a court, commission, arbitration
tribunal, or judicial, governmental or administrative department, body, agency,
administrator or official, grand jury or any other forum for the resolution of
grievances) against or relating to CTI or any of its Subsidiaries or involving
any of its or their assets or business. CTI has made available to WAXS all
information requested by WAXS with respect to each pending litigation, claim,
suit, action, investigation, indictment or information, proceeding, arbitration,
grievance or other procedure listed in SCHEDULE 3.11, and the judgements and
informations, grand jury subpoenas and civil investigative demands, plea
agreements, stipulations and awards listed in said Schedule.
3.12 Employment Matters and Benefit Plans.
(a) SCHEDULE 3.12(A) sets forth a list of all material agreements,
arrangements, commitments, and policies (1) which relate to employee
benefits; (2) which pertain to present or former employees, officers,
retirees, directors or independent contractors (or their beneficiaries,
dependents or spouses) of CTI or any of its Subsidiaries; and (3) which are
currently in effect or expected to be adopted, maintained by, sponsored by,
or contributed to by CTI or any other employer (a "CTI Affiliate")
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which, under Section 414 of the Code, would constitute a single employer
with CTI (collectively referred to as "CTI Employee Benefit Plans",
including, but not limited to, all: (A) employee benefit plans as defined
in Section 3(3) of ERISA; and (B) all other deferred compensation,
incentive, profit-sharing, thrift, stock ownership, stock appreciation
rights, bonus, stock option, stock purchase, vacation, or other benefit
plans or arrangements.
(b) CTI and all CTI Affiliates have complied with their respective
substantive obligations with respect to all CTI Employee Benefit Plans
(including, but not limited to, (1) filing or distributing all reports or
notices required by ERISA or the Code and (2) complying with all
requirements of Part 6 of Title I of ERISA and Code Section 4980B) and have
maintained the CTI Employee Benefit Plans in compliance with all applicable
laws and regulations (including, but not limited to, ERISA and the Code),
except where the failure to comply with such obligations would not result
in a Material Adverse Effect on CTI. Each CTI Employee Benefit Plan that is
intended to qualify under Code Section 401(a) has received a favorable
determination letter (or other ruling indicating its tax-qualified status)
from the IRS which is current with respect to all plan provisions required
under applicable law for which such a letter can be obtained under IRS
procedures, and the IRS has not threatened or taken any action to revoke
any favorable determination letter issued with respect to any such CTI
Employee Benefit Plan. No statement, either oral or written, has been made
or administrative action has been taken by CTI or any CTI Affiliate (or any
agent of either) to any Person regarding any CTI Employee Benefit Plans
that is not in accordance with the terms of that plan that would have a
Material Adverse Effect on CTI.
(c) CTI has made available to WAXS true, correct and complete copies
of all of the current documents relating to the CTI Employee Benefit Plans,
including, but not limited to (1) all plan texts (including any subsequent
amendments), trust instruments and other funding arrangements adopted or
entered into in connection with each of the CTI Employee Benefit Plans; (2)
the notices and election forms used to notify employees and their
dependents of their continuation coverage rights under group health plans
(under Code Section 4980B(f) and ERISA Section 606), if applicable; and (3)
the most recent Form 5500 annual reports (including all schedules thereto),
summary plan descriptions and favorable determination letters, if
applicable, for Employee Benefit Plans. Since the date such documents were
supplied to WAXS, no plan amendments have been adopted and no such
amendments or changes shall be adopted or made prior to the Closing Date
without WAXS's approval, except as required by applicable law after the
date hereof.
(d) Except as listed in SCHEDULE 3.12(D), neither CTI nor any CTI
Affiliate has any material agreement, arrangement, commitment or
understanding to create any additional CTI Employee Benefit Plans or to
continue, modify, change or terminate any existing CTI Employee Benefit
Plans.
(e) None of the CTI Employee Benefit Plans (1) is currently under
investigation, audit or review by the U.S. Department of Labor, the IRS,
the Pension Benefit Guaranty Corporation or any other federal or state
agency or (2) is liable for any federal, state, local or foreign taxes that
would have a Material Adverse Effect on CTI. Except for such liabilities
that would not have a Material Adverse Effect on CTI, there is no
transaction in connection with which CTI or any CTI Affiliate could be
subject to either a civil penalty assessed pursuant to ERISA Section 502, a
tax imposed by Code Section 4975 or liability for a breach of fiduciary
responsibility under ERISA.
(f) Other than routine claims for benefits payable to participants or
beneficiaries in accordance with the terms of the CTI Employee Benefit
Plans, or relating to qualified domestic relations orders (as defined in
Section 414(p) of the Code), there are no claims, pending or threatened, by
any participant or beneficiary against any of the CTI Employee Benefit
Plans or any fiduciary of any of the CTI Employee Benefit Plans that would
have a Material Adverse Effect on CTI.
(g) Neither CTI nor any CTI Affiliate has at any time maintained,
sponsored or contributed to any "pension plan", as defined in ERISA Section
3(2), which is subject to Title IV of ERISA or contributed to any pension
plan which is a "multiemployer plan" as defined in ERISA Section 3(37)(A).
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(h) SCHEDULE 3.12(H) sets forth a list of all agreements,
arrangements, commitments and CTI Employee Benefit Plans, under which (1)
any benefits will be increased, (2) the vesting or exercisability of
benefits will be accelerated, (3) amounts will become immediately payable,
and/or (4) the immediate funding for any benefits is required, upon the
occurrence of the transactions contemplated by this Agreement. Except with
respect to CTI Stock Options, SCHEDULE 3.12(H) also sets forth a good faith
estimate of the total value and/or cost of any such change in control
benefits and/or funding and a statement of the time periods in which such
payments must be made and/or funding obligations must be met, including but
not limited to the value and/or costs of any gross up payments for tax
purposes.
(i) To the knowledge of CTI, no key employee, or group of employees of
CTI has any plans to terminate employment with CTI or any of its
Subsidiaries other than employees with plans to retire. CTI and its
Subsidiaries have complied with all laws relating to the employment of
labor, including provisions thereof relating to wages, hours and equal
opportunity, and it does not have any labor relations problems (including
threatened or actual strikes or work stoppages or grievances), except for
such failures or problems that would not have a Material Adverse Effect on
CTI.
3.13 Collective Bargaining. Except as set forth on SCHEDULE 3.13, there
are no labor contracts, collective bargaining agreements, letters of
understanding or other arrangements, formal or informal, with any union or labor
organization covering any of CTI's or its Subsidiaries' employees and none of
said employees are represented by any union or labor organization. CTI has made
available to Buyer a true, correct, and complete copy of each agreement listed
on SCHEDULE 3.13.
3.14 Labor Disputes. CTI and its Subsidiaries are in compliance with all
federal and state laws respecting employment and employment practices, terms and
conditions of employment, wages and hours, except where the failure to be in
compliance would not have a Material Adverse Effect on CTI. No unfair labor
practice complaint against CTI or any of its Subsidiaries is pending before the
National Labor Relations Board. CTI does not know of any labor strike or other
labor trouble actually pending, being threatened against, or affecting CTI or
any of its Subsidiaries. Relations between management and labor are amicable and
there have not been, nor are there presently, any attempts to organize non-union
employees, nor are there plans for any such attempts.
3.15 Investments. Except for the Subsidiary Shares and as disclosed on
SCHEDULE 3.15, neither CTI nor any of its Subsidiaries owns any capital stock or
other securities or have any other material investment in any person or other
entity.
3.16 Tax Matters. Except as set forth on SCHEDULE 3.16:
(a) (i) All material Tax Returns required to be filed under applicable
law by CTI and each of its Subsidiaries have been filed, or requests for
extensions have been timely filed and have not expired; (ii) all such Tax
Returns filed by CTI and its Subsidiaries are complete and accurate in all
material respects; (iii) all Taxes shown to be due on such Tax Returns or
on subsequent assessments with respect thereto have been paid or the
Financial Statements reflect that adequate reserves have been established
for the payment of such Taxes, and no other material Taxes are payable by
CTI and its Subsidiaries with respect to items or periods covered by such
Tax Returns (whether or not shown on or reportable on such Tax Returns) or
with respect to any period prior to the date of this Agreement; (iv) CTI
and each of its Subsidiaries has disclosed on their federal income Tax
Return all positions taken therein that could give rise to a substantial
understatement of income Tax within the meaning of Section 6662 of the
Code; (v) there are no material liens on any of the assets of CTI or any of
its Subsidiaries with respect to Taxes, other than liens for Taxes not yet
due and payable or for Taxes that CTI or any of its Subsidiaries is
contesting in good faith through appropriate proceedings and for which the
Financial Statements reflect that appropriate reserves have been
established; (vi) no power of attorney to deal with Tax matters or waiver
or extension of any statute of limitations with respect to Taxes has been
granted by CTI or any of its Subsidiaries; and (vii) there is no (X) audit,
examination, deficiency or refund litigation or matter in controversy with
respect to any Taxes of CTI and its Subsidiaries nor (Y) has the IRS nor
any other Tax authority asserted any claim for Taxes in
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writing, or to the knowledge of CTI, is threatening to assert any claim for
Taxes, that might reasonably be expected to result in a Tax determination
which would have a Material Adverse Effect on CTI.
(b) SCHEDULE 3.16 sets forth the names of the Subsidiaries of CTI
which are or have been a member of an affiliated group of corporations
filing a consolidated federal income Tax Return (or a group of corporations
filing a consolidated, combined or unitary income Tax Return under
comparable provisions of state, local or foreign Tax law) other than a
group the common parent of which was CTI;
(c) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of CTI or any of its Subsidiaries that,
individually or collectively, could give rise to the payment of any amount
(or portion thereof) that would not be deductible pursuant to Section 280G
of the Code.
(d) Neither CTI nor any of its Subsidiaries is a party to (i) a Tax
Sharing Agreement, (ii) transactions which have produced deferred
intercompany gains, losses or other intercompany items or excess loss
accounts (within the meaning of Treas. Reg. sec. 1.1502-13 or 1.1502-19,
respectively, or any predecessor regulations or any comparable items for
state, local or non-United States Tax purposes), or (iii) any joint
venture, partnership, limited liability company or other arrangement or
contract that should be treated as a partnership for federal income Tax
purposes or as to which, an election has been made under Treas. Reg. sec.
301.7701-3 to have the entity disregarded for federal income Tax purposes
as an entity separate from its owner.
(e) None of CTI and its Subsidiaries (i) has or has had operations or
assets outside the United States taxable as a "branch" by the United States
or as a "permanent establishment" by any foreign country, (ii) has received
written notice of any claim made by a Tax authority in a jurisdiction where
CTI or any of its Subsidiaries does not file Tax Returns that it is or may
be subject to Taxes in such jurisdiction, (iii) is a "passive foreign
investment company" within the meaning of the Code, (iv) has participated
in or cooperated with an international boycott or has been requested to do
so in connection with any prior transaction or the transactions
contemplated by this Agreement, and (v) has availed itself of any Tax
amnesty, Tax holiday or similar relief in any jurisdiction.
(f) CTI has made available to WAXS true copies of (i) all material Tax
Returns that CTI or its Subsidiaries have filed since its fiscal year ended
September 30, 1995, and (ii) all material correspondence, including without
limitation, closing agreements, private letter rulings, advance pricing
agreements and gain recognition agreements and other written submissions to
or communications with any Tax authorities.
(g) (i) There is no plan or intention on the part of holders of CTI
Capital Stock who own five percent (5%) or more of the CTI Capital Stock by
vote or value (the "5% CTI stockholders"), nor have any of such 5% CTI
stockholders entered any agreement, and to the knowledge of CTI, there is
no plan or intention on the part of the remaining holders of CTI Capital
Stock to sell, exchange or otherwise dispose of a number of shares of WAXS
Common Stock received in the Merger (excluding the Contingent Shares, if
any) to any person related to WAXS within the meaning of Treas. Reg. sec.
1.368-1(e)(3) that would reduce the CTI stockholders' aggregate ownership
of such WAXS Common Stock to a number of shares of WAXS Common Stock having
a value, as of the Effective Time of the Merger, of less than fifty percent
(50%) of the value of all of the formerly outstanding CTI Capital Stock as
of the Effective Time. For purposes of this representation, shares of WAXS
Common Stock exchanged for cash or other property, surrendered by
dissenters or exchanged for cash in lieu of fractional shares of WAXS
Common Stock will be treated as outstanding CTI Capital Stock as of the
Effective Time. Any third party who may acquire WAXS Common Stock from
Roger Abbott and Rosalind Abbott as former CTI stockholders after the
Merger as contemplated in the Voting and Stock Transfer Restriction
Agreement dated as of the date hereof between WAXS and Roger Abbott and
Rosalind Abbott (the "Abbott Voting and Stock Transfer Restriction
Agreement"), will not be a person related to WAXS within the meaning of
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Treas. Reg. sec. 1.368-1(e)(3), and there are no facts and circumstances
indicating that the cash to be used by each such third party to purchase
the WAXS Common Stock from such former CTI stockholders receiving WAXS
Common Stock in the Merger will in substance be exchanged by WAXS or any of
its Subsidiaries for CTI Capital Stock.
(ii) The fair market value of the WAXS Common Stock (inclusive of
Contingent Shares, if any) and cash in lieu of fractional shares of
Parent Common Stock, if any, together with any cash paid or shares of
WAXS Common Stock issued, as the case may be, in satisfaction of accrued
unpaid dividends on CTI Preferred Stock, received by each holder of CTI
Capital Stock in the Merger will be approximately equal to the fair
market value of the shares of CTI Capital Stock surrendered in the
Merger by each CTI stockholder.
(iii) CTI is not a regulated investment company, a real estate
investment trust, or a corporation fifty percent (50%) or more of the
value of whose total assets (excluding cash, cash items, receivables and
U.S. government securities) are stock or securities and eighty percent
(80%) or more of the value of whose total assets are assets held for
investment. For purposes of the fifty percent (50%) and eighty percent
(80%) determinations under the preceding sentence, stock and securities
in any subsidiary corporation shall be disregarded and the parent
corporation shall be deemed to own its ratable share of the subsidiary's
assets. A corporation shall be considered a subsidiary for purposes of
this paragraph if the parent owns fifty percent (50%) or more of the
combined voting power of all classes of stock entitled to vote, or fifty
percent (50%) or more of the total value of shares of all classes of
stock outstanding.
(iv) In the Merger, CTI will transfer to Merger Sub at least ninety
percent (90%) of the fair market value of its net assets, and at least
seventy percent (70%) of the fair market value of its gross assets held
immediately prior to the Merger. For purposes of this representation,
amounts paid by CTI to dissenters or to CTI stockholders who receive
cash or other property, CTI assets used by CTI to pay reorganization
expenses, and CTI assets used for redemptions and distributions
(excluding regular, normal dividends) made by CTI prior to the Effective
Time will be included as assets of CTI held immediately prior to the
Merger.
(v) None of the compensation received by any stockholder-employee
of CTI will be separate consideration for, or allocable to, any of the
shares of CTI Capital Stock held by such stockholder-employee; none of
the shares of WAXS Common Stock issued in the Merger and received by any
stockholder-employee of CTI will be separate consideration for, or
allocable to, any employment agreement, agreement not to compete or any
other compensation owed or owing to such stockholder-employee; and the
compensation paid to any stockholder-employee of CTI will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
(vi) CTI and each of its stockholders will pay their respective
expenses, if any, incurred in connection with the Merger.
(vii) There is no intercorporate indebtedness existing between WAXS
and CTI or between CTI and the Merger Sub that was issued, acquired, or
will be settled at a discount.
(viii) At the Effective Time of the Merger, the fair market value
of the assets of CTI transferred to Merger Sub will equal or exceed the
sum of its liabilities assumed by Merger Sub, plus (without duplication)
the amount of liabilities, if any, to which the transferred assets of
CTI are subject.
(ix) The liabilities of CTI assumed by Merger Sub and the
liabilities of CTI to which the transferred assets of CTI are subject
were incurred by CTI in the ordinary course of its business.
(x) CTI is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
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(xi) The business carried on by CTI at the Effective Time is its
"historic business" within the meaning of Treas. Reg. sec. 1.368-1(d).
(xii) Prior to the Effective Time, CTI has not distributed the
stock of any corporation in a distribution qualifying for Tax-free
treatment under Section 355 of the Code.
(xiii) During the five (5) year period ending as of the Effective
Time, neither CTI nor any persons related to CTI within the meaning of
Treas. Reg. sec. 1.368-1(e)(3) (but without regard to Treas. Reg. sec.
1.368-1(e)(3)(i)(A)) will have directly or through any transaction,
agreement, or arrangement with any other person, (A) acquired CTI
Capital Stock with consideration other than shares of WAXS capital stock
or CTI Capital Stock or (B) made any "extraordinary distributions" with
respect to CTI Capital Stock within the meaning of Treas. Reg. sec.
1.368-1T(e)(1)(ii)(A).
(xiv) The principal purposes of CTI for participating in the Merger
are bona fide purposes unrelated to Taxes, and the terms of this
Agreement are the product of arm's-length negotiations.
(xv) CTI and each of its Subsidiaries are not currently, have not
been within the last five (5) years, and do not anticipate becoming a
"United States real property holding corporation" within the meaning of
Section 897(c) of the Code.
(xvi) There is a valid business reason underlying the Section
1.7(d) provisions concerning the possible issuance of Contingent Shares
and the provisions of this Agreement relating to Contingent Shares
satisfy the specific requirements of Section 3.03 of IRS Revenue
Procedure 77-37, as it has been amplified and superseded by the IRS.
(xvii) There is a valid business reason for the escrow of shares of
WAXS Common Stock, including Contingent Shares, if any, pursuant to
Section 2.5 of this Agreement and the Escrow Agreement described in
Section 7.1(d), and the escrow provisions of this Agreement and the
Escrow Agreement satisfy the specific requirements of Section 3.06 of
IRS Revenue Procedure 77-37, as it has been amplified and superseded by
the IRS.
(xviii) There is a valid business reason for the escrow of shares
of WAXS Common Stock comprising the Expense Fund pursuant to Section
2.14 of this Agreement, and the escrow provisions of Section 2.14
satisfy the specific requirements of Section 3.06 of IRS Revenue
Procedure 77-37, as it has been amplified and superseded by the IRS.
(h) For purposes of this Agreement:
(i) "Tax" (and, with correlative meaning, "Taxes" shall mean: (i)
all taxes, charges, fees, levies or other assessments, however
denominated, including any interest, penalties or other additions to tax
that may become payable in respect thereof, imposed by any federal,
territorial, state, local or foreign government or any agency or
political subdivision of any such government, which taxes shall include,
without limiting the generality of the foregoing, all income or profits
taxes (including, but not limited to, federal income taxes and state
income taxes), payroll and employee withholding taxes, unemployment
insurance, social security taxes, sales and use taxes, ad valorem taxes,
excise taxes, employer tax, estimated, severance, telecommunications,
occupation, goods and services, capital, profits, value added taxes,
franchise taxes, gross receipts taxes, business license taxes,
occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, transfer taxes, workers' compensation, Pension
Benefit Guaranty Corporation premiums and other governmental charges,
and other obligations of the same or of a similar nature to any of the
foregoing, which the Person is required to pay, withhold or collect; and
(ii) any liability for the payment of any amounts described in clause
(i) as a result of being a successor to or transferee of any individual
or entity or a member of an affiliated, consolidated or unitary group
for any period (including pursuant to Treas. Reg. sec. 1.1502-6 or
comparable provisions of state, local or foreign tax law); and (iii) any
liability for the payment of amounts
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described in clause (i) or clause (ii) as a result of any express or
implied obligation to indemnify any Person or as a result of any
obligations under agreements or arrangements with any Person;
(ii) "Tax Asset" means any net operating loss, net capital loss,
investment tax credit, foreign tax credit, charitable deduction or any
other credit or tax attribute which could reduce Taxes (including,
without limitation, credits related to alternative minimum Taxes);
(iii) "Tax Return" shall mean all reports, estimates, declarations
of estimated tax, information statements and returns (including any
attached schedules) or similar statement relating to, or required to be
filed in connection with, any Taxes, including information returns or
reports with respect to backup withholding and other payments to third
parties; and
(iv) "Tax Sharing Agreement" shall mean any and all existing
written Tax sharing agreements, or arrangements binding two or more
persons with respect to the payment of Taxes, including any written
agreements or arrangements which afford any other person the right to
receive any payment from one or more other persons in respect to any
Taxes or the benefit of any Tax Asset of one or more other persons or
require or permit the transfer or assignment of any income, revenue,
receipts or gains.
3.17 Required Licenses and Permits. Except as would not have a Material
Adverse Effect on CTI, CTI and its Subsidiaries have all licenses, tariffs,
permits, variances, exemptions, orders, approvals and other authorizations of
all Governmental Entities necessary for the operation of the business of CTI and
its Subsidiaries (the "CTI Permits"). CTI and its Subsidiaries are in compliance
with the terms of the CTI Permits, except where the failure to so be in
compliance would have a Material Adverse Effect on CTI. The businesses of CTI
and its Subsidiaries are not being conducted in violation of, and neither CTI
nor any of its Subsidiaries have received any notices of violations with respect
to, any law, ordinance or regulation of any Governmental Entity, except for
possible violations which would not have a Material Adverse Effect on CTI. CTI
has made available to WAXS true, correct, and complete copies of all CTI
Permits.
3.18 Contracts and Commitments. Except as set forth or described in
SCHEDULES 3.12, 3.13 or 3.18:
(a) Neither CTI nor any of its Subsidiaries is a party to any
agreement or contract, the absence of which would have a Material Adverse
Effect on CTI;
(b) No contracts or commitments of CTI or any of its Subsidiaries have
unexpired terms of more than twelve (12) months from the date hereof or
require payments or the provision of services having a value individually
in excess of $1,000,000 (or, as to any series of related contracts or
commitments, $1,000,000 in the aggregate);
(c) Neither CTI not any of its Subsidiaries have any contract, written
or oral, relating to the employment of any person by CTI or any Subsidiary
thereof, or any consulting or similar kind of contract, that is not
cancelable by CTI as a Subsidiary thereof, on notice of not longer than one
hundred twenty (120) days and without liability of any kind, except
liabilities which arise as a matter of law upon termination of employment,
or any agreement or arrangement providing for the payment of any bonus or
commission based on sales or earnings;
(d) Except for negotiable instruments in the process of collection,
neither CTI nor any of its Subsidiaries has any unexpired power of attorney
outstanding or any contract, commitment or liability (whether absolute,
accrued, contingent or otherwise), as guarantor, surety, co-signer,
endorser, co-maker, indemnitor in respect of the contract or commitment of
any other person, corporation, partnership, joint venture, association,
organization or other entity (other than a Subsidiary of CTI) with respect
to an amount exceeding $2,000,000;
(e) There are no contracts or agreements with any director, officer or
shareholder of CTI or a Subsidiary thereof, or with any person related to
any such person or with any company or other organization in which any
director, officer, or shareholder of CTI or a Subsidiary thereof, or anyone
related to any such person, has a material direct or indirect financial
interest;
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(f) Neither CTI nor any of its Subsidiaries is subject to any contract
or agreement containing covenants limiting the freedom of CTI or any of its
Subsidiaries to compete in any line of business in any geographic area or
requiring CTI or any of its Subsidiaries to share any profits;
(g) Neither CTI nor any of its Subsidiaries has any outstanding
contract or agreement for variable cost service (excluding point-to-point
service obtained pursuant to a lease or IRU arrangement) which is of a
"take-or-pay" or similar variety and which requires payments or the
provision of services having a value in excess of $50,000 per year or
$1,000,000 over the term of the contract or agreement; and
(h) CTI has made available to WAXS true, correct and complete copies
of each of the agreements listed on SCHEDULE 3.18 (such agreements,
together with any agreements set forth or described in or required to be
set forth or described in any of SCHEDULES 3.12 or 3.13 being referred to
as the "Material Contracts");
3.19 No Conflict. Subject to obtaining any required consents or approvals
set forth on SCHEDULE 3.21, the execution and delivery of this Agreement by CTI,
the consummation of the transactions contemplated herein by CTI, and the
performance of the covenants and agreements hereunder of CTI will not, with or
without the giving of notice or the lapse of time, or both, (i) violate or
conflict with any of the provisions of any charter document or bylaw of CTI or a
Subsidiary thereof, (ii) except as set forth in SCHEDULE 3.19, violate, conflict
with or result in a breach or default under or give rise to a right of
termination, amendment, cancellation or acceleration of any term, condition or
obligation under any material mortgage, indenture, contract, license, permit,
instrument, trust document, will, or other agreement, document or instrument to
which CTI or a Subsidiary thereof is a party or by which CTI, any Subsidiary
thereof or its or their assets may be bound, (iii) violate any provision of law,
statute, regulation, court order or ruling of any governmental authority to
which CTI or a Subsidiary thereof is a party or by which its or their assets may
be bound or (iv) result in the creation or imposition of any lien, claim,
charge, restriction, security interest or encumbrance of any kind whatsoever
upon any asset, except, with respect to the foregoing clauses (ii), (iii) or
(iv), where there would arise no Material Adverse Effect on CTI therefrom.
3.20 Agreements in Full Force and Effect. Except as expressly set forth in
SCHEDULE 3.20, all Material Contracts are valid and binding and in full force
and effect and are enforceable in accordance with their terms, except to the
extent that such enforceability may be limited due to laws relating to
bankruptcy, reorganization, moratorium or other such laws. CTI does not have
knowledge of any pending or threatened bankruptcy, insolvency or similar
proceeding with respect to any party to such agreements. No event has occurred
with respect to any agreement or contract to which CTI or a Subsidiary thereof
is a party which (whether with or without notice, lapse of time or the happening
or occurrence of any other event) would constitute a default thereunder by CTI
or a Subsidiary thereof, or to the knowledge of CTI, any other party thereto,
except where such default would not have a Material Adverse Effect on CTI.
3.21 Required Consents and Approvals. Except as set forth on SCHEDULE
3.21, no consent or approval is required by virtue of the execution hereof by
CTI or the consummation of any of the transactions contemplated herein by CTI to
avoid the violation or breach of, or the default under, or the creation of a
lien on any asset of CTI or a Subsidiary thereof pursuant to the terms of, any
regulation, order, decree or award of any Governmental Entity or any lease,
agreement, contract, mortgage, note, license, permit, tariff, authorization or
any other instrument to which CTI or a Subsidiary thereof is a party or to which
it or any of its property or any of its capital stock is subject, except where
the failure to obtain such consent or approval would not have a Material Adverse
Effect on CTI.
3.22 Absence of Certain Changes and Events. Except as set forth on
SCHEDULE 3.22, since September 30, 1999, each of CTI and its Subsidiaries has
conducted its business only in the ordinary course, and has not:
(a) made any declaration, setting aside or payment of any dividend or
other distribution of assets (whether in cash, stock or property) with
respect to the capital stock of CTI or a Subsidiary thereof,
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or any direct or indirect redemption, purchase or other acquisition of such
stock, or otherwise made any payment of cash or any transfer of other
assets, to any shareholder or affiliate thereof (including, without
limitation, the repayment of or on any indebtedness or other obligation);
or transferred any assets from a Subsidiary to CTI;
(b) suffered any Material Adverse Effect;
(c) except for customary increases based on term of service or regular
promotion of non-officer employees, increased (or announced any increase
in) the compensation payable or to become payable to any employee or
increased (or announced any increase in) any bonus, insurance, pension or
other employee benefit plan, payment or arrangement for such employees, or
entered into or amended any material employment, consulting, severance or
similar agreement;
(d) incurred, assumed or guaranteed any liability or obligation
(absolute, accrued, contingent or otherwise) other than in the ordinary
course of business consistent with past practice;
(e) paid, discharged, satisfied or renewed any material claim,
liability or obligation other than in the ordinary course of business and
consistent with past practice;
(f) permitted any asset to be subjected to any mortgage, lien,
security interest, restriction, charge or other encumbrance of any kind
except for Permitted Liens;
(g) waived any material claims or rights;
(h) sold, transferred or otherwise disposed of any material asset,
except in the ordinary course of business consistent with past practice;
(i) made any single capital expenditure or investment in excess of
$1,000,000;
(j) made any change in any method, practice or principle of financial
or tax accounting;
(k) paid, loaned, advanced, sold, transferred or leased any asset to
any employee, except for normal compensation involving salary and benefits
or expenses reimbursed in the ordinary course of business, consistent with
past practice;
(l) issued or sold any of its capital stock or issued any warrant,
option or other right to purchase shares of its capital stock, or any
security convertible into its capital stock;
(m) entered into any material commitment or transaction, other than in
the ordinary course of business consistent with past practice, affecting
the business of CTI or its Subsidiaries; or
(n) agreed in writing, or otherwise, to take any action described in
this Section 3.22.
3.23 Brokers and Advisers. Except for Gerard Klauer Mattison & Co., Inc.,
no broker, agent or finder has rendered financial services to CTI in connection
with the transactions contemplated by this Agreement.
3.24 Information Supplied. None of the information supplied or to be
supplied by CTI for inclusion or incorporation by reference in the Proxy
Statement/Prospectus and the Registration Statement (each as defined herein)
will, on the date it is first mailed to WAXS's stockholders or at the time of
the WAXS Stockholders Meeting (in the case of the Proxy Statement/Prospectus) or
on the date it is filed or declared effective by the SEC (in the case of the
Registration Statement) contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. None of the information supplied or to be supplied by
CTI to its stockholders in connection with such stockholders' adoption of this
Agreement and approval of the Merger and the other transactions contemplated
hereby will contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
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3.25 CTI Board Approval. The Board of Directors of CTI, by resolutions
duly adopted by unanimous vote at a meeting duly called and held and not
subsequently rescinded or modified in any way (the "CTI Board Approval"), has
duly (i) determined that this Agreement, the Merger and the other transactions
contemplated hereby are fair to and in the best interests of CTI and its
stockholders, (ii) approved this Agreement, the Merger and the other
transactions contemplated hereby and (iii) declared the advisability of this
Agreement, the Merger and the other transactions contemplated hereby, and,
further, (iv) recommended that the stockholders of CTI approve and adopt this
Agreement, the Merger and the other transactions contemplated hereby and
directed that this Agreement and the transactions contemplated hereby be
submitted for consideration by CTI's stockholders.
3.26 Required CTI Stockholder Vote. The affirmative vote of holders of
shares of CTI Common Stock, CTI Series A Preferred Stock and CTI Series B
Preferred Stock voting as three (3) separate classes, representing a majority of
the outstanding shares of each such class (the "Required CTI Stockholder Vote"),
are the only votes of the holders of any class or series of CTI capital stock
necessary to adopt this Agreement and approve the Merger and the other
transactions contemplated hereby.
3.27 Disclosure. No representations or warranties by CTI in this Agreement
(as qualified by the corresponding Schedules delivered by CTI pursuant hereto)
contain any untrue statement of material fact, or omit to state any fact
necessary, in light of the circumstances under which it was made, in order to
make the statements herein or therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF WAXS AND MERGER SUB
WAXS and Merger Sub hereby represent and warrant to CTI as follows:
4.1 Organization. WAXS and Merger Sub are corporations duly organized,
validly existing and in good standing under the laws of the state of their
incorporation and have all requisite corporate power and authority to effect the
transactions and perform their obligations as contemplated hereunder. Except as
set forth on SCHEDULE 4.1, Exhibit 21.1 to WAXS's Annual Report on Form 10-K for
the year ended December 31, 1998 includes all the Subsidiaries of WAXS which as
of the date of this Agreement are Significant Subsidiaries (as defined in Rule
1-02 of Regulation S-X of the Securities and Exchange Commission (the "SEC")).
Except as disclosed on SCHEDULE 4.1 or in the WAXS SEC Reports (as defined
herein), all the outstanding shares of capital stock of, or other equity
interest in, each such Significant Subsidiary owned or held by WAXS have been
validly issued and are fully paid and nonassessable and are owned directly or
indirectly by WAXS, free and clear of all pledges, claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever and free of
any other restriction (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests), except
for such matters as would not have a Material Adverse Effect on WAXS. Neither
WAXS nor any of its Subsidiaries directly or indirectly owns any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for any equity or similar interest in, any corporation, partnership,
joint venture or other business association or entity (other than the
Subsidiaries of WAXS) that is or would reasonably be expected to be material to
WAXS and its Subsidiaries taken as a whole.
4.2 Authorization. Subject to the approval of this Agreement, the Merger
and the other transactions contemplated hereby by the stockholders of WAXS by
the Required WAXS Vote, WAXS has the right, power and authority to execute,
deliver and perform this Agreement and the Escrow Agreement and to consummate
the transactions contemplated hereby and thereby, including the issuance of the
WAXS Common Stock as contemplated hereunder. The execution, delivery and
performance of this Agreement and the Escrow Agreement, and the consummation of
the transactions contemplated hereby and thereby, have been duly and validly
authorized by all necessary corporate action on the part of WAXS, subject to the
approval of this Agreement, the Merger and the other transactions contemplated
hereby by the stockholders of WAXS by the Required WAXS Vote. This Agreement and
the Escrow Agreement have
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been duly and validly executed and delivered by WAXS and constitute a legal,
valid and binding obligation of WAXS, enforceable in accordance with their
terms, except to the extent such enforceability may be limited by applicable
bankruptcy, reorganization, moratorium or other such laws affecting the rights
of creditors generally. Merger Sub has the right, power and authority to
execute, deliver and perform this Agreement and to consummate the transactions
contemplated hereunder. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of the
Merger Sub. This Agreement has been duly and validly executed and delivered by
Merger Sub and constitutes a legal, valid and binding obligation of Merger Sub,
enforceable in accordance with its terms, except to the extent such
enforceability may be limited by applicable bankruptcy, reorganization,
moratorium or other such laws affecting the rights of creditors generally.
4.3 No Conflict. The execution and delivery of this Agreement and the
Escrow Agreement by WAXS, the execution and delivery of this Agreement by Merger
Sub, the consummation of the transactions contemplated herein and therein by
WAXS and Merger Sub, as applicable, and the performance of the covenants and
agreements of WAXS and Merger Sub will not, with or without the giving of notice
or the lapse of time, or both, (i) violate or conflict with any of the
provisions of any charter document or bylaw of WAXS or Merger Sub, (ii) except
as set forth in SCHEDULE 4.3, violate, conflict with or result in a breach or
default under or give rise to a right of termination, amendment, cancellation or
acceleration of any term, condition or obligation under any material mortgage,
indenture, contract, license, permit, instrument, trust document, or other
agreement, document or instrument to which WAXS or Merger Sub is a party or by
which WAXS or Merger Sub or any of its or their properties may be bound, (iii)
violate any provision of law, statute, rule, regulation, court order, judgment
or decree, or ruling of any Governmental Entity, to which WAXS or Merger Sub is
a party or by which WAXS or Merger Sub or any of its or their properties may be
bound or (iv) result in the creation or imposition of any lien, claim, charge,
restriction, security interest or encumbrance of any kind whatsoever upon any
asset of WAXS or Merger Sub, except, with respect to the foregoing clauses (ii),
(iii) or (iv), where there would arise no Material Adverse Effect on WAXS or
Merger Sub therefrom.
4.4 Validity of Issuance. The shares of WAXS Common Stock, when issued in
accordance with Section 1.7 hereof, will be duly authorized, validly issued,
fully paid and nonassessable.
4.5 Capital Structure. As of February 11, 2000:
(a) The authorized capital stock of WAXS consists of (A) 150,000,000
shares of WAXS Common Stock, of which 53,787,805 shares are outstanding and
no shares are held in treasury of WAXS and (B) 10,000,000 shares of
Preferred Stock, par value $.01 per share, of which 50,000 shares
designated as 4.25% Cumulative Senior Perpetual Convertible Preferred
Stock, Series A, par value $.01 per share (the "Series A Preferred Stock"),
and 350,259.875 shares designated as Convertible Preferred Stock, Series C
(the "Series C Preferred Stock"), are outstanding. WAXS has reserved or has
available 4,347,827 shares of WAXS Common Stock for issuance upon
conversion of the Series A Preferred Stock and 18,027,478 shares of WAXS
Common Stock for issuance upon conversion of the Series C Preferred Stock.
All issued and outstanding shares of the capital stock of WAXS are duly
authorized, validly issued, fully paid and nonassessable, and no class of
capital stock is entitled to preemptive rights. In addition to the option
described in Item 1 of SCHEDULE 4.5, there are outstanding options,
warrants or other rights (a "WAXS Stock Option") to acquire 13,133,837
shares of capital stock from WAXS.
(b) No bonds, debentures, notes or other indebtedness of WAXS having
the right to vote on any matters on which holders of capital stock of WAXS
may vote are issued or outstanding.
(c) Except as otherwise set forth in this Section 4.5, the WAXS SEC
Reports (as defined below) or SCHEDULE 4.5 and as contemplated by Section
1.5 and Section 1.6, there are no securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind
to which WAXS or any of its Subsidiaries is a party or by which any of them
is bound obligating WAXS or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold,
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additional shares of capital stock or other voting securities of WAXS or
any of its Subsidiaries or obligating WAXS or any of its Subsidiaries to
issue, grant, extend or enter into any such security, option, warrant, call
right, commitment, agreement, arrangement or undertaking. Except as set
forth on SCHEDULE 4.5 or the WAXS SEC Reports, there are no outstanding
obligations of WAXS or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of WAXS or any of its
Subsidiaries.
4.6 Reports and Financial Statements.
(a) WAXS has filed all required registration statements, prospectuses,
reports, schedules, forms, statements and other documents required to be
filed by it under the federal securities laws with the SEC since January 1,
1998 (collectively, including all exhibits thereto, the "WAXS SEC
Reports"). No Subsidiary of WAXS is required to file any form, report,
registration statement, prospectus or other document with the SEC not
otherwise filed with a WAXS SEC Report. None of the WAXS SEC Reports, as of
their respective dates (or, if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing), contained or
will contain any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The WAXS SEC Reports, taken as a whole, do not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances existing as of the time of filing of
such reports, not misleading. Each of the financial statements (including
the related notes) included in the WAXS SEC Reports (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the
date of such filing) presents fairly, in all material respects, the
consolidated financial position and consolidated results of operations and
cash flows of WAXS and its Subsidiaries as of the respective dates or for
the respective periods set forth therein all in conformity with GAAP
consistently applied during the periods involved except as otherwise noted
therein, and subject, in the case of the unaudited interim financial
statements, to normal and recurring year-end adjustments that have not been
and will not be material in amount. All of such WAXS SEC Reports, as of
their respective dates (or as of the date of any amendment to the
respective WAXS SEC Report filed prior to the date of this Agreement),
complied as to form in all material respects with the applicable
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder.
(b) Except as disclosed on SCHEDULE 4.6 or in the WAXS SEC Reports,
since December 31, 1999, WAXS and its Subsidiaries have not incurred any
liabilities that are of a nature that would be required to be disclosed on
a balance sheet of WAXS and its Subsidiaries or the footnotes thereto
prepared in conformity with GAAP, other than (A) liabilities incurred in
the ordinary course of business or (B) liabilities that would not have a
Material Adverse Effect on WAXS.
4.7 Brokers and Advisers. Except for Donaldson, Lufkin & Jenrette
Securities Corporation, no broker, agent or finder has rendered financial
services to WAXS in connection with the transactions contemplated by this
Agreement.
4.8 Information Supplied. None of the information supplied or to be
supplied by WAXS for inclusion or incorporation by reference in the Proxy
Statement/Prospectus (as defined herein) will, on the date it is first mailed to
WAXS's stockholders, or at the time of the WAXS Stockholders Meeting contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The Proxy
Statement/Prospectus will, on the date it is first mailed to WAXS's stockholders
and at the time of the WAXS Stockholders Meeting, comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations promulgated thereunder.
4.9 WAXS Board Approval. The Board of Directors of WAXS, by resolutions
duly adopted by unanimous vote at a meeting duly called and held and not
subsequently rescinded or modified in any way (the "WAXS Board Approval"), has
duly (i) determined that this Agreement, the Merger and the other
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transactions contemplated hereby are fair to and in the best interests of WAXS
and its stockholders, (ii) approved this Agreement, the Merger and the other
transactions contemplated hereby and (iii) declared the advisability of this
Agreement, the Merger and the other transactions contemplated hereby, and,
further, (iv) recommended that the stockholders of WAXS approve and adopt this
Agreement, the Merger and the other transactions contemplated hereby and
directed that this Agreement and the transactions contemplated hereby by
submitted for consideration by WAXS's stockholders at the WAXS Stockholders
Meeting.
4.10 Required WAXS Stockholder Vote. Except as set forth on SCHEDULE 4.10,
the affirmative vote of holders of shares of WAXS Common Stock, Series A
Preferred Stock and Series C Preferred Stock, voting together as a single class,
representing a majority of the outstanding shares of WAXS Common Stock, Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (the
"Required WAXS Vote"), is the only vote of the holders of any class or series of
WAXS capital stock necessary to adopt this Agreement and approve the Merger and
the other transactions contemplated hereby.
4.11 Required Merger Sub Board Approval. The Board of Directors of Merger
Sub, by resolutions duly adopted by a unanimous written consent and not
subsequently rescinded or modified in any way, has duly (i) determined that this
Agreement, the Merger and the other transactions contemplated hereby are fair to
and in the best interests of Merger Sub and its sole stockholder, WAXS, (ii)
approved this Agreement, the Merger and the other transactions contemplated
hereby and (iii) declared the advisability of this Agreement, the Merger and the
other transactions contemplated hereby, and, further, (iv) recommended that WAXS
adopt this Agreement and approve the Merger and the other transactions
contemplated hereby.
4.12 Required Merger Sub Stockholder Vote. The affirmative vote of WAXS,
as sole stockholder of Merger Sub, is the only vote of the holders of any class
or series of Merger Sub capital stock necessary to adopt this Agreement and
approve the Merger and the other transactions contemplated hereby. WAXS, in its
capacity as sole stockholder of Merger Sub, has, by resolutions duly adopted by
written consent (the "Merger Sub Stockholder Resolutions") adopted this
Agreement and approved the Merger and the other transactions contemplated
hereby.
4.13 Litigation; Compliance with Laws.
(a) Except as disclosed on SCHEDULE 4.13 or in the WAXS SEC Report,
there is no suit, investigation, action or proceeding pending or, to the
knowledge of WAXS, threatened, against or affecting WAXS or any Subsidiary
of WAXS having, or which would have a Material Adverse Effect on WAXS, nor
is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against WAXS or any
Subsidiary of WAXS having, or which would have a Material Adverse Effect on
WAXS.
(b) Except as would not have a Material Adverse Effect on WAXS, WAXS
and its Subsidiaries hold all permits, licenses, variances, authorizations,
exemptions, orders and approvals of all Governmental Entities which are
necessary for the operation of the businesses of WAXS and its Subsidiaries
(the "WAXS Permits"). WAXS and its Subsidiaries are in compliance with the
terms of the WAXS Permits, except as disclosed in the WAXS SEC Reports or
where the failure to be valid and in full force and effect or to so comply
would not have a Material Adverse Effect on WAXS. The businesses of WAXS
and its Subsidiaries are not being conducted in violation of, and WAXS has
not received any notices of violations with respect to, any law, ordinance
or regulation of any Governmental Entity, except as disclosed in the WAXS
SEC Reports or for violations which would not have a Material Adverse
Effect on WAXS.
4.14 Absence of Certain Changes or Events. Except as disclosed on SCHEDULE
4.14 or in the WAXS SEC Reports and except for liabilities incurred in
connection with this Agreement or the transactions contemplated hereby, since
December 31, 1998 through and including the date hereof, (i) WAXS and its
Subsidiaries have conducted, in all material respects, their business only in
the ordinary course and (ii) there has not been any change, circumstance or
event which has had, or would reasonably be expected
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to have, a Material Adverse Effect on WAXS, other than any change, circumstance
or effect relating (A) to the economy or financial markets in general, or (B) in
general to the industries in which WAXS and its Subsidiaries operate and not
specifically relating to WAXS and its Subsidiaries.
4.15 Tax Matters. Except as set forth on SCHEDULE 4.15:
(a) (i) All material Tax Returns required to be filed under applicable
law by WAXS and each of its Subsidiaries have been filed, or requests for
extensions have been timely filed and have not expired; (ii) all such Tax
Returns filed by WAXS and its Subsidiaries are complete and accurate in all
material respects; (iii) all Taxes shown to be due on such Tax Returns or
on subsequent assessments with respect thereto have been paid or the WAXS
SEC Reports reflect that adequate reserves have been established for the
payment of such Taxes, and no other material Taxes are payable by WAXS or
any of its Subsidiaries with respect to items or periods covered by such
Tax Returns (whether or not shown on or reportable on such Tax Returns) or
with respect to any period prior to the date of this Agreement; (iv) there
are no material liens on any of the assets of WAXS or any of its
Subsidiaries with respect to Taxes, other than liens for Taxes not yet due
and payable or for Taxes that WAXS and its Subsidiaries is contesting in
good faith through appropriate proceedings and for which the WAXS SEC
Reports reflect that appropriate reserves have been established; and (v)
there is no audit, examination, deficiency or refund litigation or matter
in controversy with respect to any Taxes of WAXS and its Subsidiaries that
might reasonably be expected to result in a Tax determination which would
have a Material Adverse Effect on WAXS.
(b) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of WAXS or any of its Subsidiaries that,
individually or collectively, could give rise to the payment of any amount
(or portion thereof) that would not be deductible pursuant to Section 280G
of the Code.
(c) Neither WAXS nor any of its Subsidiaries is a party to a Tax
Sharing Agreement.
(d) (i) During the five (5) year period beginning as of the Effective
Time, neither WAXS nor any person "related" to WAXS within the meaning of
Treas. Reg. sec. 1.368-1(e)(3) will (A) be under any obligation and will
have entered into any agreement to redeem or repurchase any of the WAXS
Common Stock issued in the Merger or to make any "extraordinary
distributions" within the meaning of Treas. Reg. sec. 1.368-1T(e)(1)(ii)(A)
in respect of the WAXS Common Stock and (B) have a plan or intention to
reacquire any of the WAXS Common Stock issued in the Merger either directly
or through any transaction, agreement or arrangement with any other person,
except (X) for escrowed shares of WAXS Common Stock, if any, which may be
returned to WAXS pursuant to the Escrow Agreement and (Y) that WAXS may
repurchase shares of WAXS Common Stock on the open market through a broker
for the prevailing market price pursuant to an open-market repurchase
program as described in Rev. Rul. 99-58, 1999-52 I.R.B. 701. To the
knowledge of WAXS, any third party who may acquire WAXS Common Stock from
Roger Abbott and Rosalind Abbott as former CTI stockholders after the
Merger as contemplated by the Abbott Voting and Stock Transfer Restriction
Agreement will not be a person related to WAXS within the meaning of Treas.
Reg. sec. 1.368-1(e)(3) and to the knowledge of WAXS, there are no facts
and circumstances indicating that the cash to be used by any such third
party to purchase the WAXS Common Stock from such former CTI stockholders
receiving such WAXS Common Stock in the Merger will in substance be
exchanged by WAXS or any of its Subsidiaries for CTI Capital Stock.
(ii) As of the Effective Time, neither WAXS nor any person related
to WAXS within the meaning of Treas. Reg. sec. 1.368-1(e)(3) will own
beneficially or of record, nor will have owned during the past five (5)
years, any CTI Capital Stock or securities of CTI or options or
instruments giving the holder thereof the right to acquire CTI Capital
Stock or securities of CTI.
(iii) Prior to or in the Merger, neither WAXS nor any person
related to WAXS within the meaning of Treas. Reg. sec. 1.368-1(e)(3)
will have acquired directly or through any transaction,
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agreement or arrangement with any other person, any capital stock of CTI
with consideration other than shares of WAXS Common Stock.
(iv) The fair market value of the WAXS Common Stock (inclusive of
Contingent Shares, if any) and cash in lieu of fractional shares of WAXS
Common Stock, if any, together with any cash paid or shares of WAXS
Common Stock issued, as the case may be, in satisfaction of accrued
unpaid dividends on CTI Preferred Stock, received by each holder of CTI
Capital Stock in the Merger will be approximately equal to the fair
market value of the shares of CTI Capital Stock surrendered in the
Merger by each CTI stockholder.
(v) Following the Merger, WAXS will cause Merger Sub to continue
CTI's "historic business" within the meaning of Treas. Reg. sec.
1.368-1(d) or use a significant portion of CTI's historic business
assets in a business. For purposes of this representation, Merger Sub
will be treated as conducting CTI's historic business or using a
significant portion of CTI's historic business assets in a business if
(a) the members of the WAXS "qualified group" (as defined below in this
Section 4.15(d)(viii)), in the aggregate, continue the historic business
of CTI or use a significant portion of CTI's historic business assets in
a business, or (b) the foregoing activities are undertaken by a
partnership in which (1) the members of the WAXS qualified group, in the
aggregate, own at least a thirty-three and one third percent (33 1/3%)
interest in the partnership, or (ii) one or more members of the
qualified group has active and substantial management functions as a
partner with respect to the partnership business and the members of the
qualified group, in the aggregate, own at least a twenty percent (20%)
interest in the partnership.
(vi) On and prior to the Effective Time, WAXS will be in "control"
of Merger Sub within the meaning of Section 368(c) of the Code, which is
a newly-formed corporation that was organized for the sole purpose of
facilitating the Merger.
(vii) WAXS has no plan or intention, and WAXS has no plan or
intention to cause the Merger Sub, to issue additional shares of its
capital stock following the Merger, or take any other action, that would
result in WAXS losing "control" of the Merger Sub within the meaning of
Section 368(c) of the Code.
(viii) WAXS has no plan or intention following the Merger to
liquidate the Merger Sub; to merge the Merger Sub with and into another
corporation; to sell or otherwise dispose of the stock of the Merger
Sub; or to cause the Merger Sub to sell or otherwise dispose of any of
the assets acquired from CTI, except for dispositions made in the
ordinary course of business or for transfers or successive transfers of
all or part of the assets acquired from CTI to a member(s) of the WAXS
qualified group or to a partnership that has a member(s) of the
qualified group as a partner who own, in the aggregate, at least a
thirty-three and one third percent (33 1/3%) interest in the
partnership, or (ii) one or more members of the qualified group has
active and substantial management functions as a partner with respect to
the partnership business and the members of the qualified group, in the
aggregate, own at least a twenty percent (20%) interest in the
partnership. For purposes of this Section 4.15(d) and as set forth under
Treas. Reg. sec. 1.368-1(d)(4)(ii), the term "qualified group" shall
mean one or more chains of corporations connected through stock
ownership with WAXS, but only if WAXS owns directly stock meeting the
requirements of Section 368(c) of the Code in at least one other
corporation, and stock meeting the requirements of Section 368(c) of the
Code in each of the corporations (except WAXS) is owned directly by one
of the other corporations.
(ix) WAXS and Merger Sub will pay their respective expenses, if
any, incurred in connection with the Merger.
(x) There is no intercorporate indebtedness existing between WAXS
and CTI or between the Merger Sub and CTI that was issued, acquired, or
will be settled at a discount.
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(xi) Neither WAXS nor Merger Sub is a regulated investment company,
a real estate investment trust, or a corporation fifty percent (50%) or
more of the value of whose total assets (excluding cash, cash items,
receivables and U.S. government securities) are stock or securities and
eighty percent (80%) or more of the value of whose total assets are
assets held for investment. For purposes of the fifty percent (50%) and
eighty percent (80%) determinations under the preceding sentence, stock
and securities in any subsidiary corporation shall be disregarded and
the parent corporation shall be deemed to own its ratable share of the
subsidiary's assets. A corporation shall be considered a subsidiary for
purposes of this paragraph if the parent owns fifty percent (50%) or
more of the combined voting power of all classes of stock entitled to
vote, or fifty percent (50%) or more of the total value of shares of all
classes of stock outstanding.
(xii) No stock of the Merger Sub will be issued in the Merger.
(xiii) Neither WAXS nor the Merger Sub is under the jurisdiction of
a court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
(xiv) In the Merger, to the knowledge of WAXS, the Merger Sub will
acquire at least ninety percent (90%) of the fair market value of CTI's
net assets, and at least seventy percent (70%) of the fair market value
of CTI's gross assets held immediately prior to the Merger. For purposes
of this representation, amounts paid by CTI to dissenters or to CTI
stockholders who receive cash or other property, CTI assets used by CTI
to pay reorganization expenses, and CTI assets used for redemptions and
distributions (excluding regular, normal dividends) made by CTI prior to
the Effective Time will be included as assets of CTI held immediately
prior to the Merger.
(xv) None of the compensation received by any stockholder-employee
of CTI will be separate consideration for, or allocable to, any of the
shares of CTI Capital Stock held by such stockholder-employee; none of
the shares of WAXS Common Stock issued in the Merger and received by any
stockholder-employee of CTI will be separate consideration for, or
allocable to, any employment agreement, agreement not to compete or any
other compensation owed or owing to such stockholder-employee; and the
compensation paid to any stockholder-employee of CTI will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
(xvi) The payment of cash in lieu of fractional shares of WAXS
Common Stock is solely for the purpose of avoiding the expense and
inconvenience to WAXS of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to CTI stockholders
instead of issuing fractional shares of WAXS Common Stock will not
exceed one percent (1%) of the total Merger Consideration that will be
issued in the Merger.
(xvii) Prior to the Effective Time, neither WAXS nor any Subsidiary
of WAXS has distributed the stock of any corporation in a distribution
of stock qualifying for Tax-free treatment under Section 355 of the
Code.
(xviii) The principal purposes of WAXS for participating in the
Merger are bona fide purposes unrelated to Taxes, and the terms of this
Agreement are the product of arm's-length negotiations.
(xix) To the extent of the shares of WAXS Common Stock, including
Contingent Shares, if any, that are placed in escrow under the Escrow
Agreement for possible return to WAXS under the conditions specified in
such Escrow Agreement and this Agreement: (1) there is a valid business
reason for establishing the escrow arrangement; (2) the shares of WAXS
Common Stock subject to the Escrow Agreement at the Effective Date,
including the Contingent Shares, if any, which are issued pursuant to
Section 1.7(d) hereunder and subsequently become subject to the Escrow
Agreement, will each appear as issued and outstanding on the balance
sheet of
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WAXS and such shares will be legally outstanding under applicable state
law; (3) all dividends paid on such stock by WAXS will be distributed to
the former CTI stockholders; (4) all voting rights of such stock held
under the Escrow Agreement will be exercisable by the former CTI
stockholders or on their behalf by the Shareholder Representative; (5)
such stock will not be subject to restrictions requiring its return to
WAXS because of the death, failure to continue employment or similar
restrictions; (6) all such stock will be released from the Escrow
Agreement within five (5) years after the Effective Time (except where
there is a bona fide dispute as to whom such stock should be released);
(7) the return of such stock to WAXS will not be triggered by an event
the occurrence or nonoccurrence of which is within the control of the
CTI stockholders; (8) the return of such stock to WAXS will not be
triggered by the payment of additional Tax or reduction in Taxes paid as
a result of an IRS audit of the CTI stockholders, Merger Sub or WAXS
either (x) with respect to the Merger or (y) when the Merger involves a
related person within the meaning of Section 267(c)(4) of the Code; (9)
the mechanism for the calculation of the number of shares of WAXS Common
Stock to be returned to WAXS from the Escrow Fund is objective and
readily ascertainable; and (10) at least fifty percent (50%) of the
number of shares of WAXS Common Stock issued as of Effective Time to the
CTI stockholders will not be subject to the Escrow Agreement or the
Expense Fund.
(xx) As to the Contingent Shares, if any, which may be issued by
WAXS pursuant to Section 1.7(d) hereunder: (1) all the Contingent Shares
will be issued by WAXS pursuant to Section 1.7(d) of this Agreement
within five (5) years from the Effective Time and as to any Contingent
Shares which are placed in escrow under the Escrow Agreement, such
Contingent Shares will be released from the Escrow Agreement within five
(5) years after the Effective Time (except where there is a bona fide
dispute as to whom such stock should be released); (2) there is a valid
business reason for the provisions in Section 1.7(d) concerning the
possible issuance of Contingent Shares; (3) the maximum number of
Contingent Shares that may be issued is stated hereunder; (4) at least
fifty percent (50%) of the maximum number of shares of WAXS Common Stock
(inclusive of the Contingent Shares) will be issued as of the Effective
Time pursuant to Section 1.7(c) hereunder; (5) the Section 1.7(d)
provisions concerning the possible right to receive Contingent Shares
after the Effective Time prohibit assignment of such rights except by
operation of law; (6) the Section 1.7(d) provisions can give rise only
to the receipt of additional WAXS Common Stock; (7) such stock issuance
will not be triggered by an event the occurrence or nonoccurrence of
which is within the control of the CTI stockholders; (8) such stock
issuance will not be triggered by the payment of additional Tax or
reduction in Taxes paid as a result of an IRS audit of the CTI
shareholders or WAXS either (x) with respect to the Merger or (y) when
the Merger involves related persons within the meaning of Section
267(c)(4) of the Code; and (9) the mechanism in Section 1.7(d) hereunder
for the calculation of Contingent Shares to be issued is objective and
readily ascertainable.
(xxi) To the knowledge of WAXS, there is a valid business reason
for the escrow of shares of WAXS Common Stock comprising the Expense
Fund pursuant to Section 2.14 of this Agreement, and to the knowledge of
WAXS, the escrow provisions of Section 2.14 satisfy the specific
requirements of Section 3.06 of IRS Revenue Procedure 77-37, as it has
been amplified and superseded by the IRS.
ARTICLE V
COVENANTS RELATED TO CONDUCT OF BUSINESS
5.1 Covenants of CTI. During the period from the date of this Agreement
and continuing until the Effective Time, CTI agrees as to itself and its
Subsidiaries that:
(a) Ordinary Course. Except with respect to any of the matters
described on any of the Schedules to Sections 5(b), (c), (e), (f), (g), (h)
or (j), CTI and its Subsidiaries shall carry on
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their respective businesses in the usual, regular and ordinary course,
substantially in accordance with past practice, in all material respects.
(b) Dividends; Changes in Share Capital. Except as set forth on
SCHEDULE 5.1(B), CTI shall not, and shall not permit any of its
Subsidiaries to, and shall not propose to, (i) declare or pay any dividends
on or make other distributions in respect of any of its capital stock,
except for dividends by wholly-owned Subsidiaries of CTI (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or
in substitution for, shares of its capital stock, except for any such
action by a wholly-owned Subsidiary of CTI which remains a wholly-owned
Subsidiary after consummation of such transaction, or (iii) repurchase,
redeem or otherwise acquire any shares of capital stock of CTI or any of
its Subsidiaries or any securities convertible into or exercisable for any
shares of such capital stock except for the purchase from time to time by
CTI of CTI Common Stock in the ordinary course of business consistent with
past practice in connection with the CTI Employee Benefit Plans.
(c) Issuance of Securities. Except as set forth on SCHEDULE 5.1(C),
CTI shall not, and shall not permit any of its Subsidiaries to, issue,
deliver or sell, or authorize or propose the issuance, delivery or sale of,
any shares of its capital stock of any class, or any securities convertible
into or exercisable for, or any rights, warrants or options to acquire, any
such shares, or enter into any agreement with respect to any of the
foregoing, other than (i) the issuance of CTI Common Stock upon the
exercise of CTI Stock Options or in connection with other stock-based
benefits plans outstanding on the date hereof, in each case in accordance
with their present terms or (ii) issuances by a wholly-owned Subsidiary of
CTI of capital stock to such Subsidiary's parent or another wholly-owned
subsidiary of CTI.
(d) Governing Documents. Neither CTI nor any of its Subsidiaries
shall amend or propose to amend their respective certificates of
incorporation, bylaws or other governing documents.
(e) Acquisitions. Except as set forth on SCHEDULE 5.1(E), CTI shall
not, and shall not permit any of its Subsidiaries to acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial
equity interest in or a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquire or
agree to acquire any assets (other than the acquisition of assets used in
the operations of the business of CTI and its Subsidiaries in the ordinary
course).
(f) Sales. Except as set forth on SCHEDULE 5.1(F), CTI shall not, and
shall not permit any of its Subsidiaries to, sell or agree to sell by
merging or consolidating with, or by selling a substantial equity interest
in or a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof or otherwise sell or agree to sell any
assets (other than the sale of assets used in the operations of the
business of CTI and its Subsidiaries in the ordinary course).
(g) Investments; Indebtedness. Except as set forth on Schedule
5.1(g), CTI shall not, and shall not permit any of its Subsidiaries to make
any capital expenditures or capital investments or make any loans, advances
or capital commitments to, or investments in, any other person, in excess
of $5,000,000 in the aggregate other than (x) by CTI or a Subsidiary of CTI
to or in CTI or in any Subsidiary of CTI or (y) pursuant to any contract or
other legal obligation of CTI or any of its Subsidiaries existing at the
date hereof. Except as set forth on SCHEDULE 5.1(G), CTI shall not, and
shall not permit any of its Subsidiaries to, create, incur, assume or
suffer to exist any indebtedness, issuances of debt guarantees, loans or
advances not in existence as of the date hereof except pursuant to credit
facilities, indentures and other arrangements in existence on the date
hereof (as such credit facilities, indentures and other arrangements may be
amended, extended, modified, refunded, renewed or refinanced after the date
hereof) or in the ordinary course of business consistent with past
practice.
(h) Compensation. Other than as contemplated by SCHEDULE 5.1(H) or
SCHEDULE 5.1(C), CTI shall not (i) increase the amount of compensation of
any director or executive officer except in the
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ordinary course of business consistent with past practice or as required by
an existing agreement, (ii) make any increase in or commitment to increase
any employee benefits, except in the ordinary course of business,
consistent with past practice or as required by an agreement existing on
the date hereof, (iii) issue any options, warrants or other rights to
acquire any shares of CTI Capital Stock or adopt or make any commitment to
adopt any agreement, arrangement, commitment or policy which, if in affect
as of the date hereof, would constitute a CTI Employee Benefit Plan under
Section 3.12(a) hereof or (iv) make any contribution, other than regularly
scheduled contributions, to any CTI Employee Benefit Plan.
(i) Accounting Methods; Income Tax Matters. CTI shall not change its
methods of accounting in effect on December 31, 1999, except as required by
changes in GAAP as concurred in by CTI's independent auditors. CTI shall
not (i) change its fiscal year, (ii) make any material tax election, (iii)
adopt or change any Tax accounting method, (iv) enter into any closing
agreement, settle or compromise a Tax liability with a Tax authority, (v)
surrender any right to claim a refund of Taxes, or (vi) take (or permit any
Subsidiary of CTI to take) any other action which would have the effect of
materially increasing the Tax liability or materially decreasing any Tax
asset of CTI or any of its Subsidiaries, other than in the ordinary course
of business consistent with past practice.
(j) Certain Agreements. Except as set forth on SCHEDULE 5.1(J) and
except for extensions or renewals of agreements in existence on the date
hereof, CTI shall not, and shall not permit any of its Subsidiaries to,
without the prior consent of WAXS (which consent shall not be unreasonably
withheld or delayed), enter into any agreement or arrangement which, if it
had been entered into prior to the execution of this Agreement, would have
been a Material Contract.
(k) Litigation. CTI shall not and shall not permit any of its
Subsidiaries to settle or, compromise any litigation, except where the
amount paid or payable, in each case, does not exceed $1,000,000.
5.2 Control of CTI's Business. Nothing contained in this Agreement shall
give WAXS, directly or indirectly, the right to control CTI's operations prior
to the Effective Time. Prior to the Effective Time, CTI shall exercise,
consistent with the terms and conditions of this Agreement, complete control and
supervision over its operations.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Preparation of Proxy Statement: Stockholders Meetings.
(a) As promptly as reasonably practicable following the date hereof,
WAXS shall prepare and file with the Securities and Exchange Commission
(the "SEC") materials which shall constitute its proxy statement and
prospectus in connection with the WAXS Stockholders Meeting (such proxy
statement and prospectus, and any amendments or supplements thereto, the
"Proxy Statement/Prospectus") and WAXS shall prepare and file a
registration statement on Form S-4 with respect to the issuance of all WAXS
Common Stock in the Merger, including, without limitation, the Contingent
Shares and the shares of WAXS Common Stock issuable to the holders of CTI
Preferred Stock as contemplated by Section 2.6(b) (the "Registration
Statement"). The Proxy Statement/Prospectus will be included in and will
constitute a part of the Registration Statement as WAXS's prospectus. The
Registration Statement and the Proxy Statement/Prospectus shall comply as
to form in all material respects with the applicable provisions of the
Securities Act and the Exchange Act and the rules and regulations
thereunder. WAXS shall use reasonable efforts to have the Registration
Statement declared effective by the SEC as promptly as reasonably
practicable after filing with the SEC and to keep the Registration
Statement effective as long as is necessary to consummate the Merger and
the actions contemplated thereby. CTI shall use its reasonable best efforts
to cooperate with and assist WAXS in connection with the preparation and
amendment of the Proxy Statement/Prospectus and the Registration Statement.
WAXS will provide CTI with a
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reasonable opportunity to review and comment on any amendment or supplement
to the Registration Statement prior to filing such with the SEC, and will
provide CTI with a copy of all such filings made with the SEC. WAXS will
use reasonable efforts to cause the Joint Proxy Statements/Prospectus to be
mailed to WAXS's stockholders as promptly as practicable after the
Registration Statement is declared effective under the Securities Act. WAXS
shall also take any action (other than qualifying to do business in any
jurisdiction in which it is not now so qualified or to file a general
consent to service of process) required to be taken under any applicable
state securities laws in connection with the issuance of WAXS Common Stock
and CTI shall furnish all information concerning CTI and the holders of CTI
Capital Stock as may be reasonably requested in connection with any such
action. WAXS will advise CTI promptly after it receives notice thereof, of
the time when the Registration Statement has become effective, the issuance
of any stop order or the suspension of the qualification of the WAXS Common
Stock issuable in connection with the Merger for offering or sale in any
jurisdiction or any request by the SEC for amendment of the Registration
Statement. If at any time prior to the Effective Time any information
relating to WAXS or CTI, or any of their respective affiliates, officers or
directors, should be discovered by WAXS or CTI which should be set forth in
an amendment or supplement to the Registration Statement or the Proxy
Statement/Prospectus so that any of such documents would not include any
misstatement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, the party which discovers such
information shall promptly notify the other party hereto and, to the extent
required by law, rules or regulations, an appropriate amendment or
supplement describing such information shall be promptly filed with the SEC
and disseminated to the stockholders of WAXS and CTI.
(b) CTI shall, as promptly as reasonably practicable following the
execution of this Agreement, (i) duly take all lawful action to call, give
notice of, convene and hold a meeting of its stockholders (which meeting
the parties intend to be held no later than 30 days following the date on
which the Registration Statement has been declared effective by the SEC)
for the purpose of obtaining or (ii) duly take all lawful action to obtain
by written consent pursuant to the CGCL, the required vote of its
stockholders with respect to the actions contemplated by this Agreement and
shall take all lawful action to solicit the adoption of this Agreement by
the stockholders of CTI by written consent or otherwise. The Board of
Directors of CTI shall recommend adoption of this Agreement by the
stockholders of CTI and shall not withdraw, modify or materially qualify in
any manner adverse to WAXS such recommendation or take any action or make
any statement materially inconsistent with such recommendation
(collectively, an "Adverse Change in the CTI Recommendation"); provided,
however, that the foregoing shall not prohibit accurate disclosure of
factual information regarding the business, financial condition or results
of operations of WAXS or CTI or the fact that an Acquisition Proposal (as
defined in Section 6.4) has been made, the identity of the party making
such proposal or the material terms of such proposal (provided, that the
Board of Directors of CTI does not withdraw, modify or materially qualify
in any manner adverse to WAXS its recommendation) in the Registration
Statement or the Proxy Statement/Prospectus, to the extent such
information, facts, identity or terms is required to be disclosed therein
under applicable law.
(c) WAXS shall, as promptly as reasonably practicable following the
execution of this Agreement, duly take all lawful action to call, give
notice of, convene and hold a meeting of its stockholders (the "WAXS
Stockholders Meeting") (which meeting the parties intend to be held no
later than 30 days following the date on which the Registration Statement
has been declared effective by the SEC) for the purpose of obtaining the
required vote of its stockholders with respect to the transactions
contemplated by this Agreement and shall take all lawful action to solicit
the approval of the transactions contemplated hereby by the stockholders of
WAXS. The Board of Directors of WAXS shall recommend approval of the
transactions contemplated hereby by the stockholders of WAXS and shall not
withdraw, modify or materially qualify in any manner adverse to CTI such
recommendation or take any action or make any statement in connection with
the WAXS Stockholders Meeting materially inconsistent with such
recommendation; provided, however, that the
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foregoing shall not prohibit accurate disclosure of factual information
regarding the business, financial condition or operations of WAXS or CTI.
6.2 Access to Information. Upon reasonable notice, each of CTI and WAXS
shall (and shall cause its Subsidiaries to) afford to the officers, employees,
accountants, counsel, financial advisors and other representatives of the other
parties hereto reasonable access during normal business hours, during the period
prior to the Effective Time, to all its properties, books, contracts,
commitments, records, officers and employees and, during such period, each of
CTI and WAXS shall (and shall cause its Subsidiaries to) furnish promptly to the
other parties hereto (a) a copy of each report, schedule, registration statement
and other document filed, published, announced or received by it during such
period pursuant to the requirements of federal or state securities laws, as
applicable (other than documents which such party is not permitted to disclose
under applicable law), and (b) consistent with its legal obligations, all other
information concerning it and its business, properties and personnel as such
other party may reasonably request; provided, however, that either CTI or WAXS
may restrict the foregoing access to the extent that any law, treaty, rule or
regulation of any governmental entity applicable to such party requires such
party or its Subsidiaries to restrict access to any properties or information.
The parties will hold any such information which is non-public in confidence to
the extent required by, and in accordance with, the provisions of the
Confidentiality Agreement, dated January 6, 2000, between CTI and WAXS (the
"Confidentiality Agreement"). Any investigation by WAXS or CTI shall not affect
the representations and warranties made herein of CTI or WAXS, as the case may
be.
6.3 Reasonable Efforts.
(a) Subject to the terms and conditions of this Agreement, each party
will use reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the Merger and the other
transactions contemplated by this Agreement as soon as practicable after
the date hereof, including (i) preparing and filing as promptly as
practicable all documentation to effect all necessary applications,
notices, petitions, filings, and other documents and to obtain as promptly
as practicable all consents, waivers, licenses, orders, registrations,
approvals, permits and authorizations necessary or advisable to be obtained
from any third party and/or any governmental entity in order to consummate
the Merger or any of the other transactions contemplated by this Agreement
and (ii) taking all reasonable steps as may be necessary to obtain all such
material consents, waivers, licenses, registrations, permits,
authorizations, tax rulings, orders and approvals. The parties each shall
keep the other apprised of the status of matters relating to completion of
the transactions contemplated hereby, including promptly furnishing the
other with copies of notices or other communications received by it or any
of its Subsidiaries or affiliates from any governmental entity or third
party with respect to the Merger or any of the other transactions
contemplated by this Agreement, in each case, to the extent permitted by
law or regulation or any applicable confidentiality agreements existing on
the date hereof.
(b) The parties shall promptly prepare and file any required
notifications with the United States Department of Justice (the "DOJ") and
the Federal Trade Commission (the "FTC") as required by the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). The parties shall cooperate with each other in connection with the
preparation of such notifications and related matters, including sharing
information concerning sales and ownership and such other information as
may be needed to complete such notification, and providing a copy of such
notifications to the other prior to filing; provided, that WAXS and CTI
shall have the right to redact any dollar revenue information from the
copies of such notifications provided to the other parties. The parties
shall keep all information about the other obtained in connection with the
preparation of such notification confidential pursuant to the terms of the
Confidentiality Agreement. Each party shall pay the filing fee required
under the regulations promulgated pursuant to the HSR Act with respect for
the notification for which such party is the "Acquiring Person" (as defined
in the regulations promulgated to the HSR Act).
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6.4 Acquisition Proposals. Without the prior written consent of WAXS,
pending the Closing, CTI agrees that neither it nor any of its Subsidiaries
shall, and that it shall cause its employees, officers, directors, affiliates,
agents and representatives (including any investment banker, financial advisor,
attorney or accountant retained by any of them) not to, directly or indirectly,
initiate, solicit, encourage or knowingly facilitate (including by way of
furnishing information or engaging in discussions or negotiations) any inquiries
or the making of any proposal or offer with respect to a merger, reorganization,
share exchange, consolidation, business combination, recapitalization,
liquidation, dissolution or similar action involving CTI, or any purchase or
sale of a material portion of the assets of (including stock of Subsidiaries) of
CTI, taken as a whole, or any purchase or sale of, or tender or exchange offer
for, a material portion of the equity securities of CTI (any such proposal or
offer being referred to herein as an "Acquisition Proposal"). CTI further agrees
that neither it nor any of its Subsidiaries shall, and that it shall cause it
and its Subsidiaries' officers, directors, affiliates, employees, agents and
representatives (including any investment banker, financial advisor, attorney or
accountant retained by it or any of its Subsidiaries) not to, directly or
indirectly, have any discussion with or provide any confidential information or
data to any Person relating to an Acquisition Proposal, or engage in any
negotiations concerning an Acquisition Proposal, or knowingly facilitate any
effort or attempt to make or implement an Acquisition Proposal or accept an
Acquisition Proposal. CTI agrees that it and its Subsidiaries will, and will
cause its officers, directors, affiliates, employees, agents and representatives
to, immediately cease and cause to be terminated any activities, discussions or
negotiations existing as of the date of this Agreement with any parties
conducted heretofore with respect to any Acquisition Proposal. CTI agrees that
it will promptly inform its directors, officers, affiliates, key employees,
agents and representatives of the obligations undertaken in this Section 6.4.
6.5 Fees and Expenses. All Expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such Expenses. As used in this Agreement, "Expenses" includes all
out-of-pocket expenses (including all fees and expenses of counsel, accountants,
investment bankers, experts and consultants to a parry hereto and its
affiliates) incurred by a party or on its behalf in connection with or related
to the authorization, preparation, negotiation, execution and performance of
this Agreement and the transactions contemplated hereby.
6.6 Public Announcements. Neither WAXS nor CTI shall, without the prior
consent of the other party, issue a press release or any other public statement
with respect to this Agreement or the transactions contemplated hereby except
pursuant to a joint communications plan, unless otherwise required by applicable
law or by obligations pursuant to any listing agreement with or rules of any
securities exchange, in which case the parties shall use reasonable efforts to
consult with each other before issuing any press release or otherwise making any
public statement with respect to this Agreement or the transactions contemplated
hereby.
6.7 Listing. So long as WAXS Common Stock is quoted on the Nasdaq or
listed on any national securities exchange, WAXS, if permitted by the rules of
such system or exchange, will quote or list and keep quoted or listed on such
system or exchange, all WAXS Common Stock issuable pursuant to Article I hereof.
WAXS shall not voluntarily cause or take any steps to voluntarily cause WAXS
Common Stock to fail to be quoted on the Nasdaq or a national securities
exchange.
6.8 Termination of Tax Sharing Agreements. As of the Effective Time, CTI
shall cause all Tax Sharing Agreements to which CTI or any of its Subsidiaries
is a party to be terminated and of no further force and effect after the
Effective Time, thereby extinguishing any rights or obligations of any party
thereunder.
6.9 Bridge Financing. WAXS agrees to make funds available to Borrower (as
defined in that certain Participation Agreement, of even date herewith, between
Foothill Capital Corporation and WAXS (the "Participation Agreement")) on and
subject to the terms and conditions set forth in the Participation Agreement.
6.10 Tax Treatment; Plan of Reorganization. This Agreement is intended to
constitute a "plan of reorganization" within the meaning of Treas. Reg.
sec.1.368-2(g). During the period from the date of this
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Agreement through the Effective Time, unless the parties shall otherwise agree
in writing, none of WAXS, CTI or any of their respective Subsidiaries shall
knowingly take or fail to take any action which action or failure to act which
could reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" within the meaning of Section 368(a) of the Code. After the
Merger and pursuant to the plan of reorganization set forth in this Agreement,
WAXS expects to transfer some or all of the assets of the Surviving Corporation
in a manner permitted under Section 368(a)(2)(C) of the Code and Treas. Reg.
sec.1.368-2(k). WAXS and CTI agree to treat the Merger as a reorganization
within the meaning of Section 368(a) of the Code. To this end, none of WAXS, CTI
nor Merger Sub, nor, after the Merger, the Surviving Corporation will take any
position on any federal, state or local income or franchise Tax Return, or take
any other Tax reporting position that is inconsistent with the treatment of the
Merger as a reorganization within the meaning of Sections 368(a)(1)(A) and
368(a)(2)(D) of the Code, unless otherwise required by a "determination" (as
defined in Section 1313(a)(1) of the Code) or by applicable state or local
income or franchise Tax law.
6.11 Directors' and Officers' Indemnification and Insurance.
(a) From the Effective Time through the sixth (6th) anniversary of the
date on which the Effective Time occurs, WAXS shall indemnify and hold
harmless each present (as of the Effective Time) or former officer or
director of CTI and its Subsidiaries (the "Indemnified Parties"), against
all claims, losses, liabilities, damages, judgments, fines and reasonable
fees, costs and expenses, including attorneys' fees and disbursements
(collectively, "Costs"), incurred in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative
or investigative, arising out of or pertaining to (i) the fact that the
Indemnified Party is or was an officer or director of CTI or any of its
Subsidiaries or (ii) matters existing or occurring at or prior to the
Effective Time (including those related to this Agreement and the
transactions and actions contemplated hereby), whether asserted or claimed
prior to, at or after the Effective Time, to the fullest extent permitted
under applicable law; provided that no Indemnified Party may settle any
such claim without the prior approval of WAXS (which approval shall not be
unreasonably withheld or delayed). Each Indemnified Party will be entitled
to advancement of expenses incurred in the defense of any claim, action,
suit, proceeding or investigation from WAXS within ten (10) business days
of receipt by WAXS from the Indemnified Party of a request therefor;
provided that any person to whom expenses are advanced provides an
undertaking, to the extent required by the CGCL, to repay such advances if
it is ultimately determined that such person is not entitled to
indemnification.
(b) WAXS shall maintain, at no expense to the beneficiaries, in effect
for six years from the Effective Time the current policies of the
directors' and officers' liability insurance maintained by CTI with respect
to matters existing or occurring at or prior to the Effective Time
(including the transactions contemplated by this Agreement); provided that
WAXS may substitute therefor policies of at least the same coverage
containing terms and conditions which are not materially less advantageous
to any beneficiary thereof; and provided, further, that in no event shall
WAXS be required to pay annual premiums for such insurance in excess of
125% of the annual premiums currently paid by CTI for such insurance.
Notwithstanding the foregoing, if the insurance policies that WAXS would be
required to maintain pursuant to this Section 6.11(b) would require the
payment of aggregate annual premiums in excess of 125% of the aggregate
annual premiums in effect under such policies of CTI as of the date hereof
(the "CTI Policies"), then WAXS shall be obligated to use commercially
reasonable efforts to obtain and maintain such substitute policies of
insurance as are the best available as to amount and other coverage terms
and conditions for annual premiums equal to 125% of the aggregate annual
premiums in respect of the CTI Policies.
(c) Notwithstanding anything herein to the contrary, if any claim,
action, suit, proceeding or investigation (whether arising before, at or
after the Effective Time) is made against any Indemnified Party, on or
prior to the sixth (6th) anniversary of the Effective Time, the provisions
of this Section 6.11 shall continue in effect until the final disposition
of such claim, action, suit, proceeding or investigation.
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(d) The covenants contained in this Section 6.11 are intended to be
for the benefit of, and shall be enforceable by, each of the Indemnified
Parties and their respective heirs and legal representatives and shall not
be deemed exclusive of any other rights to which an Indemnified Party is
entitled, whether pursuant to law, contract or otherwise.
(e) In the event that WAXS or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provision shall be made so that the successors or assigns of WAXS or the
purchaser of such properties and assets shall succeed to the obligations
set forth in this Section 6.11.
6.12 Merger Sub Stockholder Resolutions. Pending the Closing, WAXS shall
not rescind or modify in any material respect the Merger Sub Stockholder
Resolutions.
6.13 Compliance with Dissenters' Rights Statute. CTI shall comply with all
procedures and requirements applicable to CTI under Chapter 13 of the CGCL.
6.14 Good Faith. The parties shall perform and exercise their respective
obligations and rights provided for hereunder in good faith.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of CTI, Merger Sub and WAXS to effect the Merger are
subject to the satisfaction or waiver on or prior to the Closing Date of the
following conditions:
(a) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired.
(b) Stockholder Approval. The stockholders of WAXS shall have
approved this Agreement and the Merger by the Required WAXS Vote and the
stockholders of CTI shall have approved this Agreement and the Merger by
the Required CTI Vote.
(c) Registration Statement. The Registration Statement shall have
been declared effective by the SEC under the Securities Act. No stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and no proceedings for that purpose shall have been
initiated or, to the knowledge of WAXS or CTI, threatened by the SEC.
(d) Escrow Agreement. WAXS, CTI and the Escrow Agent shall have
executed and delivered an escrow agreement in the form attached hereto as
Exhibit A (the "Escrow Agreement").
7.2 Additional Conditions to Obligations of WAXS. The obligations of WAXS
to effect the Merger are subject to the satisfaction of, or waiver by WAXS, on
or prior to the Closing Date of the following conditions:
(a) Representations and Warranties. Each of the representations and
warranties of CTI set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent that such representations
and warranties speak as of another date, in which case any such
representations and warranties shall be true and correct as of such date),
except where any failures to be true and correct would not have a Material
Adverse Effect on WAXS or the Surviving Corporation, and WAXS shall have
received a certificate of the chief executive officer and the chief
financial officer of CTI to such effect.
(b) Performance of Obligations of CTI. CTI shall have performed or
complied in all material respects with all material agreements and
covenants required to be performed by it under this
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Agreement at or prior to the Closing Date, and WAXS shall have received a
certificate of the chief executive officer and the chief financial officer
of CTI to such effect.
(c) Consents and Approvals. All consents, approvals and actions of,
filings with and notices to any governmental entity required to consummate
the Merger and the other transactions contemplated hereby, or of any other
third party required of CTI or any of its Subsidiaries to consummate the
Merger and the other transactions contemplated hereby shall have been
obtained, except where the failure to obtain any such consent or approval
would not have a Material Adverse Effect on WAXS or the Surviving
Corporation; provided, however, that the provisions of this Section 7.2(c)
shall not be available to WAXS if WAXS's failure to fulfill its obligations
pursuant to Section 6.3 shall have been the cause of, or shall have
resulted in, the failure to obtain any such consent or approval.
(d) No Material Change. CTI and its Subsidiaries, taken as a whole,
shall not have suffered, since the date hereof, a Material Adverse Effect,
other than any change, circumstance or effect relating (i) to the economy
or financial markets in general, or (ii) in general to the industries in
which CTI operates and not specifically relating to CTI.
(e) Opinion of Counsel to CTI. WAXS shall have received from
O'Melveny & Myers LLP an opinion, dated the Closing Date, in the form
attached hereto as Exhibit B.
(f) No Injunctions or Restraints; Illegality. No laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other governmental
entity of competent jurisdiction shall be in effect (i) having the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger or (ii) which otherwise would have a Material Adverse Effect on WAXS
or the Surviving Corporation; provided, however, that the provisions of
this Section 7.2(f) shall not be available to WAXS if its failure to
fulfill its obligations pursuant to Section 6.3 shall have been the cause
of, or shall have resulted in any such order or injunction.
(g) Trading Price. The average of the closing prices of WAXS Common
Stock as reported on the Nasdaq for the ten (10) consecutive trading days
ending at the close of trading on the second (2nd) trading day preceding
the Closing shall not be below $15.00.
(h) Dissenters' Rights. CTI shall have complied with all procedures
and requirements applicable to it under Chapter 13 of the CGCL, the period
for exercising dissenters' rights pursuant to the CGCL in connection with
the Merger shall have expired and holders of less than one percent (1%) of
the shares of CTI Capital Stock issued and outstanding immediately prior to
the Closing shall have exercised such dissenters' rights, and WAXS shall
have received a certificate from an officer of CTI to all such effects.
(i) Approval of CTI Preferred Stock. All of the shares of outstanding
CTI Preferred Stock shall have been voted in favor of this Agreement, the
Merger and the other transactions contemplated hereby (which vote shall not
have been rescinded or modified in any way) and such shares have been
converted into not more than 8,282,829 shares of CTI Common Stock pursuant
to the terms and conditions of the Certificate of Determination of
Preferences of the CTI Series A Preferred Stock and the CTI Series B
Preferred Stock, as applicable.
7.3 Additional Conditions to Obligations of CTI. The obligations of CTI to
effect the Merger are subject to the satisfaction of, or waiver by CTI, on or
prior to the Closing Date of the following additional conditions:
(a) Representations and Warranties. Each of the representations and
warranties of WAXS set forth in this Agreement shall be true and correct as
of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date (except to the extent that such representations
and warranties speak as of another date, in which case any such
representations and warranties shall be true and correct as of such date),
except where any failures to be true and correct
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would not have a Material Adverse Effect on WAXS, and CTI shall have
received a certificate of the chief executive officer and the chief
financial officer of WAXS to such effect.
(b) Performance of Obligations of WAXS. WAXS shall have performed or
complied in all material respects with all agreements and covenants
required to be performed by it under this Agreement at or prior to the
Closing Date, and CTI shall have received a certificate of the chief
executive officer and the chief financial officer of WAXS to such effect.
(c) Consents and Approvals. All consents, approvals and actions of,
filings with and notices to any governmental entity required to consummate
the Merger and the other transactions contemplated hereby, or of any other
third party required of WAXS or any of its Subsidiaries to consummate the
Merger and the transactions contemplated hereby shall have been obtained,
except where the failure to obtain any such consent or approval would not
have a Material Adverse Effect on WAXS or the Surviving Corporation;
provided, however, that the provisions of this Section 7.3(c) shall not be
available to CTI if its failure to fulfill any of its obligations pursuant
to Section 6.3 shall have been the cause of, or shall have resulted in, the
failure to obtain any such consent or approval.
(d) Opinion of Counsel to WAXS. CTI shall have received from Long
Aldridge & Norman LLP an opinion, dated the Closing Date, in the form
attached hereto as Exhibit C.
(e) [Intentionally omitted.]
(f) No Injunctions or Restraints; Illegality. No laws shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order issued by a court or other governmental
entity of competent jurisdiction shall be in effect (i) having the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger or (ii) which otherwise would have a material adverse effect on the
business, financial condition or operations of WAXS and its Subsidiaries
taken as a whole; provided, however, that the provisions of this Section
7.3(g) shall not be available to CTI if its failure to fulfill its
obligations pursuant to Section 6.3 shall have been the cause of, or shall
have resulted in any such order or injunction.
ARTICLE VIII
POST-CLOSING INDEMNIFICATION; SHAREHOLDER REPRESENTATIVE
8.1 Remedies. Subject to the terms of this Article VIII, from and after
the Effective Time, WAXS shall be indemnified and held harmless from and against
any and all claims, losses, liabilities, damages, costs (including court costs)
and expenses (including reasonable attorneys' and accountants' fees) suffered or
incurred by WAXS, its successors or assigns, and their respective officers,
employees, consultants and agents (the "WAXS Protected Parties") (hereinafter
"Loss" or "Losses"), as a result of, or with respect to, (i) except as otherwise
provided in Section 8.2, any breach or inaccuracy of any representation or
warranty of CTI set forth in this Agreement (without regard to any Material
Adverse Effect qualification contained in any such representation or warranty,
except such qualification contained in the representation and warranty in
Section 3.18(a)), whether such breach or inaccuracy exists or is made on the
date of this Agreement or as of the Closing Date; (ii) any breach or inaccuracy
of any representation or warranty of CTI set forth in the certificates to be
provided to WAXS pursuant to Sections 7.2(a) and (b), without regard to the
Material Adverse Effect qualification contained in such certificate or the
underlying representations or warranties referenced therein (except such
qualification contained in the representation and warranty in Section 3.18(a));
(iii) any breach of or noncompliance by CTI prior to the Effective Time with any
covenant or agreement of CTI contained in this Agreement; and (iv) any
imposition of the suspended $17.6 million fine, or other monetary penalty,
imposed in connection with or related to the matter described in item 1 of
SCHEDULE 3.6, but only to the extent that such imposition arises out of wrongful
acts or omissions of CTI which occur after the effective date of the order
referred to in item 1 of SCHEDULE 3.6 and prior to the Closing Date.
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8.2 Indemnity Claims.
(a) Survival. The representations and warranties of CTI contained
herein or in any certificate or other document delivered pursuant hereto or
in connection herewith shall not be extinguished by the Closing but shall
survive the Closing, subject to the limitations set forth in Section 8.2(b)
hereof with respect to the time periods within which claims for indemnity
must be asserted, and the covenants and agreements of the parties contained
herein shall survive without limitation as to time except as may be
otherwise specified herein. Notwithstanding the foregoing, none of the
representations and warranties of CTI contained in Section 3.16(g) hereof
or in the CTI certificate required pursuant to Section 7.2(a) with respect
to Section 3.16(g) hereof shall survive the Closing and no WAXS Protected
Party shall be entitled to indemnification pursuant to this Article VIII
for any breach or alleged breach by CTI of such representations and
warranties. No investigation or other examination of CTI by WAXS shall
affect the term of survival of any representation or warranty contained
herein or in any certificate or other document delivered pursuant hereto or
in connection herewith.
(b) Time to Assert Claims. All claims for indemnification hereunder
shall be asserted no later than one (1) year after the Effective Time
provided; however, that if a notice of claim which conforms, in all
material respects, as to form and substance with the requirements set forth
in Section 8.4 is given pursuant to Section 8.4 prior to such one-year
anniversary of the Effective Time, such representation or warranty shall
continue indefinitely with respect to the claims in such notice until such
claims are resolved pursuant to this Article VIII. Nothing herein shall be
deemed to prevent a WAXS Protected Party from making a claim for a Loss
hereunder for potential or contingent claims or demands provided the notice
of Loss sets forth the specific basis for any such potential or contingent
claim or demand to the extent then feasible and the party making the claim
has reasonable grounds to believe that such a claim or demand may become
actual.
8.3 Deductible. Notwithstanding any other provision hereof, the WAXS
Protected Parties shall make no claim against CTI for indemnification hereunder
(except pursuant to Section 8.1(a)(iv)) unless and until the amount of each
individual Loss in excess of $150,000 (the "Subdeductible Amount") exceeds
$3,000,000 in the aggregate (the "Deductible Amount"), in which event the WAXS
Protected Parties may claim indemnification for the amount of such Losses (in
each case net of the Subdeductible Amount) in excess of the Deductible Amount.
8.4 Notice of Claim. A WAXS Protected Party shall notify the Shareholder
Representative (as defined in Section 8.7), in writing, of any claim for
indemnification, specifying in reasonable detail the nature of the Loss, and, if
known, the amount, or an estimate of the amount, of the liability arising
therefrom. The WAXS Protected Party shall provide to the Shareholder
Representative as promptly as practicable thereafter such information and
documentation as may be reasonably requested to support and verify the claim
asserted, so long as such disclosure would not violate the attorney-client
privilege of the WAXS Protected Party.
8.5 Defense. If the facts pertaining to a Loss arise out of the claim of
any third party, or if there is any claim against a third party available by
virtue of the circumstances of the Loss, the Shareholder Representative may
assume the defense or the prosecution thereof by prompt written notice to the
WAXS Protected Party, including the employment of counsel or accountants, at its
cost and expense. The WAXS Protected Party shall have the right to employ
counsel separate from counsel employed by the Shareholder Representative in any
such action and to participate therein, but the fees and expenses of such
counsel employed by the WAXS Protected Party shall be at its expense. The
Shareholder Representative shall not be liable for any settlement of any such
claim effected without its prior written consent, which shall not be
unreasonably withheld or delayed. The Shareholder Representative shall not agree
to a settlement of any claim which provides for any relief, other than the
payment of monetary damages, which would have a material precedential impact or
effect on the business or financial condition of any WAXS Protected Party
without the WAXS Protected Party's prior written consent. Whether or not the
Shareholder Representative chooses to so defend or prosecute such claim, the
parties hereto shall reasonably cooperate
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in the defense or prosecution thereof and shall furnish such records,
information and testimony, and attend such conferences, discovery proceedings,
hearings, trials and appeals, as may be reasonably requested in connection
therewith. The Shareholder Representative shall be subrogated to all rights and
remedies of any WAXS Protected Party.
8.6 Satisfaction of Obligations. Notwithstanding anything else herein or
otherwise to the contrary (except as set forth in Section 10.1), (i) the sole
remedy of any WAXS Protected Party for any breach by CTI of a representation or
warranty of CTI hereunder shall be the right to receive indemnification from CTI
pursuant to this Article VIII and (ii) the Escrow Fund shall constitute the WAXS
Protected Parties' sole source of recovery for claims for indemnification
arising under this Article VIII, and none of CTI, its Subsidiaries or any of
their respective officers, directors, employees or shareholders shall have any
personal liability whatsoever with respect thereto.
8.7 Shareholder Representative.
(a) Upon approval by the stockholders of CTI of the Merger, this
Agreement and the other transactions contemplated hereby, the stockholders
of CTI will be deemed to have appointed, as of the Effective Time, Edward
S. Soren (the "Shareholder Representative") as their representative under
this Agreement and the Escrow Agreement, including for purposes of the
indemnification obligations set forth in this Article VIII, and as
attorney-in-fact and agent for and on behalf of such CTI stockholders with
authority to take any and all actions and make any and all decisions
required or permitted to be taken or made by them under this Agreement and
the Escrow Agreement (including the settling of claims for indemnity). The
Shareholder Representative shall have full power and authority as agent of
the CTI stockholders to represent the CTI stockholders, and their
successors, heirs, representatives, and assigns with respect to all matters
arising under this Agreement and the Escrow Agreement and any other matters
concerning the transactions contemplated by this Agreement and the Escrow
Agreement after the Closing, and all action taken by the Shareholder
Representative shall be binding upon the CTI stockholders and their
successors, heirs, representatives and assigns as if expressly confirmed
and ratified by each of them.
(b) The Shareholder Representative shall act in good faith in
undertaking his duties set forth herein. The Shareholder Representative,
acting in such capacity, shall not incur any liability with respect to any
action or inaction taken by him except those involving his own willful
misconduct or gross negligence. The Shareholder Representative may, in all
questions arising under this Agreement, rely on the advice of counsel and
for anything done, omitted or suffered in good faith by the Shareholder
Representative based on such advice, the Shareholder Representative shall
not be liable to anyone, except to the extent such action or inaction
involves the Shareholder Representative's own willful misconduct or gross
negligence. Nothing set forth in this Section 8.7(b) shall in any way
relieve the Shareholder Representative in his capacity as a CTI Stockholder
of his obligations under this Article VIII.
(c) In the event of the death or permanent disability of the
Shareholder Representative or his resignation as the Shareholder
Representative, a successor Shareholder Representative shall be appointed
by Roger Abbott. Prompt notice of such appointment shall be delivered in
writing by Roger Abbott to WAXS and the Escrow Agent.
ARTICLE IX
TERMINATION PRIOR TO CLOSING
9.1 Termination of Agreement. This Agreement may be terminated at any time
prior to the Closing:
(a) By mutual written consent of WAXS and CTI;
(b) By either WAXS or CTI, if the other party shall have failed to
comply in any material respect with any of its material covenants or
agreements contained in this Agreement, which failure to so comply has not
been cured within thirty (30) days following receipt by such other party of
written
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notice of such failure to comply; provided, however, that if any such
breach is curable by the breaching party through the exercise of the
breaching party's reasonable efforts and for so long as the breaching party
shall be so using its reasonable efforts to cure such breach, the
non-breaching party may not terminate this Agreement pursuant to this
paragraph; and provided, further, that no party shall have the right to
terminate this Agreement pursuant to this Section 9.1(b) if such party is
then failing to comply in any material respect with any of its covenants or
agreements contained in this Agreement;
(c) By either WAXS or CTI, if there has been a breach by the other
party of any representations or warranties, which breach has not been cured
within thirty (30) days following receipt by such other party of written
notice of such failure to comply; provided, however, that if any such
breach is curable by the breaching party through the exercise of the
breaching party's reasonable efforts and for so long as the breaching party
shall be so using reasonable efforts to cure such breach, the non-breaching
party may not terminate this Agreement pursuant to this paragraph; and
provided further, that this provision shall only apply to such breaches
which would have a Material Adverse Effect on (i) WAXS (after giving effect
to the Merger), (ii) the Surviving Corporation or (iii) WAXS (after giving
effect to the Merger) and the Surviving Corporation;
(d) By either CTI or WAXS, if the Effective Time shall not have
occurred on or before October 31, 2000 (the "Termination Date"); provided,
however, that the right to terminate this Agreement under this Section
9.1(d) shall not be available to any party whose action or failure to
fulfill any obligation under this Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before the
Termination Date and any such action or failure constitutes a breach of
this Agreement;
(e) By either CTI or WAXS if any governmental entity (i) shall have
issued an order, decree or ruling or taken any other action (which the
parties shall have used their reasonable efforts to resist, resolve or
lift, as applicable, in accordance with Section 6.3) permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling, or other
action shall have become final and nonappealable or (ii) shall have failed
to issue an order, decree or ruling or to take any other action (which
order, decree, ruling or other action the parties shall have used their
reasonable efforts to obtain, in accordance with Section 6.3), which, in
the case of each of (i) and (ii) is necessary to fulfill the conditions set
forth in Section 7.2(f) with respect to WAXS or Section 7.3(g) with respect
to CTI, and such denial of a request to issue such order, decree, ruling or
take such other action shall have become final and nonappealable; provided,
however, that the right to terminate this Agreement under this Section
9.1(e) shall not be available to any party whose action or failure to
fulfill any obligation under this Agreement has been the cause of such
action or inaction and any such action or failure constitutes a breach of
this Agreement; or
(f) By WAXS or CTI if the adoption of this Agreement by the
stockholders of WAXS or the stockholders of CTI shall not have been
obtained by reason of the failure to obtain the required vote of the WAXS
or CTI stockholders, in each case, upon the taking of such vote.
9.2 Effect of Termination. In the event of any termination of this
Agreement by either CTI or WAXS, as provided in Section 9.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of WAXS or CTI or their respective officers or directors except with
respect to Sections 6.2, 6.5, 6.6, this Section 9.2 and Section 10.7, which
provisions shall survive such termination and except that, notwithstanding
anything to the contrary contained in this Agreement, neither WAXS nor CTI shall
be relieved or released from any liabilities or damages arising out of its
breach of this Agreement.
9.3 Amendment. This Agreement may be amended by CTI and WAXS, by action
taken or authorized by their respective Boards of Directors or representatives
or authorized officers, at any time before or after approval of the matters
presented in connection with the Merger by the stockholders of CTI and WAXS,
but, after any such approval, no amendment shall be made which by law or in
accordance with the rules of any relevant stock exchange or automatic quotations
system requires further
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<PAGE> 378
approval by such stockholders without such further approval. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
CTI and WAXS.
9.4 Extension, Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, representatives or authorized officers, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
ARTICLE X
MISCELLANEOUS
10.1 Survival of Representations and Warranties and Covenants;
Fraud/Misrepresentation. Except as otherwise provided herein, no representation
or warranty of any party made in this Agreement or in any certificate delivered
by such party pursuant hereto shall survive the Closing. Except as otherwise
provided in Section 9.2, all covenants and agreements of the parties hereto
shall survive the Closing. Notwithstanding anything in this Agreement to the
contrary, nothing contained in Article VIII or in any other provision hereof
shall limit, modify or otherwise affect the rights or remedies of WAXS or CTI,
at law or in equity, arising prior to the Effective Time or against any person
or entity for fraud or intentional misrepresentation.
10.2 Entire Agreement. This Agreement (including the Schedules and
Exhibits), the Escrow Agreement and the Confidentiality Agreement constitute the
sole understanding of the parties with respect to the subject matter hereof;
provided, however, that this provision is not intended to abrogate any other
written agreement between the parties executed with or after this Agreement.
10.3 Parties Bound by Agreement; Successors and Assigns. The terms,
conditions and obligations of this Agreement shall inure to the benefit of and
be binding upon the parties hereto and the respective successors and assigns
thereof. Without the prior written consent of WAXS, CTI may not assign its
rights, duties or obligations hereunder or any part thereof to any other person
or entity. WAXS may assign its rights and duties hereunder in whole or in part
(before or after the Effective Time) to one or more affiliates but if it does
so, it shall remain liable for all WAXS' obligations hereunder.
10.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
10.5 Headings. The headings of the Sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.
10.6 Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time by the party which is entitled to
the benefits thereof. No waiver of any of the provisions of this Agreement shall
be deemed to or shall constitute a waiver of any other provision hereof (whether
or not similar).
B-41
<PAGE> 379
10.7 Notices. Any notice, request, instruction or other document to be
given hereunder by any party hereto to any other party hereto shall be in
writing and delivered personally (including by overnight courier or express mail
service) or sent by registered or certified mail, postage or fees prepaid,
if to CTI to:
WorldxChange Communications
9999 Willow Creek Road
San Diego, California 92131
Attention: Eric Lipoff, Esq.
with a copy to:
O'Melveny & Myers LLP
610 Newport Center Drive
17th Floor
Newport Beach, California 92660
Attention: David A. Krinsky, Esq.
if to WAXS to:
World Access, Inc.
945 E. Paces Ferry Road, Suite 2200
Atlanta, Georgia 30326
Attention: W. Tod Chmar
with a copy to:
Long Aldridge & Norman LLP
Suite 5300
303 Peachtree Street
Atlanta, Georgia 30308
Attention: H. Franklin Layson, Esq.
or at such other address for a party as shall be specified by like notice. Any
notice which is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party or the office of such party. Any notice which is addressed
and mailed in the manner herein provided shall be conclusively presumed to have
been duly given to the party to which it is addressed at the close of business,
local time of the recipient, on the fourth business day after the day it is so
placed in the mail or, if earlier, the time of actual receipt.
10.8 Governing Law. This Agreement is executed by Buyer in, and shall be
construed in accordance with and governed by the laws of the State of Delaware
without giving effect to the principles of conflicts of law thereof.
10.9 No Third-Party Beneficiaries. With the exception of the parties to
this Agreement and the WAXS Protected Parties and the Seller Protected Parties,
there shall exist no right of any person to claim a beneficial interest in this
Agreement or any rights occurring by virtue of this Agreement.
10.10 "Including." Words of inclusion shall not be construed as terms of
limitation herein, so that references to "included" matters shall be regarded as
non-exclusive, non-characterizing illustrations.
10.11 Schedules and Exhibits. Each of the Schedules and Exhibits referred
to in this Agreement are and shall be incorporated herein and made a part
hereof.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
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<PAGE> 380
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed on its behalf as of the date indicated on the first page
hereof.
WAXS:
World Access, Inc.
By: /s/ W. Tod Chmar
------------------------------------
Name: W. Tod Chmar
Title: Executive Vice President
MERGER SUB:
CTI Merger Co.
By: /s/ W. Tod Chmar
------------------------------------
Name: W. Tod Chmar
Title: President
CTI:
Communication TeleSystems
International d/b/a WORLDXCHANGE
Communications
By: /s/ Edward S. Soren
------------------------------------
Name: Edward S. Soren
Title: Executive Vice President
B-43
<PAGE> 381
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Amendment"), dated as
of May 23, 2000, by and among World Access, Inc., a Delaware corporation
("WAXS"), WorldxChange Communications, Inc., a Delaware corporation f/k/a CTI
Merger Co. ("Merger Sub"), and Communication TeleSystems International d/b/a
WorldxChange Communications, a California corporation ("CTI").
W I T N E S S E T H :
WHEREAS, WAXS, Merger Sub and CTI are parties to that ceratin Agreement and
Plan of Merger, dated as of February 11, 2000 (the "Merger Agreement"), pursuant
to which CTI will merger with and into Merger Sub;
WHEREAS, the parties have agreed to make certain amendments to the Merger
Agreement; and
WHEREAS, capitalized terms used, but not otherwise defined herein, shall
have the meanings given to such terms in the Merger Agreement;
NOW THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties do hereby mutually agree as follows:
1. Notwithstanding anything in the Merger Agreement to the contrary,
no CTI stockholder and no holder of any CTI Stock Option shall have the
right to receive, or have any other interest in or to, the Contingent
Amount or any Contingent Shares.
2. The last sentence of Section 1.7(c) of the Merger Agreement is
hereby amended by deleting the phrase "and, if applicable, the Contingent
Shares issuable pursuant to Section 1.7(d)" contained therein.
3. Section 1.7(d) of the Merger Agreement is hereby deleted in its
entirety and replaced with "[INTENTIONALLY OMITTED.]".
4. The first sentence of Section 1.8(a) is hereby deleted in its
entirety and replaced with the following:
"At the Effective Time by virtue of the Merger and without any further
action on the part of CTI, WAXS, Merger Sub or the holder of any
outstanding CTI Stock Option (as defined in Section 3.2), each CTI Stock
Option will be automatically converted into an option to purchase shares
of WAXS Common Stock (a "WAXS Stock Option") in an amount equal to the
number of shares of CTI Common Stock covered under such CTI Stock Option
multiplied by the Exchange Ratio (rounded to the nearest whole number of
shares of WAXS Common Stock) at a price per share of WAXS Common Stock
equal to the per share option exercise price specified in the CTI Stock
Option divided by the Exchange Ratio (rounded to the nearest whole
cent)."
5. Section 1.8(b) is hereby amended by deleting the phrase "and
Contingent Shares, if any," contained therein.
6. Section 2.4(b) of the Merger Agreement is hereby amended by
deleting the phrase "Except for Contingent Shares, if any, notwithstanding"
and substituting therefor the word "Notwithstanding".
7. Section 2.5(b) of the Merger Agreement is hereby deleted in its
entirety and replaced with "[INTENTIONALLY OMITTED.]".
8. Section 3.16(g)(i) of the Merger Agreement is hereby amended by
deleting the phrase "(excluding the Contingent Shares, if any)" in the
first sentence of such section.
9. Section 3.16(g)(ii) of the Merger Agreement is hereby amended by
deleting the phrase "(inclusive of Contingent Shares, if any)" contained
therein.
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<PAGE> 382
10. Section 3.16(g)(xvi) of the Merger Agreement is hereby deleted in
its entirety and replaced with "[INTENTIONALLY OMITTED.]".
11. Section 3.16(g)(xvii) of the Merger Agreement is hereby amended by
deleting the phrase ", including Contingent Shares, if any," contained
therein.
12. Section 4.15(d)(iv) of the Merger Agreement is hereby amended by
deleting the phrase "(inclusive of Contingent Shares, if any)" contained
therein.
13. Section 4.15(d)(xix) of the Merger Agreement is hereby amended by
deleting the phrases ", including Contingent Shares, if any," and ",
including the Contingent Shares, if any, which are issued pursuant to
Section 1.7(d) hereunder and subsequently become subject to the Escrow
Agreement, will each" and replacing the second such phrase with the word
"will".
14. Section 4.15(d)(xx) of the Merger Agreement is hereby deleted in
its entirety and replaced with "[INTENTIONALLY OMITTED.]".
15. Section 6.1(a) of the Merger Agreement is hereby amended by
deleting the phrase "the Contingent Shares and" contained in the first
sentence thereof.
16. Except as expressly set forth in this Amendment, the Merger
Agreement shall remain in full force and effect and shall not be deemed to
have been modified or amended by this Amendment.
17. This Amendment constitutes the entire understanding of the parties
with respect to the subject matter hereof, and any other prior or
contemporaneous agreements, whether written or oral, with respect thereto
are expressly superseded hereby.
18. This Amendment may be executed in two or more counterparts, each
of which shall for all purposes be deemed to be an original and all of
which shall constitute the same instrument.
(SIGNATURES APPEAR ON FOLLOWING PAGE)
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<PAGE> 383
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Agreement and Plan of Merger as of the date first above written.
WORLD ACCESS, INC.
By: /s/ W. Tod Chmar
------------------------------------
Name: W. Tod Chmar
Title: Executive Vice President
WORLDXCHANGE
COMMUNICATIONS, INC.
By: /s/ W. Tod Chmar
------------------------------------
Name: W. Tod Chmar
Title: President
COMMUNICATION TELESYSTEMS
INTERNATIONAL D/B/A
WORLDXCHANGE
COMMUNICATIONS
By: /s/ Eric Lipoff
------------------------------------
Name: Eric Lipoff
Title: Senior Vice President
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<PAGE> 384
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Second Amendment to Agreement and Plan of Merger (this "Amendment") is
entered into this 1(st) day of August, 2000 by and among World Access, Inc., a
Delaware corporation ("WAXS"), WORLDxCHANGE Communications, Inc. f/k/a CTI
Merger Co., a Delaware corporation ("Merger Sub"), and Communication TeleSystems
International d/b/a WorldxChange Communications, a California corporation
("CTI").
WITNESSETH:
WHEREAS, the parties hereto have previously entered into an Agreement and
Plan of Merger dated as of February 11, 2000, as amended by that certain First
Amendment to Agreement and Plan of Merger among such parties dated May 23, 2000
(as so amended, the "Merger Agreement");
WHEREAS, CTI and WAXS have agreed, subject to their concurrent entering
into of this Amendment, to enter into a certain Executive Management Services
Agreement (the "Management Agreement"), pursuant to which WAXS has agreed to
manage the operations and business affairs of CTI on the terms specified
therein;
WHEREAS, in connection with the Management Agreement, CTI, Merger Sub and
WAXS have agreed to further amend the Merger Agreement, as provided in this
Amendment; and
WHEREAS, the Boards of Directors of each of CTI, Merger Sub and WAXS have
determined that it is in the best interest of each such corporation and its
shareholders, or shareholder, to enter into this Amendment.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which is hereby acknowledged
by each of the parties hereto, the parties agree as follows:
1. Amendments to the Merger Agreement. The Merger Agreement is hereby
amended as follows:
(a) Section 5.2. Section 5.2 of the Merger Agreement is hereby
deleted in its entirety and replaced with the following text:
"5.2 Management Agreement. WAXS and CTI have entered into that
certain Executive Management Services Agreement, dated August 1, 2000
(the "Management Agreement"). Pursuant to the Management Agreement, WAXS
has agreed to manage the operations and business affairs of CTI on the
terms specified therein. In light of the foregoing and notwithstanding
any other term or provision of this Agreement, WAXS hereby agrees that
CTI shall have no liability whatsoever for any breach by CTI of any one
or more of its covenants stated in this Agreement (including, without
limitation, any covenant or agreement of CTI set forth in Section 5.1
(Covenants of CTI) or any Section or Article VI) to the extent such
breach is caused by any action or omission of WAXS pursuant to the
Management Agreement."
(b) Section 7.2(a). Section 7.2(a) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following text:
"(a) Representations and Warranties. Each of the representations
and warranties of CTI set forth in this Agreement shall be true and
correct as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except to the extent that
such representations and warranties speak as of another date, in which
case any such representations and warranties shall be true and correct
as of such date), except (i) where any failures to be true and correct
as of the Closing Date have been caused by or result from any act or
omission of WAXS pursuant to the Management Agreement occurring from and
after the date of the Management Agreement through and including the
Closing Date or (ii) where any such failures to be true and correct
would not have a Material Adverse Effect on WAXS or the Surviving
Corporation, and WAXS shall have received a certificate of the chief
executive officer and the chief financial officer of CTI to such
effect."
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<PAGE> 385
(c) Section 7.2(b). Section 7.2(b) of the Merger Agreement is hereby
amended to delete the period at the end of such Section and in place
thereof insert the following text:
"; provided, that the foregoing condition shall be deemed satisfied
notwithstanding any failure by CTI to have performed or complied in any
material respect with any of its material agreements or covenants
required to be performed by it hereunder to the extent such failure is
caused by any act or omission of WAXS pursuant to the Management
Agreement occurring from and after the date of the Management Agreement
through and including the Closing Date."
(d) Section 7.2(c). Section 7.2(c) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following text:
"(c) Consents and Approvals. All consents, approvals and actions
of, filings with and notices to any governmental entity required to
consummate the Merger and the other transactions contemplated hereby, or
of any other third party required of CTI or any of its Subsidiaries to
consummate the Merger and the other transactions contemplated hereby
shall have been obtained, except where the failure to obtain any such
consent or approval would not have a Material Adverse Effect on WAXS or
the Surviving Corporation; provided, however, that the provisions of
this Section 7.2(c) shall not be available to WAXS if the failure to
obtain any consent or approval shall have been caused by or as a result
of any act or omission of WAXS pursuant to the Management Agreement
occurring from and after the date of the Management Agreement through
and including the Closing Date."
(e) Section 7.2(d). Section 7.2(d) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following text:
"(d) [Reserved]".
(f) Section 7.2(g). Section 7.2(g) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following text:
"(g) [Reserved]".
(g) Section 8.1. Section 8.1 of the Merger Agreement is hereby
amended by adding the following text after the end of such Section:
"Notwithstanding the foregoing, CTI shall not have any liability
for, and shall not be required to indemnify any WAXS Protected Party
with respect to any of the matters set forth in the foregoing clauses
(i), (ii), (iii) or (iv), in each case to the extent that such breach,
inaccuracy or noncompliance, or imposition of any part or all of the
suspended fine, is caused by or results from any act or omission of WAXS
pursuant to the Management Agreement occurring from and after the date
of the Management Agreement through and including the Closing Date."
(h) Section 9.1(b). Section 9.1(b) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following text:
"(b) By either WAXS or CTI, if the other party shall have failed to
comply in any material respect with any of its material covenants or
agreements contained in this Agreement, which failure to so comply has
not been cured within thirty (30) days following receipt by such other
party of written notice of such failure to comply; provided, however,
that if any such breach is curable by the breaching party through the
exercise of the breaching party's reasonable efforts and for so long as
the breaching party shall be so using its reasonable efforts to cure
such breach, the non-breaching party may not terminate this Agreement
pursuant to this paragraph; and provided, further, that (i) no party
shall have the right to terminate this Agreement pursuant to this
Section 9.1(b) if such party is then failing to comply in any material
respect with any of its covenants or agreements contained in this
Agreement and (ii) WAXS shall not have the right to terminate this
Agreement pursuant to this Section 9.1(b) if CTI's failure to comply in
any material respect with any of its material covenants or agreements
contained in this Agreement is caused by or results from any act or
omission of WAXS pursuant to the Management Agreement occurring from and
after the date of the Management Agreement through and including the
Closing Date;"
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<PAGE> 386
(i) Section 9.1(c). Section 9.1(c) of the Merger Agreement is hereby
deleted in its entirety and replaced with the following text:
"(c) By either WAXS or CTI, if there has been a breach by the other
party of any representations or warranties, which breach has not been
cured within thirty (30) days following receipt by such other party of
written notice of such failure to comply; provided, however, that if any
such breach is curable by the breaching party through the exercise of
the breaching party's efforts to cure such breach, the non-breaching
party may not terminate this Agreement pursuant to this paragraph; and
provided further, that (i) this provision shall only apply to such
breaches which would have a Material Adverse Effect on (A) WAXS (after
giving effect to the Merger), (B) the Surviving Corporation or (C) WAXS
(after giving effect to the Merger) and the Surviving Corporation and
(ii) WAXS shall not have the right to terminate this Agreement pursuant
to this Section 9.1(c) if CTI's breach of any of its representations and
warranties stated herein is caused by or results from any act or
omission of WAXS pursuant to the Management Agreement occurring from and
after the date of the Management Agreement through and including the
Closing Date;"
(j) Section 9.1(d). Section 9.1(d) of the Merger Agreement is hereby
amended by changing the date "October 31, 2000" therein to "December 31,
2000".
2. No Other Changes. Except as expressly set forth herein, the Merger
Agreement shall not be amended, revised or changed in any respect whatsoever and
shall remain in full force and effect.
3. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall for all purposes be deemed an original and all
of which shall constitute the same instrument.
[Signatures appear on the following page]
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<PAGE> 387
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
duly executed on its behalf as of the date indicated on the first page hereof.
WAXS:
WORLD ACCESS, INC.
By:
------------------------------------
Name:
Title:
MERGER SUB:
CTI MERGER CO.
By:
------------------------------------
Name:
Title:
CTI:
Communication TeleSystems
International d/b/a
WORLDxCHANGE
Communications
By:
------------------------------------
Name:
Title:
B-50
<PAGE> 388
ANNEX C
February 11, 2000
Board of Directors
World Access, Inc.
945 East Paces Ferry Road
Suite 2200
Atlanta, GA 30326
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to World Access, Inc. (the "Company") of the consideration to be paid by
the Company pursuant to the terms of the Agreement and Plan of Merger, dated as
of February 11, 2000 (the "Agreement"), by and among the Company, STI Merger
Co., a wholly-owned subsidiary of the Company ("Merger Sub"), and STAR
Telecommunications, Inc. ("STAR"), pursuant to which STAR will be merged (the
"Merger") with and into Merger Sub.
Pursuant to the Agreement, each share of common stock, par value $0.001 per
share, of STAR ("STAR Common Stock") issued and outstanding will be converted
into, at the election of the Company by written notice to STAR prior to the
Closing, the following consideration (the "Merger Consideration"): (i) the right
to receive the number of shares of common stock, par value $.01 per share, of
the Company ("WAXS Common Stock") obtained by solving for "X" in the following
formula (the "Exchange Ratio"): X = (7.81 + Z) / 20.00, or (ii) the right to
receive, at the option of the holder, either (x) the number of shares of WAXS
Common Stock equal to the Exchange Ratio or (y) such number of shares of WAXS
Common Stock as shall equal sixty percent (60%) of the Exchange Ratio and an
amount in cash equal to forty percent (40%) of the sum of ($7.81 + Z) (the "Cash
and Stock Election"); provided, however, that in no event shall more than
forty-five percent (45%) of the outstanding shares of STAR Common Stock receive
the Cash and Stock Election. For the purposes of the Agreement and this opinion,
(a) in determining the Exchange Ratio, "Z" shall equal the PT-1 Excess Proceeds
(as defined below) divided by the number of issued and outstanding STAR
shares/options and (b) "PT-1 Excess Proceeds" means the cash proceeds received
by STAR at the consummation of the sale of PT-1, net of all taxes, fees and
expenses in connection with the sale of PT-1 ("Net PT-1 Proceeds") in excess of
$150.0 million.
In arriving at our opinion, we have reviewed the draft dated February 6,
2000 of the Agreement. We also have reviewed financial and other information
that was publicly available or furnished to us by the Company and STAR,
including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of STAR for the period
beginning January 1, 2000 and ending December 31, 2004 prepared by the
management of the Company and certain financial projections of the Company for
the period beginning January 1, 2000 and ending December 31, 2004 prepared by
the management of the Company. In addition, we have compared certain financial
and securities data of the Company and STAR with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the common stock of the Company and STAR, reviewed prices
paid in certain other business combinations and conducted such other financial
studies, analyses and investigations as we deemed appropriate for purposes of
this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and STAR or their
respective representatives, or that was otherwise reviewed by us. In particular,
we have relied upon the estimates of the management of the Company of the
operating synergies achievable as a result of the Merger. With respect to the
financial projections supplied to us, we have relied on representations that
they have been reasonably prepared on the basis reflecting the best
<PAGE> 389
currently available estimates and judgments of the management of the Company as
to the future operating and financial performance of the Company and STAR. In
addition, we have relied upon and assumed Net PT-1 Proceeds of $150.0 million
from the sale of PT-1. We have not assumed any responsibility for making any
independent evaluation of any assets of liabilities or for making any
independent verification of any of the information reviewed by us. We have
assumed that the Merger will be accounted for as a purchase under generally
accepted accounting principles and that it will qualify as a tax-free
reorganization for U.S. federal income tax purposes.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have nay obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which the WAXS Common Stock will actually trade at any time. Our opinion does
not address the relative merits of the Merger and the other business strategies
being considered by the Company's Board of Directors, nor does it address the
Board's decision to proceed with the Merger. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("Donaldson, Lufkin &
Jenrette"), as part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Donaldson, Lufkin & Jenrette has performed investment banking and other services
for the Company in the past and has been compensated for such services.
Donaldson, Lufkin & Jenrette acted as financial advisor to the Company in
connection with its acquisition of FaciliCom International, Inc. ("FaciliCom"),
and acted as solicitation agent in connection with the consent solicitation for
FaciliCom's outstanding senior notes. Donaldson, Lufkin & Jenrette is currently
acting as financial advisor to the Company in connection with its proposed
acquisition of Communication TeleSystems International d/b/a WorldxChange
Communications. Further, Donaldson, Lufkin & Jenrette is currently providing
advisory services in connection with the exploration of a possible sale of the
Company's NACT Telecommunications Inc. and Telco Systems Inc. subsidiaries and
the Company's Wireless Local Loop Division.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Merger Consideration to be paid by the Company pursuant
to the Agreement is fair to the Company and its stockholders from a financial
point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ MICHAEL CONNOLLY
------------------------------------
Michael Connolly
Vice President
C-2
<PAGE> 390
ANNEX D
February 11, 2000
Board of Directors
World Access, Inc.
945 East Paces Ferry Road
Suite 2200
Atlanta, GA 30326
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to World Access, Inc. (the "Company") of the consideration to be paid by
the Company pursuant to the terms of the Agreement and Plan of Merger, dated as
of February 11, 2000 (the "Agreement"), by and among the Company, CTI Merger
Co., a wholly-owned subsidiary of the Company ("Merger Sub"), and Communication
TeleSystems International d/b/a WorldxChange Communications, ("CTI"), pursuant
to which CTI will be merged (the "Merger") with and into Merger Sub.
Pursuant to the Agreement, each share of common stock, par value $.01 per
share, of CTI, each share of preferred stock, Series A, no par value per share,
of CTI and each share of preferred stock, Series B, no par value per share, of
CTI, issued and outstanding, will be converted into the right to receive 0.6583
shares of common stock, par value $.01 per share, of the Company ("WAXS Common
Stock") (such shares and the Contingent Shares referred to below are referred to
as the "Merger Consideration"). In the event that the average of the closing
prices of WAXS Common Stock for the ten (10) trading-day period ending at the
close of trading on the second trading day preceding the Closing is less than
$20.38, then, in addition to the shares of WAXS Common Stock issued pursuant to
the above, each CTI stockholder who receives shares of WAXS Common Stock shall
be entitled to receive the amount, if any (the "Contingent Amount"), by which
the Target Price (as defined below) exceeds the greater of (i) the Current
Market Price (as defined below) on the first anniversary of the Effective Time
(the "Maturity Date") and (ii) $11.50, multiplied by the number of shares of
WAXS Common Stock issued to such holder pursuant to the prior sentence. The
Contingent Amount shall only be paid in shares of WAXS Common Stock (the
"Contingent Shares"), which shares shall be valued for purposes hereof at the
greater of the Current Market Price as of the Maturity Date and $11.50 and
rounded to the nearest whole share. Any and all rights in, or to receive, the
Contingent Amount shall terminate and be of no further force or effect if, at
any time on or prior to the Maturity Date, the Current Market Price is greater
than the Target Price.
For purposes hereof, (a) the Target Price means $20.38 per share of WAXS
Common Stock; provided, however, that if the Nasdaq Composite Index (the "IXIC")
at the close of trading on the Maturity Date is eighty-five percent (85%) or
less than the "IXIC" at the close of trading on the date of the Effective Time
(the difference between one hundred percent (100%) and such percentage being
referred to as the "Market Correction Percentage"), then the Target Price shall
be reduced by a percentage equal to that portion of the Market Correction
Percentage in excess of fifteen percent (15%); and (b) the Current Market Price
means, as of any date specified herein, the average of the daily closing trading
prices of WAXS Common Stock for the twenty (20) consecutive trading days ending
at the close of trading on such date.
In arriving at our opinion, we have reviewed the draft dated February 10,
2000 of the Agreement. We also have reviewed financial and other information
that was publicly available or furnished to us by the Company and CTI including
information provided during discussions with their respective managements.
Included in the information provided during discussions with the respective
managements were certain financial projections of CTI for the period beginning
January 1, 2000 and ending December 31, 2004 prepared by the management of the
Company, and certain financial projections of the Company for the
<PAGE> 391
period beginning January 1, 2000 and ending December 31, 2004 prepared by the
management of the Company. In addition, we have compared certain financial and
securities data of the Company and CTI with various other companies whose
securities are traded in public markets, reviewed prices paid in certain other
business combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and CTI or their
respective representatives, or that was otherwise reviewed by us. In particular,
we have relied upon the estimates of the management of the Company of the
operating synergies achievable as a result of the Merger. With respect to the
financial projections supplied to us, we have relied on representations that
they have been reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of the Company and CTI as to
the future operating and financial performance of the Company and CTI. We have
not assumed any responsibility for making any independent evaluation of any
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have assumed that the Merger will be accounted
for as a purchase under generally accepted accounting principles and that it
will qualify as a tax-free reorganization for U.S. federal income tax purposes.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion as to the prices
at which the WAXS Common Stock will actually trade at any time. Our opinion does
not address the relative merits of the Merger and the other business strategies
being considered by the Company's Board of Directors, not does it address the
Board's decision to proceed with the Merger. Our opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("Donaldson, Lufkin &
Jenrette"), as part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
Donaldson, Lufkin & Jenrette has performed investment banking and other services
for the Company in the past and has been compensated for such services.
Donaldson, Lufkin & Jenrette acted as financial advisor to the Company in
connection with its acquisition of FaciliCom International, Inc. ("FaciliCom"),
and acted as solicitation agent in connection with the consent solicitation for
FaciliCom's outstanding senior notes. Donaldson, Lufkin & Jenrette is currently
acting as financial advisor to the Company in connection with its proposed
acquisition of STAR Telecommunications, Inc. Further, Donaldson, Lufkin &
Jenrette is currently providing advisory services in connection with the
exploration of a possible sale of the Company's NACT Telecommunications Inc. and
Telco Systems Inc. subsidiaries and the Company's Wireless Local Loop Division.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Merger Consideration to be paid by the Company pursuant
to the Agreement is fair to the Company and its stockholders from a financial
point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ MICHAEL CONNOLLY
------------------------------------
Michael Connolly
Vice President
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ANNEX E
February 7, 2000
Board of Directors
Star Telecommunications, Inc.
223 East De La Guerra
Santa Barbara, CA 93101
Ladies and Gentlemen:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial
advisor to Star Telecommunications, Inc. ("STAR") in connection with the
proposed merger of STAR and World Access, Inc. ("World Access") pursuant to the
Agreement and Plan of Merger (the "Merger Agreement") to be entered into among
World Access, STAR and STI Merger Co., a wholly owned subsidiary of World Access
("Acquiror Sub"), which provides, among other things, for the merger of STAR
with and into Acquiror Sub (the "Transaction"), as a result of which STAR will
become a wholly owned subsidiary of World Access. As set forth more fully in the
Merger Agreement, as a result of the Transaction, each share of the Common
Stock, par value $0.001 per share, of STAR ("STAR Common Stock") not owned
directly or indirectly by World Access or STAR will be converted into the right
to receive the "Merger Consideration" described below. The "Merger
Consideration" is (A) a number of shares of Common Stock, par value $0.01 per
share, of World Access ("World Access Common Stock") equal to a fraction (the
"Exchange Ratio") (1) the numerator of which is the sum of (a) $7.81 and (b) an
amount equal to the "PT-1 Excess Proceeds" (as defined in the Merger Agreement)
divided by the total number of issued and outstanding shares of STAR Common
Stock and shares of STAR common stock underlying issued and outstanding options
with exercise prices of $7.81 or less (the "PT-1 Excess Proceeds Per Share") and
(2) the denominator of which is $20.00; or, at the election of World Access by
written notice to STAR, (B) (1) a number of shares of World Access Common Stock
equal to 60 percent of the Exchange Ratio and (2) an amount in cash equal to 40
percent of the sum of (a) $7.81 and (b) the PT-1 Excess Proceeds Per Share. The
terms and conditions of the Transaction are more fully set forth in the Merger
Agreement.
You have requested Deutsche Bank's opinion, as investment bankers, as to
the fairness, from a financial point of view, to the holders of STAR Common
Stock of the Merger Consideration to be received by such stockholders pursuant
to the Merger Agreement.
In connection with Deutsche Bank's role as financial advisor to, and in
arriving at its opinion, Deutsche Bank has reviewed certain publicly available
financial and other information concerning STAR and World Access and certain
internal analyses and other information furnished to it by STAR and World
Access. Deutsche Bank has also held discussions with members of the senior
managements of STAR and World Access regarding the businesses and prospects of
their respective companies and the joint prospects of a combined company. In
addition, Deutsche Bank has (i) reviewed the reported prices and trading
activity for STAR Common Stock and World Access Common Stock, (ii) compared
certain financial and stock market information for STAR and World Access with
similar information for certain other companies whose securities are publicly
traded, (iii) reviewed the financial terms of certain recent business
combinations which it deemed comparable in whole or in part, (iv) reviewed the
terms of the February 6, 2000 draft of the Merger Agreement, and (v) performed
such other studies and analyses and considered such factors as it deemed
appropriate.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning STAR or World Access, including,
without limitation, any financial information, forecasts or projections
considered in connection with the rendering of its opinion. Accordingly, for
purposes of its opinion, Deutsche Bank has assumed and relied upon the accuracy
and completeness of all such information and Deutsche Bank has not conducted a
physical inspection of any of the properties or assets, and has not prepared or
obtained any independent evaluation or appraisal of any of the assets or
liabilities, of STAR or World Access. With respect to the financial forecasts
and projections, including the analyses and forecasts of certain cost
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savings, operating efficiencies, revenue effects and financial synergies
expected by STAR and World Access to be achieved as a result of the Transaction
(collectively, the "Synergies"), made available to Deutsche Bank and used in its
analyses, Deutsche Bank has assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of STAR or World Access, as the case may be, as to the matters
covered thereby. In rendering its opinion, Deutsche Bank expresses no view as to
the reasonableness of such forecasts and projections, including the Synergies,
or the assumptions on which they are based. Deutsche Bank's opinion is
necessarily based upon economic, market and other conditions as in effect on,
and the information made available to it as of, the date hereof. We undertake no
obligation to update this opinion to reflect any developments occurring after
the date hereof. We express no opinion as to the price or range of prices at
which World Access Common Stock may trade subsequent to the announcement or
consummation of the Transaction.
For purposes of rendering its opinion, Deutsche Bank has assumed that the
final terms of the Merger Agreement would not vary from the February 6, 2000
draft that Deutsche Bank reviewed in any respect that would be material to
Deutsche Bank's analysis. Further, Deutsche Bank has assumed that, in all
respects material to its analysis, the representations and warranties of STAR,
World Access and Acquiror Sub contained in the Merger Agreement are true and
correct, STAR, World Access and Acquiror Sub will each perform all of the
covenants and agreements to be performed by it under the Merger Agreement and
all conditions to the obligations of each of STAR, World Access and Acquiror Sub
to consummate the Transaction will be satisfied without any waiver thereof.
Deutsche Bank has also assumed that all material governmental, regulatory or
other approvals and consents required in connection with the consummation of the
Transaction will be obtained and that in connection with obtaining any necessary
governmental, regulatory or other approvals and consents, or any amendments,
modifications or waivers to any agreements, instruments or orders to which
either STAR or World Access is a party or is subject or by which it is bound, no
limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on STAR
or World Access or materially reduce the contemplated benefits of the
Transaction to STAR or its stockholders. In addition, you have informed Deutsche
Bank, and accordingly for purposes of rendering its opinion Deutsche Bank has
assumed, that the Transaction will be tax-free to each of the STAR, World
Access, World Access's stockholders and, to the extent they receive World Access
Common Stock, STAR's stockholders.
In connection with our engagement, we have not been authorized by STAR or
its Board of Directors to solicit, nor have we solicited, any alternative
transactions to the Transaction.
This opinion is addressed to the Board of Directors of STAR and is not a
recommendation to the stockholders of STAR to approve the Transaction. This
opinion is limited to the fairness, from a financial point of view, to the
stockholders of STAR of the consideration to be received by such stockholders
pursuant to the Merger Agreement in the Transaction, and Deutsche Bank expresses
no opinion as to the merits of the underlying decision by STAR to engage in the
Transaction.
Deutsche Bank will be paid a fee for its services as financial advisor to
STAR in connection with the Transaction, a substantial portion of which is
contingent upon consummation of the Transaction. We are an affiliate of Deutsche
Bank AG (together with its affiliates, the "DB Group"). One or more members of
the DB Group have, from time to time, provided investment banking, commercial
banking (including extension of credit) and other financial services to STAR and
World Access or their respective affiliates for which it has received
compensation. A portion of the proceeds of a bridge loan to be provided by World
Access to STAR pursuant to the Merger Agreement may be used to repay
indebtedness of STAR which has been extended by one or more members of the DB
Group. In the ordinary course of business, members of the DB Group may actively
trade in the securities and other instruments and obligations of STAR and World
Access for their own accounts and for the accounts of their customers.
Accordingly, the DB Group may at any time hold a long or short position in such
securities, instruments and obligations.
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<PAGE> 394
Based upon and subject to the foregoing, it is Deutsche Bank's opinion as
investment bankers that, as of the date hereof, the Merger Consideration to be
received pursuant to the Merger Agreement by holders of STAR Common Stock in the
Transaction is fair, from a financial point of view, to such stockholders.
Very truly yours,
DEUTSCHE BANK SECURITIES INC.
/s/ Deutsche Bank Securities Inc.
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<PAGE> 395
ANNEX F
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
sec. 262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
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<PAGE> 396
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated
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<PAGE> 397
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
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submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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ANNEX G
SECTIONS 1300 THROUGH 1312 OF THE CALIFORNIA GENERAL CORPORATION LAW
Section 1300. Shareholder in short-form merger; Purchase at fair market
value; "Dissenting shares"; "Dissenting shareholder"
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the National Market System of the NASDAQ
Stock Market, and the notice of meeting of shareholders to act upon the
reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares
with respect to which there exists any restriction on transfer imposed by
the corporation or by any law or regulation; and provided, further, that
this provision does not apply to any class of shares described in
subparagraph (A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
Section 1301. Notice to holder of dissenting shares of reorganization
approval; Demand for purchase of shares; Contents of demand
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's
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right under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. Stamping or endorsing dissenting shares
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
Section 1303. Dissenting shareholder entitled to agreed price with
interest thereon; When price to be paid
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Section 1304. Action by dissenters to determine whether shares are
dissenting shares or fair market value of dissenting shares or both; Joinder of
shareholders; Consolidation of actions; Determination of issues; Appointment of
appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision
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(i) of Section 1110 was mailed to the shareholder, but not thereafter, may file
a complaint in the superior court of the proper county praying the court to
determine whether the shares are dissenting shares or the fair market value of
the dissenting shares or both or may intervene in any action pending on such a
complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305. Duty and report of appraisers; Court's confirmation of
report; Determination of fair market value by court; Judgment, and payment;
Appeal; Costs of action
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
Section 1306. Prevention of payment to holders of dissenting shares of
fair market value; Effect
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Section 1307. Disposition of dividends upon dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
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Section 1308. Rights and privileges of dissenting shares; Withdrawal of
demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
Section 1309. When dissenting shares lose their status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. Suspension of proceedings for compensation or valuation
pending litigation
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
Section 1311. Shares to which chapter inapplicable
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
Section 1312. Attack on validity of reorganization or short-form merger;
Rights of shareholders; Burden of proof
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such
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shareholder's shares pursuant to this chapter; but if the shareholder institutes
any action to attack the validity of the reorganization or short-form merger or
to have the reorganization or short-form merger set aside or rescinded, the
shareholder shall not thereafter have any right to demand payment of cash for
the shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10 days' prior notice to
the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the General Corporation Law of the State of Delaware
("DGCL") allows a corporation to eliminate or limit the personal liability of
directors of a corporation to the corporation or to any of its security holders
for monetary damages for a breach of fiduciary duty as a director, except (i)
for breach of the director's duty or loyalty, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for certain unlawful dividends and stock repurchases, or (iv) for any
transaction from which the director derived an improper personal benefit.
Section 145 of the DGCL provides that, in the case of any action other than
one by or in the right of the corporation, a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
in such capacity on behalf of another corporation or enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Articles X and XI of the World Access, Inc. amended certificate of
incorporation provide for indemnification of directors, officers and employees
to the fullest extent permissible under the DGCL.
Officers and directors of World Access are presently covered by insurance
which (with certain exceptions and with certain limitations) indemnifies them
against any losses or liabilities arising from any alleged "wrongful act"
including any alleged breach of duty, neglect, error, misstatement, misleading
statement, omissions or other act done or wrongfully attempted. The cost of such
insurance is borne by World Access as permitted by the DGCL.
World Access has entered into separate indemnification agreements with its
directors and non-director officers at the level of Vice President and above.
These indemnification agreements provide as follows:
- there is a rebuttable presumption that the director or officer has met
the applicable standard of conduct required for indemnification;
- World Access will advance litigation expenses to a director or officer at
his request provided that he undertakes to repay the amount advanced if
it is ultimately determined that he is not entitled to indemnification
for such expenses;
- World Access will indemnify a director or officer for amounts paid in
settlement of a derivative suit;
- in the event of a determination by the disinterested members of the board
of directors or independent counsel that a director or officer did not
meet the standard of conduct required for indemnification, the director
or officer may contest this determination by petitioning a court or
commencing any arbitration proceeding conducted by a single arbitrator
pursuant to the rules of the American Arbitration Association to make an
independent determination of whether such director or officer is entitled
to indemnification under his indemnification agreement; and
- World Access will reimburse a director or officer for expenses incurred
enforcing his rights under his indemnification agreement.
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<PAGE> 405
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits. The following exhibits are filed as part of this
registration statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
2.1 -- Agreement and Plan of Merger, dated as of February 11, 2000
among World Access, Inc., STI Merger Co. and STAR
Telecommunications, Inc. (incorporated by reference to
Exhibit 2.1 to World Access' Form 10-Q for the quarter ended
March 31, 2000, filed May 22, 2000).
2.2 -- Agreement and Plan of Merger, dated as of February 11, 2000
among World Access, Inc., WorldxChange Communications, Inc.
f/k/a CTI Merger Co. and Communication TeleSystems
International d/b/a WorldxChange Communications
(incorporated by reference to Exhibit 2.2 to World Access'
Form 10-Q for the quarter ended March 31, 2000, filed May
22, 2000).
2.3 -- First Amendment to Agreement and Plan of Merger dated May
23, 2000 by and among World Access, Inc., WorldxChange
Communications, Inc. and Communication TeleSystems
International d/b/a WorldxChange Communications
(incorporated by reference to Annex B to World Access' joint
proxy statement/prospectus contained in this Registration
Statement).
2.4 -- Second Amendment to Agreement and Plan of Merger dated
August 1, 2000 by and among World Access, Inc., WorldxChange
Communications, Inc. and Communication TeleSystems
International d/b/a (incorporated by reference to Annex B to
World Access' joint proxy statement/prospectus contained in
this Registration Statement).
2.5 -- First Amendment to Agreement and Plan of Merger dated June
7, 2000 by and among World Access, Inc., STI Merger Co. and
STAR Telecommunications, Inc. (incorporated by reference to
Annex A to World Access' joint proxy statement/prospectus
contained in this Registration Statement).
2.6 -- Purchase and Transfer Agreement, dated as of June 14, 2000
between Dr. Henning F. Klose, Apax Germany II L.P., Apax
Funds Nominees Ltd. fur "B" Account, Apax Funds Nominees
Ltd. fur "D" Account, AP Vermogensverwaltung Gesellshaft
burgerlichen Rechts, A + M GmbH & Co. Vermogensverwaltung
KG, and, World Access, Inc. and TelDaFax Aktiengesellschaft
Marburg/Lahn (incorporated by reference to Exhibit 2.3 to
World Access' Form 10-Q for the quarter ended June 30, 2000,
filed August 14, 2000).
2.7 -- Second Amendment to Agreement and Plan of Merger dated
October 6, 2000 by and among World Access, Inc., STI Merger
Co. and STAR Telecommunications, Inc. (incorporated by
reference to Annex A to World Access' joint proxy
statement/prospectus contained in this Registration
Statement).
3.1 -- Certificate of Incorporation of World Access and Amendments
to Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to World Access' Form S-4 filed to October 6,
1998, Registration No. 333-65389, Amendment to Certificate
of Incorporation incorporated by reference to Exhibit 3.2 of
WA Telcom Products Co., Inc.'s Form 8-K filed October 28,
1998).
3.2 -- Amendment to Certificate of Incorporation (incorporated by
reference to Exhibit 3.2 to World Access' Form 10-K for the
year ended December 31, 1998, filed April 9, 1999).
3.3 -- Certificate of Designation of 4.25% Cumulative Senior
Perpetual Convertible Preferred Stock, Series A
(incorporated by reference to Exhibit 4 to World Access'
Form 8-K, filed May 3, 1999).
3.4 -- Certificate of Designation of 4.25% Cumulative Junior
Convertible Preferred Stock, Series B (incorporated by
reference to Exhibit 4.1 to World Access' Form 8-K, filed
July 14, 1999).
3.5 -- Certificate of Designation of Convertible Preferred Stock,
Series C (incorporated by reference to Exhibit 1.7(b) to
Appendix A to World Access' Proxy Statement dated November
5, 1999 relating to the Special Meeting of Stockholders held
on December 7, 1999).
3.6 -- Certificate of Designation of Convertible Preferred Stock,
Series D (incorporated by reference to Exhibit 4 to World
Access' Form 8-K, filed February 28, 2000).
</TABLE>
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<PAGE> 406
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
3.7 -- Certificate of Designation of Convertible Preferred Stock,
Series E (incorporated by reference to Exhibit 3.7 to World
Access' Form 10-Q for the quarter ended June 30, 2000, filed
August 14, 2000).
3.8 -- Bylaws of World Access (incorporated by reference to Exhibit
3.2 to World Access' Form S-4 filed October 6, 1998, No.
333-65389).
4.1 -- Indenture dated as of October 1, 1997 by and between World
Access, Inc. and First Union Bank, as trustee (incorporated
by reference to Exhibit 4.1 to WA Telcom Products Co.,
Inc.'s Form 8-K, filed October 8, 1997).
4.2 -- First Supplemental Indenture dated October 28, 1998 between
World Access, Inc., WA Telcom Products Co., Inc. and First
Union Bank, as Trustee (incorporated by reference to Exhibit
4.1 to World Access' Form 8-K filed October 28, 1998).
4.3 -- Indenture dated as of December 7, 1999 by and between World
Access, Inc. and First Union Bank, as Trustee.
4.4** -- Voting and Stock Transfer Restriction Agreement dated as of
February 11, 2000 between World Access, Inc. and Samer
Tawfik.
4.5** -- Voting and Stock Transfer Restriction Agreement dated as of
February 11, 2000 between World Access, Inc. and Christopher
E. Edgecomb.
4.6** -- Voting and Stock Transfer Restriction Agreement dated as of
February 11, 2000 between World Access, Inc. and Roger B.
Abbott and Rosalind Abbott.
4.7** -- Voting and Stock Transfer Restriction Agreement dated as of
February 11, 2000 between World Access, Inc. and Atocha,
L.P.
4.8** -- Voting and Stock Transfer Restriction Agreement dated as of
February 11, 2000 between World Access, Inc. and Gold &
Appel Transfer S.A.
4.9** -- Voting and Stock Transfer Restriction Agreement dated as of
February 11, 2000 between World Access, Inc. and Edward S.
Soren.
4.10** -- Voting and Stock Transfer Restriction Agreement dated as of
February 11, 2000 between Communication TeleSystems
International d/b/a WorldxChange Communications and WorldCom
Network Services, Inc., The 1818 Fund III, L.P., John D.
Phillips, W. Tod Chmar, Resurgens Partners, LLC and
Armstrong International Telecommunications, Inc.
4.11** -- Form of Escrow Agreement between World Access, Inc., Edward
S. Soren and SunTrust Bank, Atlanta.
4.12** -- Form of Voting and Stock Transfer Restriction Agreement
among Communication TeleSystems International d/b/a
WORLDxCHANGE Communications and Geocapital V, L.P,
Geocapital Advisors, L.P., Geocapital Investors V, L.P.,
Clay C. Long, Gregory A. Somers, Kelli J. Somers, Water J.
Burmeister, Gilbert Global Equity Partners, L.P., Gilbert
Global Equity Partners (Bermuda), L.P., Morgan Stanley & Co.
Incorporated, SSCM, LLC, R2 Investments, Ltd, Erie Indemnity
Company, Erie Insurance Exchange, John P. Imlay, Comm/Net
Holding Liquidating Trust, Michael Billingsley, Teleplus
Telecommunications, Inc., Carl E. Sanders and Zilkha Capital
Partners.
5.1 -- Opinion of Long Aldridge & Norman LLP regarding legality of
common stock.
8.1* -- Opinion of Long Aldridge & Norman LLP regarding certain tax
matters in connection with the merger of STAR
Telecommunications, Inc. with and into STI Merger Co., a
wholly-owned subsidiary of World Access.
8.2* -- Opinion of Long Aldridge & Norman LLP regarding certain tax
matters in connection with the merger of Communication
Telesystems International d/b/a WorldxChange Communications
with and into WorldxChange Communications, Inc. f/k/a CTI
Merger Co., a wholly-owned subsidiary of World Access.
8.3* -- Opinion of O'Melveny & Myers LLP regarding certain tax
matters in connection with the merger of Communication
Telesystems International d/b/a WorldxChange Communications
with and into WorldxChange Communications, Inc. f/k/a CTI
Merger Co., a wholly-owned subsidiary of World Access.
</TABLE>
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<PAGE> 407
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
10.1 -- World Access, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to WA Telco
Systems' Registration Statement on Form S-8, filed on July
25, 1991, No. 33-41255-A).
10.2 -- Amendment to World Access, Inc. 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to WA Telco
Systems' Form 10-K for the year ended December 31, 1993,
filed March 31, 1994).
10.3 -- Second Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to WA Telco Systems' Form 10-K for
the year ended December 31, 1993, filed March 31, 1994).
10.4 -- Third Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.26 to WA Telco Systems' Form S-2,
Amendment No. 2, filed on February 14, 1995, No. 33-87026).
10.5 -- World Access, Inc., Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.40 to WA Telco
Systems' Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
10.6 -- Directors' Warrant Incentive Plan (incorporated by reference
to Exhibit 10.41 to WA Telco Systems' Form 10-K for the year
ended December 31, 1995, filed April 10, 1996).
10.7 -- Fourth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.32 to WA Telco Systems' Form 10-K
for the year ended December 31, 1996, filed April 11, 1997).
10.8 -- Fifth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.33 to WA Telco Systems' Form 10-K
for the year ended December 31, 1996, filed April 11, 1997).
10.9 -- Amendment One to Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.33 to WA Telco
Systems' Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.10 -- Amendment One to Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.31 to WA Telco
Systems' Form 10-K for the year ended December 31, 1996,
filed April 11, 1997).
10.11 -- Amendment Two to Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.21 to WA Telco
Systems' Form 10-K for the year ended December 31, 1997,
filed April 15, 1998).
10.12 -- Amendment Two to Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.22 to WA Telco
Systems' Form 10-K for the year ended December 31, 1997,
filed April 15, 1998).
10.13 -- Sixth Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.22 to WA Telco Systems' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.14 -- Severance Protection Agreement dated November 1, 1997 by and
between World Access, Inc. and Mark A. Gergel (incorporated
by reference to Exhibit 10.33 to WA Telco Systems' Form 10-K
for the year ended December 31, 1997, filed April 15, 1998).
10.15 -- Amendment Three to Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.21 to World Access'
Form 10-K for the year ended December 31, 1998, filed April
9, 1999).
10.16 -- Executive Employment Agreement between World Access, Inc.
and Mark A. Gergel dated as of December 14, 1998
(incorporated by reference to Exhibit 10.23 to World Access'
Form 10-K for the year ended December 31, 1998, filed April
9, 1999).
10.17 -- World Access, Inc. 1998 Incentive Equity Plan, as amended
(incorporated by reference to Exhibit 10.25 to World Access'
Form 10-K for the year ended December 31, 1998, filed April
9, 1999).
10.18 -- Assignment and Assumption Agreement dated October 29, 1998
between World Access, Inc. and WA Telcom Products Co., Inc.
(incorporated by reference to Exhibit 10.1 to World Access'
Form 8-K filed October 28, 1998).
10.19 -- Form of Indemnification Agreement with directors and
officers (incorporated by reference to Appendix H to World
Access' Joint Proxy Statement/Prospectus dated November 10,
1998 relating to the Special Meeting of Stockholders held on
November 30, 1998).
</TABLE>
II-4
<PAGE> 408
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
10.20 -- Schedule of all officers and directors who have signed an
Indemnification Agreement referred to in Exhibit 10.19
(incorporated by reference to Exhibit 10.28 to World Access'
Form 10-K for the year ended December 31, 1998, filed April
9, 1999).
10.21 -- First Amended and Restated Credit Agreement dated as of
December 7, 1999 between Telco Systems, Inc., World Access
Holdings, Inc. and Bank of America, N.A. as Administrative
Agent and Fleet National Bank as Syndication Agent and Bank
Austria Creditanstalt Corporate Finance, Inc. as
Documentation Agent and Banc of America Securities LLC as
Lead Arranger and Book Running Manager (incorporated by
reference to Exhibit 10.20 to World Access' Form 10-K for
the year ended December 31, 1999, filed March 30, 2000).
10.22 -- Guaranty dated as of December 30, 1998 between World Access,
Telco Systems, World Access Holdings, Inc., NationsBank,
N.A. as Administrative Agent and the lenders party to the
Credit Agreement referred to in Exhibit 10.21 (incorporated
by reference to Exhibit 10.30 to World Access' Form 10-K for
the year ended December 31, 1998, filed April 9, 1999).
10.23 -- Pledge Agreement dated as of December 31, 1998 by World
Access in favor of NationsBank, N.A. as Administrative Agent
and the lenders party to the Credit Agreement referred to in
Exhibit 10.21 (incorporated by reference to Exhibit 10.31 to
World Access' Form 10-K for the year ended December 31,
1998, filed April 9, 1999).
10.24 -- Security Agreement dated as of December 31, 1998 by World
Access in favor of NationsBank, N.A. as Administrative Agent
and the lenders party to the Credit Agreement referred to in
Exhibit 10.21 (incorporated by reference to Exhibit 10.32 to
World Access' Form 10-K for the year ended December 31,
1998, filed April 9, 1999).
10.25 -- Disbursement Agreement dated as of December 14, 1998 by and
among World Access, Inc., Cherry Communications Incorporated
(d/b/a Resurgens Communications Group) and William H.
Cauthen, Esq. (incorporated by reference to Exhibit 10.33 to
World Access' Form 10-K for the year ended December 31,
1998, filed April 9, 1999).
10.26 -- Agreement and Plan of Merger and Reorganization by and among
World Access, Inc., WAXS INC., WA Merger Corp. and Cherry
Communications Incorporated (d/b/a/ Resurgens Communications
Group) dated as of May 12, 1998, as amended (incorporated by
reference to Appendix A to World Access, Inc.'s Proxy
Statement dated November 12, 1998 relating to the Special
Meeting of Stockholders held on December 14, 1998).
10.27 -- Share Exchange Agreement by and among World Access, Inc.,
WAXS INC., Cherry Communications U.K. Limited and
Renaissance Partners II, dated as of May 12, 1998
(incorporated by reference to Appendix B to World Access,
Inc.'s Proxy Statement dated November 12, 1998 relating to
the Special Meeting of Stockholders held on December 14,
1998).
10.28 -- Confirmation Agreement dated as of December 7, 1999 by Telco
Systems, Inc., World Access Holdings, Inc., World Access,
Inc., WA Telco Systems Products Co., Inc., NACT
Telecommunications, Inc., Restor-AIT, Inc., Sunrise Sierra,
Inc., Westec Communications, Inc., Telco Systems Security
Corporation, World Access Capital Corp., World Access
Telecommunications Group, Inc., Cellular Infrastructure
Supply, Inc. and Galaxy Personal Services, Inc. for the
benefit of the lenders party to the Credit Agreement
referred to in Exhibit 10.20 (incorporated by reference to
Exhibit 10.24 to World Access' Form 10-K for the year ended
December 31, 1999, filed March 30, 2000).
10.29 -- Pledge Agreement dated as of December 7, 1999 by World
Access, Inc. in favor of Bank of America, N.A., in its
capacity as Administrative Agent, and each lender a party to
the Credit Agreement referred to in Exhibit 10.20
(incorporated by reference to Exhibit 10.28 to World Access'
Form 10-K for the year ended December 31, 1999, filed March
30, 2000).
10.30 -- FaciliCom International, Inc. 1998 Stock Option Plan
(incorporated by reference to Exhibit 10.19 to FaciliCom
International, Inc.'s Form 10-K for the year ended September
30, 1998, filed December 28, 1998).
</TABLE>
II-5
<PAGE> 409
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C> <C>
10.31 -- First Amendment to the World Access, Inc. 1998 Incentive
Equity Plan (incorporated by reference to Exhibit 10.32 to
World Access' Form 10-K for the year ended December 31,
1999, filed March 30, 2000).
10.32 -- FaciliCom International, Inc. 1999 Special Stock Option Plan
(incorporated by reference to Exhibit 10.33 to World Access'
Form 10-K for the year ended December 31, 1999, filed March
30, 2000).
10.33 -- Credit Agreement dated as of November 15, 1999 by and among
FaciliCom International, L.L.C. and Nortel Networks Inc.
(incorporated by reference to Exhibit 10.34 to World Access'
Form 10-K for the year ended December 31, 1999, filed March
30, 2000).
10.34** -- Participation Agreement dated as of February 11, 2000 by and
between Foothill Capital Corporation and World Access, Inc.
10.35** -- Amendment Number One To Participation Agreement dated as of
May 23, 2000 by and between Foothill Capital Corporation and
World Access, Inc.
10.36** -- Executive Management Services Agreement dated as of August
1, 2000 by and between World Access, Inc. and Communication
TeleSystems International d/b/a WorldxChange Communications.
10.37** -- Executive Employment Agreement between World Access, Inc.
and Bryan D. Yokley dated as of June 1, 2000.
16.1** -- Letter of PricewaterhouseCoopers LLP
21.1 -- Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to World Access' Form 10-K for the year ended
December 31, 1999, filed March 30, 2000).
23.1 -- Consent of Long Aldridge & Norman LLP (included in Exhibit
5.1).
23.2 -- Consent of Ernst & Young LLP with respect to the financial
statements of World Access, Inc.
23.3 -- Consent of PricewaterhouseCoopers LLP with respect to the
financial statements of World Access, Inc.
23.4 -- Consent of Deloitte & Touche LLP with respect to the
financial statements of FaciliCom International, Inc.
23.5 -- Consent of Ernst & Young LLP with respect to the financial
statements of Long Distance International, Inc.
23.6 -- Consent of Arthur Andersen LLP with respect to the financial
statements of STAR Telecommunications, Inc.
23.7 -- Consent of Ernst & Young LLP with respect to the financial
statements of Communications Telesystems International d/b/a
WorldxChange Communications.
23.8 -- Consent of BDO Deutsche Warentreuhand with respect to the
financial statements of TelDaFax AG.
23.9 -- Consent of Deutsche Bank Securities, Inc. with respect to
the financial opinion of Deutsche Bank Securities, Inc.
23.10 -- Consent of Donaldson, Lufkin & Jenrette Securities
Corporation with respect to the financial opinions of
Donaldson, Lufkin & Jenrette Securities Corporation.
24.1 -- Power of Attorney of World Access (included in the signature
pages hereto).
99.1** -- Form of proxy for World Access stockholders.
99.2** -- Form of proxy for STAR stockholders.
99.3** -- Form of Letter of Transmittal for STAR stockholders.
99.4** -- Form of Letter of Transmittal for WorldxChange shareholders.
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
(B) Financial Statement Schedules. The financial statement schedules that
are required by Regulation S-X are incorporated herein by reference to our
Annual Report on Form 10-K for the year ended December 31, 1999.
II-6
<PAGE> 410
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) If the registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to include any
financial statements required by Rule 3-19 of this chapter at the start of
any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the
Act need not be furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial statements
required pursuant to this paragraph (a)(4) and other information necessary
to ensure that all other information in the prospectus is at least as
current as the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements
and information required by Section 10(a)(3) of the Act or Rule 3-19 of
this chapter if such financial statements and information are contained in
periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the Form F-3.
(5) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-7
<PAGE> 411
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-8
<PAGE> 412
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on October 6, 2000.
WORLD ACCESS, INC.
By: /s/ JOHN D. PHILLIPS
------------------------------------
John D. Phillips
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the registration statement has been signed by the following persons in
the capacities indicated as of October 6, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ JOHN D. PHILLIPS Chairman and Chief Executive Officer (Principal
--------------------------------------------------- Executive Officer)
John D. Phillips
/s/ BRYAN D. YOKLEY Executive Vice President and Chief Financial
--------------------------------------------------- Officer (Principal Financial Officer)
Bryan D. Yokley
/s/ MARTIN D. KIDDER Vice President and Corporate Controller
--------------------------------------------------- (Principal Accounting Officer)
Martin D. Kidder
* President and Director
---------------------------------------------------
Walter J. Burmeister
* Director
---------------------------------------------------
Kirby J. Campbell
* Director
---------------------------------------------------
Bryan Cipoletti
* Director
---------------------------------------------------
Stephen J. Clearman
* Director
---------------------------------------------------
John P. Imlay, Jr.
* Director
---------------------------------------------------
Massimo Prelz Oltramonti
* Director
---------------------------------------------------
John P. Rigas
* Director
---------------------------------------------------
Carl E. Sanders
</TABLE>
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<PAGE> 413
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
* Director
---------------------------------------------------
Dru A. Sedwick
* Director
---------------------------------------------------
Lawrence C. Tucker
*By: /s/ JOHN D. PHILLIPS
----------------------------------------------
John D. Phillips
Attorney-in-fact
</TABLE>
II-10
