UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Three Months Ended September 30, 1996.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to
________.
Commission file number 0-19998
WORLD ACCESS, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 65-0044209
(State of Incorporation) (I.R.S. Employer Identification No.)
945 E. Paces Ferry Road,
Suite 2240, Atlanta Georgia 30326
(Address of principal executive offices) (Zip Code)
(404) 231-2025
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the Registrant's common stock, par
value $.01 per share, at November 13, 1996 was 16,163,069.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
World Access, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 December 31
1996 1995
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash and equivalents $ 784,936 $ 1,886,819
Proceeds receivable from stock offering 22,500,000 ---
Accounts receivable 8,285,359 9,648,817
Inventories 11,112,876 4,549,721
Notes receivable from stockholders --- 3,879,728
Other current assets 774,294 688,367
------------ ------------
Total Current Assets 43,457,465 20,653,452
Property and equipment 2,570,181 2,062,749
Technology license 773,652 ---
Intangible assets 9,404,546 5,084,184
Other assets 674,063 714,848
------------ ------------
Total Assets $ 56,879,907 $ 28,515,233
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 575,000 $ 5,385,220
Accounts payable 4,294,960 3,648,734
Accrued payroll and benefits 1,671,442 731,659
Accrued stock offering costs 511,975 ---
Other accrued liabilities 816,032 665,585
------------ ------------
Total Current Liabilities 7,869,409 10,431,198
Long-term debt 3,300,000 3,750,000
------------ ------------
Total Liabilities 11,169,409 14,181,198
------------ ------------
Stockholders' Equity
Common stock 156,280 125,583
Capital in excess of par value 53,882,879 27,641,543
Note receivable from affiliate (86,814) (919,836)
Accumulated deficit (8,241,847) (12,513,255)
------------ ------------
Total Stockholders' Equity 45,710,498 14,334,035
------------ ------------
Total Liabilities and
Stockholders' Equity $ 56,879,907 $ 28,515,233
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
World Access, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Quarter Ended September 30 Nine Months Ended September 30
---------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Sales of products $ 8,125,467 $ 3,392,346 $ 24,161,765 $ 6,861,884
Service revenues 4,293,899 3,268,166 12,213,764 9,176,565
----------- ----------- ----------- ----------
Total Sales 12,419,366 6,660,512 36,375,529 16,038,449
Cost of products sold 4,810,170 1,924,593 15,621,931 4,237,694
Cost of services 3,591,677 2,891,891 10,547,681 8,122,112
----------- ----------- ----------- ----------
Total Cost of Sales 8,401,847 4,816,484 26,169,612 12,359,806
----------- ----------- ----------- ----------
Gross Profit 4,017,519 1,844,028 10,205,917 3,678,643
Engineering and development 242,983 165,237 618,001 451,741
Selling, general
and administrative 1,678,647 938,986 4,368,365 2,106,832
Amortization of goodwill 141,962 44,112 364,306 66,836
Special charges --- --- --- 980,000
----------- ----------- ----------- ----------
Operating Income 1,953,927 695,693 4,855,245 73,234
Interest expense 101,360 109,573 308,592 356,173
Interest and other income (24,700) (40,534) (182,785) (52,676)
----------- ----------- ----------- ----------
Income (Loss) Before
Income Taxes 1,877,267 626,654 4,729,438 (230,263)
Income taxes 233,930 --- 458,030 ---
----------- ----------- ----------- ----------
Net Income (Loss) $ 1,643,337 $ 626,654 $ 4,271,408 $ (230,263)
=========== =========== =========== ==========
Net Income (Loss) Per
Common Share $ .12 $ .10 $ .31 $ (.03)
=========== =========== =========== ==========
Weighted Average
Shares Outstanding 13,835,374 7,930,871 13,694,591 6,967,960
=========== =========== =========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
World Access, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<CAPTION>
Capital In Note
Common Excess of Receivable Accumulated
Stock Par Value from Affiliate Deficit Total
---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 125,583 $ 27,641,543 $ (919,836) $ (12,513,255) $ 14,334,035
Net income 4,271,408 4,271,408
Issuance of 3,000,000 shares for
secondary public offering,net 30,000 21,645,000 21,675,000
Issuance of 597,246 shares for
Sunrise acquisition 5,972 2,289,757 2,295,729
Release of 318,654 shares from
escrow for AIT acquisition 2,042,373 2,042,373
Repayment of loans by affiliate, net 833,022 833,022
Issuance of 141,980 shares for
stock options and warrants 1,420 232,250 233,670
Retirement of 672,419 escrowed
shares from initial public offering (6,724) 6,724 ---
Issuance of 2,883 shares for
matching contribution to 401K plan 29 25,232 25,261
---------- ----------- ------------ ------------ -----------
Balance at September 30, 1996 $ 156,280 $ 53,882,879 $ (86,814) $ (8,241,847) $ 45,710,498
========== =========== ============ ============ ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
World Access, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30
------------------------------
1996 1995
------------ ------------
Cash Flows From Operating Activities:
Net income (loss) $ 4,271,408 $ (230,263)
Adjustments to reconcile net income
(loss) to net cash from (used by)
operating activities:
Depreciation and amortization 996,495 674,334
Provision for inventory reserves 148,150 113,970
Provision for bad debts 117,356 33,000
Stock contributed to employee benefit plan 25,261 12,742
Special charges --- 866,112
Changes in operating assets and
liabilities, net of effects from
businesses acquired:
Accounts receivable 1,158,614 (1,167,007)
Inventories (6,394,590) (503,915)
Accounts payable 491,569 (709,481)
Accrued payroll and benefits 939,783 484,070
Other assets and liabilities (214,278) (771,110)
------------ ------------
Net Cash From (Used By) Operating Activities 1,539,768 (1,197,548)
------------ ------------
Cash Flows From Investing Activities:
Acquisition of businesses (583,621) (1,517)
Repayments by (loans to) affiliate 833,022 (1,386,500)
Technology license (531,733) ---
Expenditures for property and equipment (848,832) (155,323)
Prepaid rent on equipment lease 5,906 (274,300)
------------ ------------
Net Cash Used By Investing Activities (1,125,258) (1,817,640)
------------ ------------
Cash Flows From Financing Activities:
Net proceeds from private equity offerings --- 2,835,000
Short-term debt borrowings (repayments) (4,935,220) 101,851
Long-term debt repayments (325,000) (125,000)
Proceeds from exercise of stock
warrants and options 4,113,398 212,615
Stock offering costs (313,025) ---
Debt issue costs (56,546) ---
------------ ------------
Net Cash From (Used By) Financing Activities (1,516,393) 3,024,466
------------ ------------
Increase (Decrease) in Cash and Equivalents (1,101,883) 9,278
Cash and Equivalents at Beginning of Period 1,886,819 753,264
------------ ------------
Cash and Equivalents at End of Period $ 784,936 $ 762,542
============ ============
Supplemental Schedule of Noncash Financing and
Investing Activities:
Issuance of common stock for businesses acquired $ 4,332,130 $ 2,273,418
Reduction in note receivable from affiliate
to recognize contingent purchase price earned 582,500 582,500
Conversion of accounts receivable to investment
in technology license 241,919 ---
The accompanying notes are an integral part of these financial statements.
<PAGE>
World Access, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 1996
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q. Accordingly, the financial
information does not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of the
interim periods covered have been included. For further information, refer to
the audited consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
The results of operations for the three and nine months ended September 30, 1996
are not necessarily indicative of the results of the full year.
Certain reclassifications have been made to the prior period's financial
information to conform with the presentations used in 1996.
NOTE 2. ACQUISITIONS
Sunrise Acquisition
On February 21, 1996, the Company entered into an agreement to acquire Comtech
Sunrise, Inc. ("Sunrise"), a Livermore, California based manufacturer of
multiplexers, digital loop carriers and other intelligent transmission and
access products. On June 18, 1996, after a mandatory registration process was
completed in the State of California, the transaction was completed in its final
form whereby Sunrise was merged with and into Restor-Comtech, Inc., a wholly
owned subsidiary of the Company (the "Sunrise Merger"). Restor - Comtech, Inc.
subsequently changed its name to Sunrise Sierra, Inc. In connection with the
Sunrise Merger, the stockholders of Sunrise received approximately $100,000 in
cash and 385,481 restricted shares of the Company's common stock. These shares
had an initial fair value of approximately $6.00 a share or $2.3 million.
In addition to the 385,481 shares noted above, the stockholders of Sunrise were
issued 211,765 restricted shares of the Company's common stock. These shares
were immediately placed into escrow, and along with $1.8 million in additional
purchase price (the "Additional Consideration"), will be released and paid to
the stockholders of Sunrise contingent upon the realization of predefined levels
of pre-tax income from Sunrise's operations during three one-year periods
beginning January 1, 1996. This Additional Consideration may be paid, at the
option of the Company, in the form of cash or restricted shares of the Company's
common stock valued at the then current market prices.
<PAGE>
The shares placed in escrow were valued by the Company at par value only, or
$2,118. Once conditions for release from escrow have been met, the fair market
value of the shares as measured at that time, along with any Additional
Consideration earned, will be recorded as additional goodwill and stockholders'
equity, respectively.
The acquisition of Sunrise has been accounted for using the purchase method of
accounting. Accordingly, the results of Sunrise's operations have been included
in the accompanying consolidated financial statements from January 1, 1996, the
effective date of acquisition as defined in the definitive agreement and plan of
merger. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the date of acquisition. The
excess of purchase price over the fair value of net assets acquired, currently
estimated at approximately $1.5 million, has been recorded as goodwill and is
being amortized over a 15 year period.
AIT Contingent Purchase Price Earned
In May 1995, the Company acquired AIT, Inc. ("AIT"), a provider of switching
systems, add-on frames and related circuit boards to the telecommunications
industry. As part of the total consideration paid by the Company, the sole
stockholder of AIT was issued 637,308 restricted shares of the Company's common
stock. These shares were immediately placed into escrow, and along with
$2,330,000 in potential cash payments, may be released to the sole stockholder
over a two year period ending June 30, 1997 contingent upon the realization of
predefined levels of gross profit from AIT's operations during this same period.
To the extent cash consideration is paid, the sole stockholder will immediately
be required to repay the equivalent amount of borrowings outstanding under a
promissory note entered into with the Company in connection with the
acquisition. Once repaid, the stockholder will not be entitled to reborrow such
funds.
The first measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration was May 17, 1995 to December 31, 1995. In
reviewing AIT's gross profit performance as of September 30, 1995, the Company
determined that it was highly probable that the conditions for release and
payment for this first period would be met. Accordingly, 159,327 escrowed shares
were accounted for as if released and $582,500 in contingent cash payments were
accounted for as if paid as of September 30, 1995. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$1.1 million at September 30, 1995. These shares were released and payment was
made to the former stockholder of AIT on February 15, 1996.
The second measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration was January 1, 1996 to June 30, 1996. In
reviewing AIT's gross profit performance for this period, the Company determined
that the conditions for release and payment for this second period were met.
Accordingly, 159,327 escrowed shares were accounted for as if released and
$582,500 in contingent cash payments were accounted for as if paid as of June
30, 1996. The net effect of this accounting was to increase goodwill and
stockholders' equity by approximately $1.7 million at June 30, 1996. These
shares were released and payment was made to the former stockholder of AIT on
August 15, 1996.
<PAGE>
The third measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration is July 1, 1996 to December 31, 1996, with
actual release and payment to be made on February 15, 1997. In reviewing AIT's
gross profit performance as of September 30, 1996, the Company determined that
it was highly probable that the conditions for release and payment for this
third period would be met. Accordingly, 159,327 escrowed shares were accounted
for as if released and $582,500 in contingent cash payments were accounted for
as if paid as of September 30, 1996. The net effect of this accounting was to
increase goodwill and stockholder's equity by approximately $1.5 million at
September 30, 1996.
Pro Forma Results of Operations
In addition to the Sunrise and AIT acquisitions noted above, the Company
acquired Westec Communications, Inc. ("Westec"), a provider of wireless systems
and repair services to the cable television and telecommunications industries,
in October 1995. The results of operations for AIT, Westec, and Sunrise have
been included in the Company's consolidated financial statements from their
respective dates of acquisition. A detailed discussion of the terms and
conditions of the AIT and Westec acquisitions is included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
On a pro forma, unaudited basis, as if the acquisitions of AIT, Westec and
Sunrise had occurred as of January 1, 1995, total sales, net income and net
income per common share for the nine months ended September 30, 1995 would have
been $22,898,000, $229,000 and $.02, respectively. These pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the acquisitions
been in effect on the date indicated, or which may occur in the future.
<PAGE>
NOTE 3. SPECIAL CHARGE
In the second quarter of 1995, the Company recorded a one-time special charge of
$980,000 for the following items:
Write-down of test equipment and related tooling $ 675,000
Consolidation of repair operations 95,000
Retirement benefits, search and relocation costs
for Company President 150,000
Other 60,000
-------------
$ 980,000
=============
As a result of the significant decline in circuit board repair revenues
experienced by the Company in recent years, the shift in strategic focus to new
digital repair services and programs offered by the Company in 1995, the
acquisition of AIT and other market considerations, the Company elected to
significantly write-down the net book value of certain assets related to repair
operations by $675,000. These assets primarily represent test equipment,
tooling, dies and diagnostic programs for the repair of analog
telecommunications equipment. All of these assets were capitalized in 1988 to
1990 in connection with acquisitions made by the Company.
In addition to the write-down of selected repair assets, a $95,000 charge was
recorded to provide for the estimated costs of further consolidating the
Company's Beaverton, Oregon repair operations into its Orlando, Florida
facility. This charge consists of severance benefits, equipment relocation,
lease termination and other costs related to the consolidated plan.
In June 1995, the Company's President and Chief Executive Officer elected to
retire. In connection with his retirement, the Company's Board of Directors
elected to award approximately $100,000 in retirement benefits consisting
primarily of salary and health care insurance through February 1996. An
additional provision of $50,000 was also charged to operations for the estimated
search and relocation costs expected to be incurred in hiring a replacement.
NOTE 4. INVENTORIES
Inventories consist of the following:
September 30 December 31
1996 1995
------------ ------------
Switching systems, frames and
related circuit boards $ 7,058,369 $ 2,127,653
Electronic components 2,737,498 1,595,281
Pay telephone parts 422,303 346,978
Work in progress 636,047 307,438
Other finished goods 258,659 172,371
------------ ------------
$ 11,112,876 $ 4,549,721
============ ============
<PAGE>
NOTE 5. TECHNOLOGY LICENSE
In March 1996, the Company entered into a memorandum of understanding with
International Communication Technologies, Inc. ("ICT") and Eagle Telephonics,
Inc. ("Eagle") to manufacture, market and sell a new modular, digital central
office switch recently developed by Eagle. In July 1996, a long-term technology
licensing agreement was executed by all three parties. As consideration for this
license, the Company paid Eagle $250,000 in cash and agreed to provide it
$450,000 of manufacturing services, the majority of which were performed prior
to July 1996. Effective January 1, 1997, the license fees paid Eagle will be
amortized to expense over the estimated useful life of the license.
In addition to the up front consideration, the Company will pay ICT certain
royalties based on future sales of the switch by the Company. In August 1996,
the Company agreed to prepay up to $270,000 in royalties related to future
switch sales at a significantly discounted royalty rate. As of September 30,
1996, $75,000 of prepayments had been made.
In connection with this license and the up front consideration paid, the Company
received 1.2 million restricted shares of Eagle common stock. The fair value of
these shares was not material as of September 30, 1996.
NOTE 6. DEBT
Debt outstanding consists of the following:
September 30 December 31
1996 1995
----------- -----------
Revolving credit loans payable to bank $ --- $ 4,926,142
Term loan payable to bank 3,875,000 4,200,500
Other notes payable --- 8,578
----------- -----------
Total debt 3,875,000 9,135,220
Amount due within one year (575,000) (5,385,220)
----------- -----------
Long-term debt $ 3,300,000 $ 3,750,000
=========== ===========
In March 1996, the Company and its primary lender amended their existing bank
credit facility to increase the Company's revolving line of credit from $2
million to $6 million, reduce the interest rate by one percent and extend the
bank's commitment until March 2001. The existing $4 million term loan,
originally scheduled to mature in November 1997, was replaced with a new $4
million term loan requiring escalating quarterly payments through March 2001.
In October 1996, the Company repaid the $3,875,000 outstanding under the term
loan from proceeds received in connection with the Company's secondary public
offering (see "Note 7").In connection with the completion of the public offering
and the repayment of the term loan, the Company's primary lender committed to
increase the Company's available revolving line of credit from $6 million to $10
million.
Interest on the new bank facility is set at prime plus 1 1/4% or Libor plus 2
1/2%, at the option of the Company. As of September 30, 1996, the interest rate
on all bank debt was 8%.
Interest paid was $305,769 and $311,753 for the nine months ended September 30,
1996 and 1995, respectively.
<PAGE>
NOTE 7. EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
On August 12, 1996, an Escrow Agreement entered into by certain stockholders of
the Company in connection with the Company's initial public offering in August
1991 expired. Since conditions for release during this five year term were not
met, 672,419 escrowed shares of Company common stock were returned to the
Company and are now authorized but unissued shares.
On September 25, 1996, 3.0 million shares of Company common stock were sold in a
secondary public offering at a price of $8.00 per share. On October 2, 1996, the
Company received $22.5 million from this offering, after the application of a
6.25% underwriter discount fee. Additional expenses incurred by the Company in
connection with this offering were estimated at $825,000 as of September 30,
1996.
In addition to the shares sold in September 1996, the Company granted the
underwriters an option to purchase up to an additional 487,500 shares of common
stock to cover over-allotments. In October 1996, the underwriters exercised the
over-allotment option in full (see "Note 8").
The computation of earnings per share is based on the weighted average number of
outstanding common shares during the period plus, when their effect is dilutive,
common stock equivalents consisting of shares subject to stock options and
warrants. A total of 435,090 common shares held in escrow from certain
acquisitions have been excluded from the earnings per share calculations because
the conditions for release of shares from escrow have not been satisfied.
Common stock issued and outstanding at September 30, 1996 and December 31, 1995
was 15,627,969 and 12,558,279 shares, respectively.
NOTE 8. SUBSEQUENT EVENT
In October 1996, the underwriters of the Company's secondary offering exercised
the over-allotment option in full and purchased from the Company an additional
487,500 shares of common stock at a price of $8.00 per share. As a result, the
Company received additional cash proceeds of approximately $3.7 million.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company develops, manufacturers, and markets wireline and wireless
switching, transmission and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The products
offered by the Company include those manufactured by the Company as well as
those manufactured by other companies. To support and complement its product
sales, the Company also provides its customers with a broad range of design,
manufacturing, testing, installation, repair and other value-added services.
The Company has recently completed strategic and financial
restructuring programs designed to strengthen its management team, reposition
the Company as a provider of telecommunications products, improve its financial
condition, reduce its operating costs and position the Company for future
growth. These programs were undertaken following the losses incurred by the
Company in the early 1990s, primarily due to a discontinued smart pay telephone
business, and to take advantage of the significant growth opportunities present
within the Company's existing customer base and related markets.
In November 1994, the Company began to rebuild its management team and
change its strategic focus by appointing a new Chairman of the Board. In
December 1994, three experienced telecommunications executives agreed to serve
on the Company's Board of Directors. Throughout 1995 and early 1996, as the
Company was changing from providing principally services to providing
telecommunications products and related services, the Company further
strengthened its management team by recruiting and hiring a new President and
Chief Operating Officer, Vice President of Business Development and Vice
President of Operations. These individuals, along with other key managers
recruited into the Company during this time frame, bring to the Company
significant experience in manufacturing and marketing telecommunications
equipment.
During 1995 and early 1996, the Company acquired three businesses (the
"Acquisitions") in an effort to broaden its line of switching, transmission and
access products, enhance its product development capabilities and strengthen its
technical base. Effective May 1995, the Company acquired AIT, a full service
provider of Northern Telecom switching systems, add-on frames and related
circuit boards. Effective October 1995, the Company acquired Westec, a provider
of wireless products and services primarily to the cable television industry.
Effective January 1996, the Company acquired Sunrise, a manufacturer of
intelligent transmission and access products.
The Company realized significant improvements in its sales and
operating results during 1995 and the nine months ended September 30, 1996,
primarily as a result of the three acquisitions and the sale of DSC
Communications Corporation ("DSC") access products under a distribution
agreement entered into in September 1995. The Company's total sales increased by
97.2% in 1995 and 126.8% in the first nine months of 1996 when compared to 1994
and the first nine months of 1995, respectively. As the Company's sales mix
shifted from a majority of service revenues in 1994 (81.8% of total sales) to a
majority of product sales in 1995 and the first nine months of 1996 (57.7% and
66.4% of total sales, respectively), the Company's gross profit margin increased
from 12.9% in 1994 to 21.1% in 1995 and 28.1% in the first nine months of 1996.
As a percentage of total sales, the Company's operating income (loss) before
special charges increased from (8.5%) in 1994 to 8.3% in 1995 and 13.3% in the
first nine months of 1996. Management will continue to seek further improvements
in gross profit margin over time as the Company's product offerings include more
internally developed and acquired products containing proprietary technology.
<PAGE>
Since January 1, 1995, the Company has significantly strengthened its
balance sheet through improved operating results, $10 million in new capital
from private placements of the Company's common stock, and a recently completed
secondary public stock offering that provided the Company approximately $25.5
million in cash proceeds. The Company has used this improved financial strength
to facilitate acquisitions and support the working capital requirements
associated with the Company's growth. The Company's working capital and
stockholders' equity have increased from $2.3 million and $1.2 million,
respectively, at December 31, 1994 to $35.6 million and $45.7 million,
respectively, at September 30, 1996.
Results of Operations
The following table sets forth items in the Company's Consolidated
Statements of Operations as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
------------- ----------- ------------ ------------
Sales of products 65.4% 50.9% 66.4% 42.8%
Service revenues 34.6 49.1 33.6 57.2
------------- ----------- ------------ ------------
Total sales 100.0 100.0 100.0 100.0
Cost of products sold 38.7 28.9 42.9 26.4
Cost of services 29.0 43.4 29.0 50.7
------------- ----------- ------------- ------------
Total cost of sales 67.7 72.3 71.9 77.1
------------- ----------- ------------- ------------
Gross profit 32.3 27.7 28.1 22.9
Engineering and development 2.0 2.5 1.7 2.8
Selling, general and administrative 13.5 14.1 12.0 13.1
Amortization of goodwill 1.1 0.7 1.1 0.4
Special charges --- --- --- 6.1
------------- ----------- ------------ ------------
Operating income 15.7 10.4 13.3 0.5
Interest expense 0.8 1.6 0.8 2.2
Interest and other income (0.2) (0.6) (0.5) (0.3)
------------- ----------- ------------- -------------
Income (loss) before income taxes 15.1 9.4 13.0 (1.4)
Income taxes 1.9 --- 1.3 ---
------------- ----------- ------------- -------------
Net income (loss) 13.2% 9.4% 11.7% (1.4)%
============= =========== ============= =============
</TABLE>
<PAGE>
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Sales. Total sales increased $5,758,000, or 86.5%, to $12,419,000 in
the third quarter of 1996 from $6,661,000 in the third quarter of 1995. The
percentage of product sales to total sales increased to 65.4% in the third
quarter of 1996 from 50.9% in the third quarter of 1995.
Product sales increased $4,733,000, or 139.5% , to $8,125,000 in the
third quarter of 1996 from $3,392,000 in the third quarter of 1995. The increase
related primarily to an additional $3.6 million of switching products sold by
AIT and $1.0 million of transmission and access products sold by Westec and
Sunrise, both of which were acquired subsequent to September 30, 1995.
Service revenues increased $1,026,000, or 31.4%, to $4,294,000 in the
third quarter of 1996 from $3,268,000 in the third quarter of 1995. The increase
related to approximately $464,000 of Westec repair revenues following its
acquisition and $547,000 of increased circuit board repair revenues, primarily
from a new repair agent contract executed with Century Telephone in July 1995.
Gross Profit. Gross profit increased $2,174,000, or 117.9%, to
$4,018,000 in the third quarter of 1996 from $1,844,000 in the third quarter of
1995. Gross profit margin increased to 32.3% in the third quarter of 1996 from
27.7% in the third quarter of 1995. The improved performance resulted from the
86.5% increase in total sales and the change in sales mix to products, which
generally carry a higher gross profit margin than service revenues.
Gross profit margin on products sold declined to 40.8% in the third
quarter of 1996 from 43.3% in the third quarter of 1995. The reduction is a
result of $300,000 in high margin AIT revenues reported in the third quarter of
1995 for product shipments to Madagascar. Excluding these revenues, gross profit
margin for products sold in the third quarter of 1995 were 39.2%.
Gross profit margin on service revenues increased to 16.4% in the third
quarter of 1996 from 11.5% in the third quarter of 1995, primarily due to
increased gross profit margins generated by Westec's wireless equipment repair,
which was acquired subsequent to September 30, 1995, and improved margin
performance from the Company's other service operations.
Engineering and Development. Engineering and development expenses
increased $78,000, or 47.1%, to $243,000 in the third quarter of 1996 from
$165,000 in the third quarter of 1995. The increase in expenses was attributable
to the research and product development activities acquired in connection with
the acquisition of Sunrise and the formation of a corporate product development
group during the third quarter of 1996. As a result of the 86.5% increase in
total sales, engineering and development expenses decreased to 2.0% of total
sales in the third quarter of 1996 from 2.5% of total sales in the third quarter
of 1995.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $740,000, or 78.8%, to $1,679,000 in the third
quarter of 1996 from $939,000 in the third quarter of 1995. The increase
primarily related to expenses associated with the operations of the
Acquisitions, additional salary and related costs for the Company's Chairman
(who took no salary during 1995) and its new President, and the Company's
establishment of a dedicated international sales and marketing group and
corporate business development function in the first quarter of 1996. As a
percentage of total sales, selling, general and administrative expenses
decreased to 13.5% in the third quarter of 1996 from 14.1% in the third quarter
of 1995.
Amortization of Goodwill. Amortization of goodwill increased $98,000 to
$142,000 in the third quarter of 1996 from $44,000 in the third quarter of 1995,
as a result of the goodwill acquired in connection with the Acquisitions.
Operating Income. Operating income increased $1,258,000, or 180.9%, to
$1,954,000 in the third quarter of 1996 from $696,000 in the third quarter of
1995. Operating income margin increased to 15.7% in the third quarter of 1996
from 10.4% in the third quarter of 1995.
Interest Expense. Interest expense decreased $9,000, or 7.5%, to
$101,000 in the third quarter of 1996 from $110,000 in the third quarter of
1995. The decrease resulted from a reduction in the average debt outstanding of
approximately $540,000 in the third quarter of 1996 as compared to the third
quarter of 1995.
Interest and Other Income. Interest and other income decreased $16,000
to $25,000 in the third quarter of 1996 from $41,000 in the third quarter of
1995 primarily due to the reduction in notes receivable from the former owner of
AIT.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Sales. Total sales increased $20,338,000, or 126.8%, to $36,376,000 in
the first nine months of 1996 from $16,038,000 in the first nine months of 1995.
The percentage of product sales to total sales increased to 66.4% in the first
nine months of 1996 from 42.8% in the first nine months of 1995.
Product sales increased $17,300,000, or 252.1%, to $24,162,000 in the
first nine months of 1996 from $6,862,000 in the first nine months of 1995. The
increase related primarily to an additional $10.9 million of switching products
sold by AIT, which was acquired in May 1995, and $3.0 million of transmission
and access products sold by Westec and Sunrise, both of which were acquired
subsequent to September 30, 1995. Sales in the first nine months of 1996 also
included $4.7 million of DSC access products sold pursuant to a distribution
agreement entered into in the third quarter of 1995.
Service revenues increased $3,037,000, or 33.1%, to $12,214,000 in the
first nine months of 1996 from $9,177,000 in the first nine months of 1995. The
increase related to approximately $1.2 million of Westec repair revenues
following its acquisition and $1.4 million of increased circuit board repair
revenues generated by the introduction of new repair services and a new repair
agent contract executed with Century Telephone in July 1995.
<PAGE>
Gross Profit. Gross profit increased $6,527,000, or 177.4%, to
$10,206,000 in the first nine months of 1996 from $3,679,000 in the first nine
months of 1995. Gross profit margin increased to 28.1% in the first nine months
of 1996 from 22.9% in the first nine months of 1995. The improved performance
resulted from the 126.8% increase in total sales and the change in sales mix to
products, which generally carry a higher gross profit margin than service
revenues.
Gross profit margin on products sold decreased to 35.3% in the first
nine months of 1996 from 38.2% in the first nine months of 1995, primarily as a
result of the sale of DSC access products during the first half of 1996.
Excluding the sale of these distributed DSC products, gross profit margin for
products sold was 41.4%. The improved margin performance on non-distributed
products related primarily to the $10.9 million or 311.4% increase in switching
products sold by AIT.
Gross profit margin on service revenues increased to 13.6% in the first
nine months of 1996 from 11.5% in the first nine months of 1995. This
improvement related primarily to the economies of scale associated with the
33.1% increase in service revenues and reduced depreciation expense of
approximately $225,000 resulting from the special charge taken in the second
quarter of 1995 to write down the net book value of certain fixed assets of the
Company's repair operations.
Engineering and Development. Engineering and development expenses
increased $166,000, or 36.8%, to $618,000 in the first nine months of 1996 from
$452,000 in the first nine months of 1995. The increase in expenses was
attributable to the research and product development activities acquired in
connection with the acquisition of Sunrise, and the formation of a corporate
product development function during the third quarter of 1996. As a result of
the 126.8% increase in total sales, engineering and development expenses
decreased to 1.7% of total sales in the first nine months of 1996 from 2.8% of
total sales in the first nine months of 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2,261,000, or 107.3%, to $4,368,000 in the
first nine months of 1996 from $2,107,000 in the first nine months of 1995. The
increase primarily related to expenses associated with the operations of the
Acquisitions, additional salary and related costs for the Company's Chairman
(who took no salary during 1995) and its new President, and the Company's
establishment of a dedicated international sales and marketing group and
corporate business development function in the first quarter of 1996. As a
percentage of total sales, selling, general and administrative expenses
decreased to 12.0% in the first nine months of 1996 from 13.1% in the first nine
months of 1995.
Amortization of Goodwill. Amortization of goodwill increased $297,000
to $364,000 in the first nine months of 1996 from $67,000 in the first nine
months of 1995 as a result of the goodwill acquired in connection with the
Acquisitions.
<PAGE>
Special Charge. In the second quarter of 1995, the Company recorded a
one-time charge of $980,000, primarily for the write-down of test equipment and
related tooling used in certain repair operations. As a result of a decline in
analog circuit board repair revenues, the shift in strategic focus to product
sales, new digital repair services and programs offered by the Company, the
acquisition of AIT and other market considerations, management elected to
significantly write-down the net book value of certain test equipment, tooling,
dies and diagnostic programs used to repair analog telecommunications equipment.
Operating Income. Operating income increased $4,782,000 to $4,855,000
in the first nine months of 1996 from $73,000 in the first nine months of 1995.
Operating income margin increased to 13.3% in the first nine months of 1996 from
0.5% in the first nine months of 1995.
Interest Expense. Interest expense decreased $47,000, or 13.4%, to
$309,000 in the first nine months of 1996 from $356,000 in the first nine months
of 1995. The decrease resulted from a reduction in the interest rate on the
Company's bank debt due to the lender's reinstatement of a Libor-based interest
rate option in July 1995 and an additional one percentage point reduction
obtained with the Company's new bank agreement in March 1996.
Interest and Other Income. Interest and other income increased $130,000
to $183,000 in the first nine months of 1996 from $53,000 in the first nine
months of 1995 due to interest earned on notes receivable from stockholders, the
note receivable from the former owner of AIT and the Company's invested cash
balances. As of March 31, 1996, the notes receivable from stockholders were paid
in full.
<PAGE>
Liquidity and Capital Resources
Overview. The Company has traditionally financed its operations and
growth through private placements of equity, the exercise of stock warrants and
options and bank loans from its primary lender. With the significant increase in
total sales and net income in 1995 and the first nine months of 1996, cash flows
from operations are also becoming a primary cash resource for the Company.
In October 1996, the Company received approximately $26 million in
cash from the sale of 3,487,500 shares of its common stock in a secondary
public offering at a price of $8.00 per share. In October 1996, the Company used
$3,875,000 of the net proceeds to pay off all debt owed to its bank under the
Company's term loan. In consideration of the repayment of the amounts borrowed
under the term loan, the Company's primary lender committed to increase the
amount available to the Company under its revolving line of credit from $6
million to $10 million. The Company intends to use the remaining net proceeds
from the offering for the acquisition of businesses and technology licenses and
other strategic initiatives related to the growth and development of the
Company's telecommunications products business and for general corporate
purposes, including new product development, the expansion of domestic and
international sales and marketing efforts and working capital.
Cash management is a key element of the Company's operating philosophy
and future strategic plans. Acquisitions to date have been structured to
minimize the cash element of the purchase price and ensure that appropriate
levels of cash are available to support the increased product development,
marketing programs and working capital normally associated with the growth
initiatives of acquired businesses. The 1996 Salary Incentive Program discussed
below is another example of the Company's efforts to effectively manage its cash
position as cash payments related to certain salary costs are not made until
sufficient pre-tax profits and accompanying cash flow are generated by the
Company.
Operating Activities. Cash generated by operating activities increased
$2,738,000 to $1,540,000 in the first nine months of 1996 from $(1,198,000) in
the first nine months of 1995 primarily as a result of the improved net income
performance of the Company.
Accounts receivable decreased $1,364,000, or 14.1%, to $8,285,000 at
September 30, 1996 from $9,649,000 at December 31, 1995. Average day sales
outstanding at September 30, 1996 and December 31, 1995 were 49 days.
Inventories at September 30, 1996 increased $6,563,000, or 144.3%, over
December 31, 1995 levels to $11,113,000. This increase was due primarily to a
planned $4.8 million build-up of AIT inventories to support the increased demand
for its switching products. The remaining increase related primarily to
inventories from the acquisition of Sunrise and an approximately $1.0 million
increase in electronic manufacturing inventories to service fourth quarter 1996
production backlog.
<PAGE>
Investing Activities. In the first nine months of 1996, the
Company invested $849,000 in capital expenditures, primarily for new
manufacturing and test equipment, computer network and related communications
equipment designed to upgrade the Company's management information systems and
facilitate the integration of new acquisitions and facility improvements at the
AIT subsidiary.
In March 1995, the Company entered into a four year agreement to lease
approximately $1 million of new surface mount manufacturing and automated
testing equipment. As part of the lease agreement, the Company paid
approximately $220,000 as a first payment and $24,000 for a security deposit.
Other Assets on the September 30, 1996 balance sheet includes approximately
$248,000 in prepaid rent relating to this lease.
From May 1995 to January 1996, the Company completed the Acquisitions,
which were designed to bring new wireline and wireless switching, transmission
and access products and technology into the Company. All of the Acquisitions
were relatively similar in structure in that the former owner(s) received
initial consideration consisting of a combination of Company common stock and
cash, as well as contingent consideration tied to the future profitability of
the ongoing business. The majority of the contingent consideration may be paid,
at the option of the Company, in the form of common stock valued at its
then-current market price. At the time it becomes highly probable that
contingent consideration will be earned, it will be measured and recorded on the
Company's balance sheet as additional goodwill and stockholders' equity.
To date, the Company has paid approximately $2.0 million in cash
consideration in connection with the Acquisitions, including $1,165,000 in
contingent consideration paid to the previous owner of AIT in 1996 as a result
of AIT's gross profit performance to date. The impact of these payments on the
Company's cash position has been partially offset by $805,000 in cash owned by
Sunrise on the effective date of its acquisition.
In July 1995, the Company loaned the sole stockholder of AIT $1.3
million in cash in connection with a secured promissory note executed as an
integral part of the acquisition of AIT. An additional $1,030,000 may be loaned
to the stockholder as specific fully reserved accounts receivable, notes
receivable and inventories on AIT's May 17, 1995 balance sheet are collected or
realized by the Company. Through September 30, 1996, the Company had loaned an
aggregate of $1,835,000 to the stockholder, of which $87,000 had not yet been
repaid.
In March 1996, the Company entered into a memorandum of understanding
with International Communication Technologies, Inc. ("ICT") and Eagle
Telephonics, Inc. ("Eagle") to manufacture, market and sell a new modular,
digital central office switch recently developed by Eagle. In July 1996, a
long-term technology licensing agreement was executed by all three parties. As
consideration for this license, the Company paid Eagle $250,000 in cash and
agreed to provide it $450,000 of manufacturing services, the majority of which
were performed prior to July 1996. In addition, the Company will pay ICT
certain royalties based on future sales of the switch by the Company. In August
1996, the Company agreed to prepay up to $270,000 in royalties related to future
switch sales at a significantly discounted royalty rate. As of September 30,
1996, $75,000 of prepayments had been made.
<PAGE>
The switch has been designed using advanced digital and microprocessor
based technology which permits the provision of complete telephony services
including custom features such as call waiting, call forwarding, call
conferencing, operator assistance, etc. The switch contains detailed billing
software and can also be configured as a Subscriber, Tandem or Gateway switch.
The current switch design serves applications up to 4,000 subscriber lines and
will be expandable to over 60,000 lines through future software enhancements.
Initially, the Company expects to market the switch in the International
marketplace due to its compatibility with international standards, flexible
programming, modular design, small physical size and tolerance of a wide range
of environmental conditions. The Company expects to begin selling and delivering
this switch in the first half of 1997.
Financing Activities. Since February 1993, the Company has raised
approximately $6.2 million from four placements of common stock to private
investors. During June 1995, 306,400 restricted shares of the Company's common
stock were sold in a private offering for a gross consideration of $766,000, or
$2.50 per share. Participants in the offering also received warrants to purchase
a total of 306,400 of additional shares of restricted common stock at $3.50 per
share on or prior to June 30, 2000. An additional 861,600 of shares and warrants
were sold through this offering in July 1995. Net proceeds from this private
placement were used for operational purposes and to complete the acquisition of
AIT.
In October 1995, the Company raised approximately $6.5 million through
the exercise of previously issued warrants and non-qualified options to purchase
shares of common stock. The vast majority of these securities related to
warrants issued in connection with the private offerings discussed above and
bank financing agreements. In exercising their warrants or options, investors
had the option of paying cash or executing an 8% interest bearing note made
payable to the Company. Approximately $2.4 million of the total proceeds was
paid in cash and $4.1 million through notes, which were paid in full as of March
31, 1996. There are currently no significant warrants or options outstanding to
purchase common stock except those issued under the Company's 1991 Stock Option
Plan and a Director warrant plan.
On September 25, 1996, the Company sold 3.0 million shares of its
common stock in a secondary public offering at a price of $8.00 per share. In
October 1996, the underwriters exercised the over-allotment option in full and
purchased from the Company an additional 487,500 shares of common stock at a
price of $8.00 per share. After deducting expenses, the Company received net
proceeds from the offering of approximately $25.5 million.
Net Operating Loss Carryforwards. As of December 31, 1995, the Company
had approximately $8.5 million in tax net operating loss carryforwards available
to reduce future taxable income through the year 2010. In addition, the Company
has capital loss carryforwards of approximately $1.2 million expiring in 1998.
Due to the exercise of certain stock options and warrants and the issuance of
common stock relating to the AIT and Westec acquisitions during 1995, the
Company may have undergone an ownership change under Internal Revenue Service
regulations which would limit the annual utilization of net operating loss
carryforwards. If an ownership change has occurred, the annual limitation would
currently be approximately $4.4 million. The Company began recording income tax
expense in the second quarter of 1996 under the assumption that the annual
limitation will be in effect for 1996.
<PAGE>
Salary Incentive Program. In December 1995, the Company implemented a
voluntary salary reduction program designed to improve the Company's cash flow
during 1996, further align the objectives of the Company's management and
salaried employees with those of the Company's stockholders and potentially
provide the Company with significant future tax deductions. Under the program,
61 of the Company's 66 salaried employees agreed to forego $849,254 of
their 1996 compensation in exchange for 424,627 non-qualified options to
purchase Common Stock at $7.00 per share, the then-current market value of the
Common Stock (i.e., one stock option for every $2 of compensation). These
options vest 15% for each quarter in 1996 that the Company achieves certain
levels of pre-tax profitability. The remaining vesting is tied to the Company
meeting specific operational objectives in 1996, including ISO 9002
certification, 25% internal sales growth, return to NASDAQ National Market
listing and upgraded information systems that will support accelerated growth.
Under the 1996 program, employees could participate to a maximum level
of 50% of their 1996 salaries. The Company's Chairman, President and Chief
Financial Officer each elected to forego 50% of their salary under this program.
This program also provides that if certain levels of pre-tax income before
special charges is achieved for 1996 in excess of that reported for 1995, a
partial or full repayment of salaries will be made in February 1997.
Compensation expense for this program will be recorded in 1996 as it becomes
highly probable a repayment will be earned. In connection with the Company's
pre-tax income performance in the first nine months of 1996, a $650,000 expense
was recorded for the pro-rata portion of the potential repayment of 1996
salaries under this program. The related liability is included in Accrued
Payroll and Benefits on the Company's September 30, 1996 balance sheet.
Summary. The Company's improved operating performance and completion of
the secondary public offering has significantly enhanced its financial strength
and improved its liquidity. Currently, the Company has no bank debt, over $20
million of cash and a $10 million revolving line of credit available. Management
believes that the Company has sufficient financial resources to support its
working capital requirements and business plans for at least the next 12 months.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Report on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ Mark A. Gergel
--------------------------------------------
Mark A. Gergel
Vice President and Chief Financial Officer
Dated: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THIRD
QUARTER FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000876279
<NAME> WORLD ACCESS, INC.
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
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