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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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 EAST PACES FERRY RD.
SUITE 2240, ATLANTA, GA 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 31, 1997 there were 17,663,007 shares of Common Stock
outstanding. The aggregate market value of the voting Common Stock held by
non-affiliates of the Registrant as of March 31, 1997, as based on the average
closing bid and ask prices, was approximately $99,508,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders are
incorporated into Part III.
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WORLD ACCESS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
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Page
PART I Number
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Item 1 Business ........................................................ 2
Item 2 Properties ...................................................... 9
Item 3 Legal Proceedings ............................................... 9
Item 4 Submission of Matters to a Vote of Security Holders ............. 9
Item 4.5 Executive Officers of the Registrant ............................ 10
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ............................................. 11
Item 6 Selected Financial Data ......................................... 12
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 13
Item 8 Financial Statements ............................................ 22
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................ 42
PART III
Item 10 Directors and Executive Officers of the Registrant .............. 42
Item 11 Executive Compensation .......................................... 42
Item 12 Security Ownership of Certain Beneficial Owners and Management .. 42
Item 13 Certain Relationships and Related Transactions .................. 42
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ........................................................ 43
</TABLE>
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PART I
ITEM 1 - BUSINESS
OVERVIEW
The Company develops, manufactures and markets wireline and wireless
switching, transport and access products primarily for the United States,
Caribbean Basin and Latin American telecommunications markets. The Company's
products allow telecommunications service providers to build and upgrade their
central office and outside plant networks in order to provide a wide array of
voice, data and video services to their business and residential customers. The
Company offers digital switches, intelligent multiplexers, protection switching
equipment, digital loop carriers, microwave and millimeterwave radio equipment
and other wireless communications products. The products offered by the Company
include those manufactured by the Company as well as those manufactured by
original equipment manufacturers ("OEMs"). 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 believes that it is well positioned to take advantage of the
technological innovations, rapid industry growth and increased competition
among the Company's customers that is expected to occur in the
telecommunications industry over the next several years. The Company's
objective is to continue to broaden its offering of wireline and wireless
switching, transport and access products and its geographic market coverage to
become a preferred provider of telecommunications products and related services
to the Regional Bell Operating Companies ("RBOCs"), other local exchange
carriers, inter-exchange carriers, competitive access providers, cable
television companies and other telecommunications service providers expected to
enter the industry.
INDUSTRY BACKGROUND
The global telecommunications industry has undergone significant
transformation and growth in recent years due to continued domestic
deregulation, technological innovation and the growth in international markets.
In addition, business and residential demand for voice, data and video services
has increased the need for additional systems capacity and network bandwidth to
accommodate the provision of such services by telecommunications providers. The
Company believes that these market forces will intensify in the foreseeable
future and that an increased number of telecommunications service providers, the
availability of new services and strong international demand for the deployment
of basic telephone service will provide the Company with extensive opportunities
to sell its wireline and wireless switching, transport and access products in
the United States and in international markets.
Domestic Deregulation
The number of telecommunications service providers continues to increase
as a result of the federal and state deregulation of the United States
telecommunications industry. Changes in federal and state regulations have
created the opportunity for a number of new network operators to enter the
market and have fostered competition between both new and established network
operators. The recently-enacted Telecommunications Act of 1996 permits local
and long distance telecommunications companies, cable television companies and
electric utility companies, subject to certain conditions designed to
facilitate local exchange competition, to compete with each other to provide
local and long distance telephony, data and video services.
To accommodate the demand for enhanced wireless services, the Federal
Communications Commission (the "FCC") auctioned additional spectrum for
wireless communications in 1995 and 1996, thus potentially doubling the number
of operators licensed to compete in each metropolitan statistical area from two
to four, and recently announced plans to auction additional spectrum in 1997.
Changes in FCC and certain state public utility commission regulations governing
interconnections have created opportunities for the RBOCs and other local
exchange carriers to provide services in markets and geographic regions in which
they traditionally have been prohibited. In addition, such changes have allowed
local exchange carriers, inter-exchange carriers, competitive access providers,
cable television companies and other telecommunications service providers to
enter these same markets and regions. The Company believes that the
Telecommunications Act of 1996, together with FCC and other government
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initiatives, will increase the demand for telecommunications systems and
services as network operators respond to the changing competitive environment
by constructing new or enhancing existing networks and increasing the available
bandwidth to meet customer demand for voice, data and video services.
Technological Innovation
In recent years, there have been a number of significant developments
relating to telecommunications technology, including the continuing
miniaturization of large scale integrated circuits, the development of lower
cost, higher capacity memory devices and microprocessors and new network
protocols such as spread spectrum Code Division Multiple Access ("CDMA"), which
are now available to offer improved performance and increased security. These
developments have lowered the cost of delivering multifunctional services
combining voice, data and video. In addition, new low cost, modular,
software-driven products (so-called "intelligent" products) can be readily
upgraded to provide additional revenue generating features such as call waiting,
call forwarding and caller-ID without having to undertake costly hardware
replacement. Moreover, the increasing use of wireless systems and technology
permits the more rapid deployment of telecommunications systems at lower costs
than traditional wireline networks.
These technological advances make it possible for products to be used
which facilitate the delivery of telecommunications services and create
new network configuration options. For example, Integrated Services Digital
Network ("ISDN") service allows for the dynamic allocation of bandwidth between,
and simultaneous transmission of, any combination of voice, data and video, and
individual call set-up permits users to easily designate and change the service
configuration. Other new advanced technologies include Asymmetrical Digital
Subscriber Line ("ADSL"), a communications technology which permits the
transmission of information at rates up to 50 megabits per second over existing
copper wires, and High Speed Digital Subscriber Line ("HDSL,") a communications
technology which permits the digital transmission of information over longer
distances without adding signal regenerator equipment. These new technologies
create additional demands for switching systems, intelligent multiplexers and
digital loop carriers. In addition, cable television companies are beginning to
expand beyond one-way broadcast to provide interactive services using high-speed
cable modems and have announced plans to provide telephony and high speed data
services.
Growth in International Markets
The Company believes that international markets represent significant
opportunities for growth, particularly in Latin America, the Caribbean Basin
and other developing areas. According to industry sources, a small percentage
of businesses and residences throughout Latin America have basic telephone
service. For example, of the estimated 11 million people in Ecuador,
approximately 300,000 have basic telephone service. In addition, advances in
radio and antenna technology make it feasible to provide basic communications
access with wireline quality without the construction cost and obstacles
associated with establishing a wireline grid, thereby further encouraging the
deployment of telecommunications networks in developing countries. The
governments of a number of developed and developing countries have privatized
their state-owned telecommunications service providers and have granted
licenses to new network operators to compete with them. In most instances, as
part of the privatization, these governments have imposed service requirements
on all network operators, resulting in an acceleration of capital expenditures
on new or expanded network systems.
PRODUCTS AND SERVICES
The Company offers wireline and wireless switching, transport and access
products for the worldwide telecommunications marketplace. These products allow
telecommunications service providers to build and upgrade their networks to
provide a wide range of voice, data and video services to business and
residential customers. To date, the majority of the products sold by the
Company has been switching and access products manufactured by OEMs, including
Northern Telecom and DSC Communications Corporation ("DSC"). Through
acquisitions, technology license agreements and internal development, the
Company expects to manufacture an increasing proportion of its products in the
future.
Switching Products
The Company markets a broad range of digital telephone switching products
that recognize the dialed digits, route calls, complete calls and provide
billing records. These products include switches used for local, tandem,
combination local and tandem, toll, combination toll and tandem and cellular
applications. The switches offered by the Company have line capacities ranging
from 100 to 120,000 subscribers and 30 to 60,000 inter-exchange trunks.
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Switching products historically offered by the Company have been primarily
developed and manufactured by OEMs, including Northern Telecom and AT&T. These
products include complete switching systems as well as add-on frames, line
cards and modified circuit boards for either newly constructed networks or
upgrades to existing networks.
Pursuant to a long-term technology license agreement entered into in July
1996, the Company has recently started to manufacture and test its own
microprocessor-based, modular, digital central office switch, the World Access
Compact Digital Exchange(TM) ("CDX") switch. The CDX switch employs extensive
large scale integrated circuit technology, which permits the provision of
advanced telephony services such as call waiting, call forwarding and
conference calling, and requires reduced power and floorspace compared with
existing products. The current switch design serves applications up to 4,000
subscriber lines and is expandable to over 60,000 lines through future software
enhancements. The CDX switch is targeted for use in the international
marketplace due to its compatibility with international standards, "plug and
play" installation features and tolerance of a wide range of environmental
conditions.
In March 1997, the Company shipped its first CDX switch to Empresa
Hondurena De Telecomunicaciones ("Hondutel") under a first office application
agreement. Hondutel has agreed to test the switch against predefined
performance measurements during the second quarter of 1997. The sales price of
this initial shipment will be paid by Hondutel at the end of the successful
test period. The Company expects to begin selling and delivering the CDX
switch on a broader scale in the second half of 1997, although there can be no
assurance that the Company will meet this schedule or that the Company will
generate material sales from this switch.
Current users of the Company's switching products are primarily local
exchange carriers, inter-exchange carriers, competitive access providers and
other telecommunications service providers. The Company intends to expand its
current customer base for switching products by actively marketing its
switching products to new network providers, principally in Latin America and
the Caribbean Basin, and within the United States to private network users.
Transport Products
The Company develops, manufactures and markets a variety of wireline and
wireless transport products, which are used for high capacity connectivity
between points within a communications network. These products are primarily
digital and provide for the movement of any combination of voice, data and
video traffic across wireline or wireless media. The Company's transport
products include intelligent multiplexers (a device which combines or
aggregates several channels or linkages carrying voice or data signals into a
higher speed link), protection switching equipment (which protects a voice and
data link against failure by rerouting circuits to maintain continuity),
mini-repeater housings (a housing used to protect electronic repeaters from the
elements), frame controllers (used to permit encrypted networks to use
commercial transmission facilities), asynchronous and fractional data cards,
microwave and millimeterwave radio equipment and sophisticated high speed
modems used to carry voice and data in wireline or wireless networks. The
Company's multiplexers, which include intelligent fractional T1 multiplexers
and fractional T2 multiplexers, include features such as local and remote
loopbacks, built-in bit error rate detection, line code selection and built-in
performance monitoring.
The Company's wireless transport products include radios using amplitude
or frequency modulation and spread spectrum technologies that provide data,
local area network, ethernet (a local area network used for connecting computer
equipment) and voice transmission over frequencies ranging from 900 MHZ to 31
GHZ. The Company also has recently developed antenna technology applications
that permit simultaneous voice and video transmission.
Current users of the Company's transport products are primarily an RBOC
and private network users, including mining and exploration companies
and colleges and universities. The Company intends to expand its current
customer base for transport products by increasing marketing efforts in
emerging international markets.
Access Products
The Company offers access products for the local loop (i.e., that portion
of the public telecommunications network which extends from the service
provider's switch to the individual home or business end-user). Historically, a
majority of the access products sold by the Company has been manufactured by
third parties. As a result of the acquisition of Sunrise Sierra, Inc. in January
1996, the Company now manufactures and markets a digital loop carrier (which
permits network operators to provide more reliable, basic and enhanced services
at a lower cost) and DS-3 telemetry equipment (used primarily by the military
for range communications applications to multiplex telemetry, digital video, T1,
local area network, wide area network and other signals into a DS-3 signal
transmitting
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at 45 megabits per second). The Company also offers a high speed coaxial modem
(used primarily by cable television companies to deliver voice or data at
speeds up to 10 megabits per second) and a point-to-multipoint wireless service
distribution system.
In the first quarter of 1997, the Company released a new access product,
the WX-5501 Remote POTS/Remote Universal Voice Grade ("RPOT/RUVG") line card.
The WX-5501 is compatible with line cards utilized in the Lucent Technologies
SLC(R) Series 5 loop carrier system, which is widely deployed in telephone
networks across the United States. The WX-5501 replaces the Company's
remanufactured OHT-51 line card, approximately 100,000 of which were sold
during 1992-1996. The Company is cautiously optimistic that the WX-5501, with
custom features fully designed and engineered by the Company, will become a
high volume product beginning in the second half of 1997.
In the first quarter of 1997, the Company also executed a technology
licensing agreement with TCSI Corporation ("TCSI") that grants the Company the
perpetual rights to incorporate TCSI's spread spectrum CDMA-based wireless
technology into World Access products sold throughout the world. Under the
terms of the agreement, the Company also has the rights to use the technology
covered by seven TCSI patents, all of which address digital data signals and
wireless communication systems. The Company currently intends to use this
technology as the platform for several new World Access products, most notably
its Wireless Local Loop-2000(TM) ("WLL-2000"), a fixed wireless point to
multi-point system offering toll quality telephone service to subscribers in
urban and suburban areas and remote communities. Operational prototype testing
of TCSI's CDMA-based technology and its integrated processor algorithms has
been completed to support the Company's intended product applications.
The Company currently estimates that commercial development of the
CDMA-based version of its WLL-2000 will take approximately nine to twelve
months, i.e. into the first quarter of 1998. To take advantage of existing
market opportunities, the Company has reached an agreement with another OEM to
private label its fixed wireless local loop product and exclusively market it
within certain Latin American countries. The first office application of this
product was shipped to Hondutel in March 1997 under terms and conditions
similar to those described above for the CDX switch. The CDX switch and
WLL-2000, for the first time provide the Company with an integrated family of
proprietary switching and wireless access products for the international market.
Current users of the Company's access products are primarily local
exchange carriers, inter-exchange carriers, competitive access providers, cable
television companies and the United States military. The Company intends to
expand its current customer base by actively marketing its access products to
new network providers, principally in Latin America and the Caribbean Basin.
Related Services
The Company differentiates itself from other providers of
telecommunications equipment by offering a full range of complementary design,
manufacturing, installation, testing and repair services. The Company also
offers its customers ongoing systems maintenance and monitoring services,
including asset management services, which allow customers to reduce their
investment in spare and surplus plug-in circuit boards by relying on the
Company's inventories and management information systems. By providing these
services, the Company believes it is better able to offer its customers more
comprehensive telecommunications solutions.
The Company repairs a broad range of switching and transmission plug-in
circuit boards originally manufactured by leading telecommunications companies
such as Lucent Technologies, Northern Telecom, DSC and Rockwell International.
The Company's electronic manufacturing services consist of the design,
engineering, manufacturing and testing of circuit boards, electromechanical
assemblies, subsystems and complete systems. The Company's wireless equipment
repair business, which was acquired by the Company as part of its acquisition
of Westec Communications, Inc., consists principally of the repair and upgrade
of amplitude modulation equipment typically used by cable television companies.
The Company's engineers also provide customers with a full range of support
services for wireless transmission equipment, including system design, site
survey, path calculations, installation and maintenance.
Other Products and Services
The Company's other products and services include the refurbishment and
upgrade of AT&T pay telephones to like-new condition and the sale of related
pay telephone products, such as stainless steel and custom logo vault doors,
handsets and volume amplifiers. To date, substantially all of these
refurbishment services and product sales
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have been provided or made to certain RBOCs, primarily Bell Atlantic, BellSouth
and SBC Communications (formerly Southwestern Bell).
SALES AND MARKETING
The Company's domestic sales and marketing group is comprised of 25
professionals who are divided into individual sales and marketing teams for
each of the Company's product lines and related services. Each team is
responsible for obtaining a thorough technical knowledge of its products or
services, soliciting new customers and maintaining relationships with existing
customers. Each team is supervised at the corporate level by the Company's Vice
President of Business Development, who coordinates the sales and marketing of
multi-product line sales and is responsible for advertising, trade show
appearances and other Company-wide marketing efforts. In connection with the
acquisitions of three companies during 1995 and 1996, the Company acquired
product sales professionals which bring technical product knowledge and
long-term customer relationships to the Company.
Although only approximately 2% of the Company's total sales for 1996 were
derived from international sales, the Company intends to focus an increased
amount of its sales and marketing efforts on emerging international markets,
especially in Latin America and the Caribbean Basin. In March 1996, the Company
formed a dedicated international sales and marketing group headed by an
experienced officer of the Company to pursue the sale of all of the Company's
products and services outside of the United States. Based primarily on previous
service sales to the international markets, the Company has already established
a network of agents and representatives covering 14 countries in the Caribbean
Basin and Latin America. These agents and representatives, whose compensation
consists primarily of commissions based on sales, are expected to actively
promote and market the Company's products and services and ensure that the
Company receives all appropriate bid tenders issued within their territory.
The Company's marketing strategy is to sell its newly-acquired or
developed switching, transport and access products, together with the switching
and access products the Company resells on behalf of third party OEMs, to its
existing base of service customers, which is comprised of over 200
telecommunications service providers operating in the United States, the
Caribbean Basin and Latin America. The Company will seek to supplement its
product offerings through distribution agreements and other strategic alliances
in order to provide complete telecommunications systems and related
infrastructure to new network providers in emerging international markets.
CUSTOMERS
The Company sells its products and services to over 200 telecommunication
service providers, including the RBOCs, other local exchange carriers,
inter-exchange carriers, competitive access providers, cable television
companies and other telecommunications service providers operating in the
United States, the Caribbean Basin and Latin America. The following table sets
forth a representative list of the Company's major customers and end-users.
<TABLE>
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Switching Products Transport Products Access Products Services
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Ameritech ADC Telecom Ameritech Alltel
Cable & Wireless Lockheed-Martin Bell Atlantic Bell Atlantic
GTE Octel BellSouth Bell South
Puerto Rico Telephone Pacific Bell Bosch Telecom Cablevision
SBC Communications Pacific Bell Century Telephone
Sprint-United U.S. Board of GTE
Thrifty Call Regents Puerto Rico Telephone
Vartec Telecom SBC Communications
TCI
</TABLE>
A small number of customers have accounted historically for a significant
percentage of the Company's total sales. For the year ended December 31, 1996,
Cable & Wireless accounted for 10.9% of the Company's total sales, and the
Company's top 10 customers accounted for 54.2% of total sales. For the year
ended December 31, 1995, on a pro forma basis to give effect to the acquisition
of AIT, Westec and Sunrise as if each had occurred on January 1, 1995,
Ameritech and BellSouth accounted for 18.2% and 12.0% of the Company's total
sales, respectively, and the Company's top 10 customers accounted for 59.7% of
total sales. The Company's customers typically are not obligated contractually
to purchase any quantity of products or services in any particular period.
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The Company expects its customer concentration to decrease in the future
as a result of the recent acquisitions of AIT, Westec and Sunrise, which sell
their products and services primarily to non-RBOC telecommunications service
providers. In addition, the Company expects its customer base to expand due to
the entrance of new service providers into the telecommunications markets, the
recent establishment of a dedicated international sales and marketing group and
the availability of the Company's new products, such as its CDX switch,
WLL-2000 and RPOTS/RUVG card.
MANUFACTURING, ASSEMBLY AND TEST
The Company provides a broad range of electronic manufacturing, assembly
and test services to support its product sales and its contract customers. The
majority of these support services are performed at the Company's Orlando,
Florida facility, where state-of-the-art manufacturing and test equipment is
maintained. Historically, this equipment has been used primarily to perform
contract manufacturing services for third parties, primarily to large
technology companies that require a high level of professional materials
management, quality "turn-key" manufacturing and complete electronic and
functional product testing.
In 1995, the Company significantly enhanced its assembly and test
capabilities through the acquisition of approximately $1.0 million of
new surface mount manufacturing and automated testing equipment. This equipment
includes a surface mount assembly line, including advanced "pick-and-place"
equipment and a 3-D vision screen printer. The equipment allows for the
placement of fine pitch (as low as 12 mil) electronic components at a rate of up
to 14,400 placements per hour. This equipment is currently operating at
approximately 50% of the line's capacity. The Company has also recently acquired
new board test systems that provide for high performance, automated testing of
analog, digital, mixed signal and memory devices resident on printed circuit
boards. When combined with the Company's existing testing equipment, the new
equipment gives the Company an extensive software library and technical capacity
to test integrated circuits, capacitors, resistors and related electronic
components, and ensures the quality of electronic products manufactured.
In connection with the acquisitions of AIT, Westec and Sunrise, the
Company acquired additional manufacturing, assembly and test capacity and
experience. At the Company's Lakeland, Florida facility, acquired as part of
the AIT acquisition, several Northern Telecom switches and frames are dedicated
to the testing of switching products sold and to the development and
verification of the configuration and integration of custom systems. In
addition, cable manufacturing equipment and expertise is utilized to
manufacture copper and fiber cables to specific customer installation
requirements.
At the Company's Scottsdale, Arizona facility, acquired as part of the
Westec acquisition, test and tuning equipment is used to manufacture and
service wireless products. The Company also maintains electronic manufacturing
and test equipment at its Livermore, California facility, acquired as part of
the Sunrise acquisition. In order to realize improvements in efficiency, product
costs and quality, the Company intends to integrate Sunrise's manufacturing
operations into the Company's Orlando operations during 1997.
The Company has an experienced Director of Quality who, along with a staff
of quality assurance professionals, oversees the quality of the Company's
products and services. In June 1996, the Company's repair operations (conducted
at its Orlando facility) were ISO 9002 certified by an independent registrar.
The Company believes its manufacturing operations comply with ISO standards and
expects them to be ISO certified by June 30, 1997.
In connection with its manufacturing and test services, the Company
generally provides warranties on its products and services ranging from three
months to five years. A one to two year warranty is typically provided on
switching, transport and access products.
The Company believes that it currently has the equipment, personnel and
experience necessary to efficiently manufacture high quality telecommunications
products in-house. This should assist the Company in controlling the costs,
quality and delivery of its products and allow the Company to bring new
products to market on a timely basis.
SUPPLIERS
Products manufactured by the Company typically require the procurement of
printed circuit boards, electronic components, cable assemblies, fabricated
metal, plastic parts and other materials, of which electronic components are
the most costly. The Company purchases electronic components from numerous
companies, including OEMs and parts distributors.
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The Company purchases substantially all of its components and other parts
from suppliers on a purchase order basis and does not maintain long-term supply
arrangements. Most of the components used in the Company's products and related
services are available from multiple sources. However, several components,
primarily custom hybrid integrated circuits, are currently obtained from a
single source. To date, the Company has been able to obtain adequate supplies
of these components. The Company's inability in the future to obtain sufficient
quantities of limited-source components, or to develop alternative sources
therefor, could result in delays in product delivery and increased component
cost, either of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Although the Company has started to manufacture its own switching
products, a majority of the switching products sold to date by the Company has
been new or used Northern Telecom switching systems, add-on frames and circuit
boards. The major sources for such products are deinstallations by primary
users, asset recovery operations of telephone companies, auctions by Northern
Telecom, repossessions by leasing companies and formal distribution or
consignment agreements. The Company currently has formal consignment
agreements with Ameritech, Southern New England Telephone and Century
Telephone, pursuant to which the Company inventories Northern Telecom, AT&T and
other OEM circuit boards for resale by the Company.
ENGINEERING AND DEVELOPMENT
Historically, the Company's engineering, development and technical support
efforts have focused on the repair of switching, transport and access products,
and on electronic manufacturing processes. The Company has significant
experience in developing automated test systems, diagnostic programs and repair
procedures for electronic circuitry typically found within telecommunications
switching equipment. The Company's engineers have also used their expertise and
experience to create new revenue sources for the Company by developing upgrades
and enhancements to existing products, including those developed and
manufactured by OEMs.
As of March 25, 1997, the Company's engineering and development group
consisted of 20 persons involved in product development, wireless
communications, repair service development, systems integration and
manufacturing process and operations support. These employees are organized into
teams corresponding to the Company's product lines, and each team is responsible
for providing technical support to the Company's customers and for developing
and enhancing products. The Company's internal engineering resources permit the
Company to continually reduce the production cost and improve the functionality
of its products.
Following the AIT, Westec and Sunrise acquisitions, the Company's
engineering efforts have become more focused on developing new switching,
transport and access products and enhancing the features and capabilities of
current products. The Company's engineers have significant experience in
switching systems configurations, transmission and access applications and
wireless technology such as spread spectrum, radio path calculations and
frequency licensing. The Company expects that, as it begins to manufacture and
sell more sophisticated telecommunications equipment, it will make more
significant investments in research and product development.
COMPETITION
The segments of the telecommunications industry in which the Company
operates are intensely competitive. The Company's ability to compete is
dependent upon several factors, including price, quality, product features and
timeliness of delivery. Many of the Company's competitors have significantly
more extensive engineering, manufacturing, marketing, financial and technical
resources than the Company. In addition, the Company currently competes with
several of its major suppliers, including Northern Telecom, with respect to the
sale of certain of its products, which may adversely affect its ability to
continue to obtain such products from these suppliers in the future.
The Company may face additional competition from the RBOCs, which have
historically been prohibited from manufacturing telecommunications equipment by
the terms of the Modification of Final Judgment entered into in connection with
the divestiture of the RBOCs by AT&T in 1984. The recently-enacted
Telecommunications Act of 1996 contains provisions that permit the RBOCs,
subject to satisfying certain conditions designed to facilitate local exchange
competition, to manufacture telecommunications equipment. In light of these
provisions, it is possible that one or more of the RBOCs, some of which are
major customers of the Company, may decide to manufacture telecommunications
equipment or to form alliances with other manufacturers. Any of these
developments could result in increased competition for the Company.
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In the sale of switching, transport and access products, the Company
competes with OEMs such as Northern Telecom, Lucent Technologies and DSC. The
Company believes it competes favorably against these companies by providing
high quality products, comprehensive support services, competitive prices and
shortened product delivery times. As the Company increases its international
sales efforts, the Company also expects to compete with established
telecommunications equipment companies such as Ericsson, Fujitsu, Siemens and
Alcatel Network Systems.
EMPLOYEES
As of March 25, 1997, the Company had 281 full-time employees, including
20 in engineering, 29 in sales and marketing, 95 in manufacturing,
warehousing and quality assurance, 104 in repair and refurbishment and 33 in
general management, finance, administration and other support services. From
time to time, the Company also uses part-time employees in its manufacturing
operations to accommodate changes in production levels. None of the Company's
employees are represented by any collective-bargaining agreements, and the
Company has never experienced a work stoppage. The Company considers its
employee relations to be good.
ITEM 2 - PROPERTIES
The Company's executive offices are located in Atlanta, Georgia, where it
occupies approximately 2,000 square feet under a lease expiring in October
1998. The Company leases certain office, manufacturing and warehouse
facilities under operating leases which expire at various dates during the
next three years. The Company's existing facilities are adequate for its
current operations, and the Company believes that convenient, additional
facilities are readily available should the business need arise. The following
provides a summary of the operating facilities currently leased by the Company.
<TABLE>
<CAPTION>
Location Square Footage Lease Expires
- -------- -------------- -------------
<S> <C> <C>
Orlando, Florida.......................................... 54,000 November 1998
Lakeland, Florida......................................... 32,000 June 1997
Dallas, Texas............................................. 27,000 July 1999
Livermore, California..................................... 20,000 December 1998
Scottsdale, Arizona....................................... 11,000 October 1999
South Bend, Indiana....................................... 11,000 July 1997
-------
155,000
=======
</TABLE>
ITEM 3 - LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings
relating to claims arising in the ordinary course of its business. The Company
is not a party to any such legal proceeding, the adverse outcome of which,
individually or in the aggregate, is expected to have a material adverse effect
on the Company's financial condition or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1996 to a vote of
security holders through the solicitation of proxies or otherwise.
9
<PAGE> 11
ITEM 4.5 EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages (at December 31, 1996), positions and
offices held and a brief account of the business experience during the past
five years of each executive officer of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Steven A. Odom..................................... 43 Chairman and Chief Executive Officer
Hensley E. West.................................... 51 President, Chief Operating Officer and Director
Mark A. Gergel..................................... 39 Executive Vice President and Chief Financial Officer
Scott N. Madigan .................................. 39 Vice President of Business Development
</TABLE>
Steven A. Odom has served as a director of the Company since October 1994.
In November 1994, he was appointed to the newly-created position of Chairman
of the Board. In August 1995, he became Chairman and Chief Executive Officer of
the Company. From 1983 to 1987, he founded and served as Chairman and Chief
Executive Officer of Data Contract Company, Inc. ("DCC"), a designer and
manufacturer of intelligent data PBX systems, pay telephones and diagnostic
equipment. From 1987 to 1990, he was Vice President of the Public
Communications Division of Executone Information Systems, Inc., a public
company that acquired DCC in 1987. Mr. Odom has also served as a director of
Telematic Products, Inc., a manufacturer of telephone central office equipment,
and Resurgens Communications Group, Inc., a provider of long distance operator
services that later merged with LDDS Communications, Inc., now known as LDDS
WorldCom.
Hensley E. West joined the Company in January 1996 as President and Chief
Operating Officer and was also elected a director in January 1996. From January
1994 to December 1995, he was Group Vice President for the Access Systems Group
of DSC, a publicly-held manufacturer of digital switching, transmission and
access telecommunications equipment. During his tenure with DSC from 1987 to
1995, he held six sales and general management positions, including Senior Vice
President of North American Sales from July 1993 to December 1993, Vice
President of the Access Products Division from March 1992 to July 1993, Vice
President of RBOC Sales from October 1991 to March 1992 and Vice President of
Business Development from March 1990 to October 1991. Prior to joining DSC, Mr.
West held general, engineering and sales management positions with California
Microwave, Inc., ITT Telecommunications Inc. and Western Electric Co.
Mark A. Gergel has served as Vice President and Chief Financial Officer
since he joined the Company in April 1992. From 1983 to March 1992, Mr. Gergel
held five positions of increasing responsibility with Federal-Mogul
Corporation, a publicly-held manufacturer and distributor of vehicle parts,
including International Accounting Manager, Assistant Corporate Controller,
Manager of Corporate Development and Director of Internal Audit. Prior to
joining Federal-Mogul, Mr. Gergel spent four years with the international
accounting firm of Ernst & Young. Mr. Gergel is a Certified Public Accountant.
Scott N. Madigan joined the Company in March 1996 as Vice President of
Business Development. Mr. Madigan has spent the last four years with DSC as
Vice President of Marketing for Litespan-2000, DSC's flagship access product,
and Vice President of Litespan International Operations and Wireless Access
Marketing. From 1987 to 1992, he held product and account management positions
with Northern Telecom, where he was responsible for identification, assessment
and development of new business opportunities for Northern Telecom's switching,
transmission and access products. Prior to 1987, Mr. Madigan held engineering
and operations management positions with California Microwave, Inc. and ITT
Telecommunications, Inc.
10
<PAGE> 12
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.01 par value per share (the "Common Stock")
has been quoted on the Nasdaq National Market under the symbol "WAXS" since
June 25, 1996. From March 2, 1995 through June 24, 1996, the Common Stock was
quoted on the Nasdaq SmallCap Market. From January 1, 1995 to March 1, 1995,
quotations of the Common Stock were available on the OTC Bulletin Board. The
following table sets forth the closing high, low and closing sales prices of
the Common Stock for the period March 2, 1995 through December 31, 1996, as
reported by Nasdaq, and the closing high and low bid prices for the Common
Stock for the period January 1, 1995 through March 1, 1995. The bid prices are
believed to be representative interdealer quotations, without retail markup,
markdown or commissions, and may not represent prices at which actual
transactions occurred.
<TABLE>
<CAPTION>
HIGH LOW CLOSE
---- --- -----
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
First Quarter.......................................................... $10 $7 1/2 $ 8
Second Quarter......................................................... 11 1/2 8 9 1/2
Third Quarter.......................................................... 10 1/8 7 1/2 8 1/2
Fourth Quarter......................................................... 9 1/4 6 7/8 8
YEAR ENDED DECEMBER 31, 1995
First Quarter.......................................................... $ 2 9/16 $1 3/4 $ 2 3/16
Second Quarter......................................................... 3 7/8 2 1/16 3 5/16
Third Quarter.......................................................... 4 7/8 3 3/16 5
Fourth Quarter......................................................... 8 1/2 4 7/8 7 1/2
</TABLE>
As of March 31, 1997, there were approximately 288 holders of record of the
Common Stock. This number does not include beneficial owners of the Common
Stock whose shares are held in the names of various dealers, clearing agencies,
banks, brokers and other fiduciaries.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock and currently intends to retain all future earnings to fund operations
and the continued development of its business. In addition, the Company's
credit facility with its primary lender contains restrictions limiting the
ability of the Company to declare or pay cash dividends. Any future
determination to declare and pay cash dividends will be at the discretion of
the Board of Directors and will be dependent on the Company's financial
condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.
11
<PAGE> 13
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
------------ ---------------- -------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Sales of products............................... $34,411 $17,384 $ 2,776 $ 3,320 $ 4,977
Service revenues................................ 16,589 12,754 12,507 12,441 11,969
------- ------- ------- ------- -------
Total sales................................... 51,000 30,138 15,283 15,761 16,946
Gross profit.................................... 14,995 6,363 1,976 2,605 3,543
Operating income (loss) from continuing
operations before special charges.............. 7,358 2,504 (1,293) (943) (1,098)
Operating income (loss) from continuing
operations .................................... 7,358 1,524 (1,293) (1,668) (2,004)
Income (loss) from continuing operations
before income taxes............................ 7,524 1,172 (1,883) (2,120) (3,298)
Net income (loss) (2)........................... 6,779 1,172 (1,883) (2,120) (9,069)
Income (loss) from continuing operations
per common share (3)........................... $ .46 $ .12 $ (.41) $ (.54) $ (1.44)
Weighted average shares outstanding (3)......... 14,424 9,083 4,631 3,765 2,293
BALANCE SHEET DATA:
Working capital (4)............................. $37,961 $10,222 $ 2,267 $ 1,783 $ 1,013
Total assets (4)................................ 60,736 28,515 8,943 8,752 12,163
Long-term debt ................................. --- 3,750 4,328 5,388 7,100
Total liabilities............................... 8,362 14,181 7,783 8,410 13,555
Stockholders' equity (4)........................ 52,374 14,334 1,160 342 (1,392)
</TABLE>
- ------------------------------
(1) Includes results of operations for the following businesses from their
respective dates of acquisition: AIT-May 17, 1995; Westec - October 2,
1995; and Sunrise - January 1, 1996.
(2) The Company recorded no income tax expense during 1992 through 1995 due
to net losses realized and the availability of federal income tax net
operating loss carryforwards. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
(3) Net income (loss) per common share and weighted average shares
outstanding are presented on a fully diluted basis. See Note A to
"Consolidated Financial Statements".
(4) In October 1996, the Company completed a $26.2 million secondary public
equity offering. See Note I to "Consolidated Financial Statements".
12
<PAGE> 14
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, manufactures and markets wireline and wireless
switching, transport 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, transport and
access products, enhance its product development capabilities and strengthen
its technical base. Effective May 1995, the Company acquired AIT, Inc, ("AIT")
a full service provider of Northern Telecom switching systems, add-on frames
and related circuit boards. Effective October 1995, the Company acquired
Westec Communications, Inc. ("Westec"), a provider of wireless products and
services primarily to the cable television industry. Effective January 1996,
the Company acquired Sunrise Sierra, Inc. ("Sunrise"), a manufacturer of
intelligent transport and access products. See "Business."
The Company realized significant improvements in its sales and operating
results during 1995 and 1996 primarily as a result of the Acquisitions and the
sale of access products under a short-term distribution agreement entered into
in September 1995. The Company's total sales increased by 97.2% in 1995 and
69.2% in 1996 when compared to 1994 and 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 1996 (57.7% and 67.5% of
total sales, respectively), the Company's gross profit margin increased from
12.9% in 1994 to 21.1% in 1995 and 29.4% in 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 14.4% in 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.
Since January 1, 1995, the Company has significantly strengthened its
balance sheet through improved operating results, a $26.2 million secondary
public equity offering, a private equity ofering and stock warrant exercises
that generated approximately, $10 million in new capital and a new five-year
$10 million credit facility. The Company has used this capital for acquisitions
and to 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 $38.0
million and $52.4 million respectively, at December 31, 1996.
13
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total sales represented by each line item in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales of products........................................... 67.5% 57.7% 18.2%
Service revenues............................................ 32.5 42.3 81.8
----- ----- -----
Total sales................................................ 100.0 100.0 100.0
Cost of products sold....................................... 42.1 42.0 14.4
Cost of services............................................ 28.5 36.9 72.7
----- ----- -----
Total cost of sales........................................ 70.6 78.9 87.1
----- ----- -----
Gross profit............................................... 29.4 21.1 12.9
Engineering and development................................. 1.7 1.9 3.8
Selling, general and administrative......................... 12.2 10.4 17.4
Amortization of goodwill.................................... 1.1 0.5 0.2
----- ----- -----
Operating income (loss) before special charges ............ 14.4 8.3 (8.5)
Special charges............................................. --- 3.3 ---
----- ----- -----
Operating income (loss).................................... 14.4 5.0 (8.5)
Interest and other income................................... 1.0 0.5 0.1
Interest expense............................................ (0.6) (1.6) (3.4)
Other expense............................................... --- --- (0.5)
----- ----- -----
Income (loss) before income taxes.......................... 14.8 3.9 (12.3)
Income taxes................................................ 1.5 --- ---
----- ----- -----
Net income (loss).......................................... 13.3% 3.9% (12.3)%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales
Total sales increased $19,862,000, or 69.2%, to 51,000,000 in 1996 from
$30,138,000 in 1995. The percentage of product sales to total sales increased
to 67.5% in 1996 from 57.7% in 1995.
Product sales increased $17,027,000, or 97.9%, to $34,411,000 in 1996 from
$17,384,000 in 1995. The increase related primarily to an additional $16.0
million of switching products sold by AIT, which was acquired in May 1995, and
$3.6 million of transport and access products sold by Westec and Sunrise, which
were acquired in October 1995 and January 1996, respectively. The increases
noted above were partially offset by a decrease in the sales of pay telephone
parts in 1996 due to a large one-time order for stainless steel vault doors
received in 1995.
Service revenues increased $3,834,000, or 30.0%, to $16,589,000 in 1996
from $12,755,000 in 1995. The increase related to $1.2 million of Westec repair
revenues following its acquisition, $1.7 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, and
increased contract manufacturing revenues of approximately $1.4 million.
14
<PAGE> 16
Gross Profit
Gross profit increased $8,632,000, or 135.7%, to $14,995,000 in 1996 from
$6,363,000 in 1995. Gross profit margin increased to 29.4% in 1996 from 21.1%
in 1995. The improved performance resulted from the 69.2% 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 increased to 37.6% in 1996 from 27.2%
in 1995. Excluding the sale of DSC distributed products, gross profit margin
for products sold in 1996 and 1995 was 41.9% and 33.4%, respectively. The
improved margin performance for non-distributed products related primarily to
the $16.0 million, or 207%, increase in switching products sold by AIT and $2.8
million of transport and access products sold by Sunrise since its January 1996
acquisition.
Gross profit margin on service revenues decreased to 12.5% in 1996 from
12.8% in 1995 despite the increase in service revenues. The Company's gross
profit margin for service revenues is subject to wide fluctuations depending on
the sales mix (i.e., circuit board repair and pay telephone refurbishment have
targeted gross profit margins significantly higher than those of electronic
manufacturing services). In addition, circuit board repair margins as a whole
have declined in recent years due to increased out-sourced repair revenues
associated with new "one-stop" repair agent programs.
Engineering and Development
Engineering and development expenses increased $315,000, or 54.6%, to
$892,000 in 1996 from $577,000 in 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 69.2% increase in total sales, engineering and development expenses
decreased to 1.7% of total sales in 1996 from 1.9% of total sales in 1995.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3,085,000, or
98.7%, to $6,210,000 in 1996 from $3,125,000 in 1995. The increase primarily
related to expenses associated with the operations of the recently acquired
businesses, 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
increased to 12.2% in 1996 from 10.4% in 1995.
Amortization of Goodwill
Amortization of goodwill increased $377,000 to $534,000 in 1996 from
$157,000 in 1995 as a result of the goodwill acquired in connection with the
Acquisitions.
Operating Income
Operating income increased $5,834,000 to $7,358,000 in 1996 from
$1,524,000 in 1995. As a percentage of total sales, operating income increased
to 14.4% in 1996 from 5.0% in 1995.
Interest and Other Income
Interest and other income increased $341,000 to $484,000 in 1996 from
$143,000 in 1995 due to the increased invested cash balances of the Company in
1996, resulting primarily from proceeds received from the $26.2 million
secondary public equity offering completed in October. See "Liquidity and
Capital Resources".
Interest Expense
Interest expense decreased $175,000, or 35.4%, to $319,000 in 1996 from
$494,000 in 1995. The decrease resulted primarily from a decrease in the
average debt outstanding in 1996. In October 1996, the Company paid off a $3.9
million term loan with its bank using proceeds received from the secondary
public offering. A reduction in the
15
<PAGE> 17
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
also contributed to the decrease in interest expense.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales
The Company's total sales increased $14,855,000, or 97.2%, to $30,138,000
in 1995 from $15,283,000 in 1994. The mix of total sales shifted significantly
during this period to 57.7% product sales in 1995 from 81.8%
service revenues in 1994.
Product sales increased $14,608,000, or 526.2%, to $17,384,000 in 1995
from $2,776,000 in 1994. The increased sales related primarily to $6.2 million
of switching systems, add-on frames and related circuit boards sold by AIT
since its acquisition in May 1995 and $5.8 million of access products sold
under the DSC distribution agreement.
Service revenues increased $248,000, or 2.0%, to $12,755,000 in 1995 from
$12,507,000 in 1994. The increase related to repair revenues of Westec acquired
in the fourth quarter of 1995.
Gross Profit
Gross profit increased $4,387,000, or 222.0%, to $6,363,000 in 1995 from
$1,976,000 in 1994, as a result of increases in total sales and product sales
as a percentage of total sales. Gross profit margin increased to
21.1% in 1995 from 12.9% in 1994.
Gross profit margin for products sold increased to 27.2% in 1995 from
20.9% in 1994. Excluding the sale of DSC distributed products, gross
profit margin for products sold in 1995 was 33.4%. The improved gross profit
margin resulted from the Company's increased product sales and, more
specifically, on switching products offered by the Company as a result of the
acquisition of AIT. Switching systems and add-on frames sold by AIT, which
represented a new product offering for the Company, carry significantly higher
gross profit margins than the modified circuit boards and pay telephone parts
that comprised most of the product sales in 1994.
Gross profit margin on service revenues increased to 12.8% in 1995 from
11.2% in 1994. The improvement in gross profit margin in 1995 related to an
approximately $1.0 million increase in higher margin refurbishment revenues
offset by a similar reduction in contract manufacturing service revenues.
Engineering and Development Expenses
Engineering and development expenses decreased $4,000, or 0.7%, to
$577,000 in 1995 from $581,000 in 1994. As a result of the 97.2% increase in
total sales in 1995, engineering and development expenses as a percentage of
total sales decreased to 1.9% in 1995 from 3.8% in 1994.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $467,000, or 17.6%,
to $3,125,000 in 1995 from $2,658,000 in 1994. The increased expenses were
primarily a result of the AIT and Westec operations. As a percentage of total
sales, selling, general and administrative expenses decreased to 10.4% in 1995
from 17.4% in 1994.
Amortization of Goodwill
Amortization of goodwill increased $127,000 to $157,000 in 1995 from
$30,000 in 1994 as a result of goodwill acquired in connection with the AIT and
Westec Acquisitions.
Special Charges
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
16
<PAGE> 18
significantly write-down the net book value of certain test equipment, tooling,
dies and diagnostic programs used to repair analog telecommunications
equipment. See "Note C to Consolidated Financial Statements".
Operating Income (Loss)
Operating income increased $2,817,000 to $1,524,000 in 1995 from a loss of
$1,293,000 in 1994. As a percentage of total sales, operating income (loss)
increased to 5.0% in 1995 from (8.5%) in 1994.
Interest and Other Income
Interest and other income increased $130,000 to $143,000 in 1995 from
$13,000 in 1994. The increased income was generated from interest earned on
notes receivable from stockholders, a note receivable from the former owner of
AIT and the Company's invested cash balances.
Interest Expense
Interest expense decreased $29,000, or 5.5%, to $494,000 in 1995 from
$523,000 in 1994. The decrease resulted from an approximately $800,000
reduction in average debt outstanding during the second half of 1995 and an
approximately two point reduction in the interest rate being paid on bank debt
due to the reinstatement of a LIBOR-based interest rate option by the Company's
primary lender in mid-1995.
Other Expenses
In December 1994, $110,000 of 8 1/2% debentures were converted into shares
of Common Stock at a reduced price of $1.25 per share. In connection with the
incremental shares issued, the Company recorded $80,000 of debt conversion
expense and a corresponding credit to stockholders' equity.
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 1996, cash flows from operations are also
becoming a primary cash resource for the Company.
In October 1996, the Company received $26,156,000 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 increased 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 form 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 1997 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
Operating Activities
Cash generated by operating activities increased $8,176,000 to $1,987,000
in 1996 primarily as a result of the net income earned in 1996. Cash
used by operating activities of $6,189,000 for the year ended December 31, 1995
resulted from the Company's need to finance increased accounts receivable and
inventories required to support its rapid growth in sales during the second half
of 1995.
17
<PAGE> 19
Accounts receivable increased $3,000 to $9,652,000 at December 31, 1996
from $9,649,000 at December 31, 1995. Accounts receivable increased $7,095,000,
or 277.9%, to $9,649,000 at December 31, 1995 from December 31, 1994, primarily
as a result of the Company's 235.7% increase in sales in the fourth quarter of
1995 compared to the fourth quarter of 1994. Average days sales outstanding at
December 31, 1996 were 50 days as compared to 49 and 53 days at December 31,
1995 and 1994, respectively.
Inventories increased $6,107,000, or 134.2%, to $10,657,000 at December
31, 1996 from $4,550,000 at December 31, 1995. This increase was due primarily
to a planned $4.5 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 $500,000
increase in electronic manufacturing inventories to service future production
demands. Inventories at December 31, 1995 increased $2,306,000, or 102.7%,
over December 31, 1994 levels primarily as a result of the AIT Acquisition.
Investing Activities
During 1996, the Company invested $1,176,000 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 required for connection with AIT's growth. During 1995
and 1994, the Company's capital expenditures of $280,000 and $240,000,
respectively, related primarily to facility improvements, new manufacturing
equipment and repair service development projects.
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. See "Business -- Manufacturing." 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 December 31, 1996 balance
sheet include approximately $247,000 in prepaid rent relating to this lease.
See "Note E to Consolidated Financial Statements".
From May 1995 to January 1996, the Company completed the Acquisitions,
which were designed to bring new wireline and wireless switching, transport and
access products and technology into the Company. All of the Acquisitions were
relatively similar in structure in that the former owner(s) received initial
consideration consisting of a combination of the Company's common stock and
cash, as well as contingent consideration tied to the future profitability of
the ongoing business. See "Note B to Consolidated Financial Statements". 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, the fair market value is measured and recorded on the Company's balance
sheet as additional goodwill and stockholders' equity.
Through December 31, 1996, the Company has paid approximately $1.9 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 during 1995 and the first six months
of 1996. The impact of these payments on the Company's cash position has been
partially offset by the addition of $805,000 in cash owned by Sunrise on its
effective date of 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 $1.0 million was loaned to the
shareholder as specific fully reserved accounts receivable, notes receivable
and inventories on AIT's May 17, 1995 balance sheet were collected or realized
by the Company in 1995 and 1996. As of December 31, 1996, the Company had
loaned an aggregate of $2,319,000 to the shareholder, of which $572,000
remained outstanding. See "Note B to Consolidated Financial Statements".
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 license agreement was executed by all three parties. As
consideration for this license, the Company agreed to pay Eagle $250,000 in cash
and provide it with $450,000 of manufacturing services, which have been
performed as of December 31, 1996. In addition, the Company agreed to pay ICT
certain royalties based on future sales of the switch by the Company. Other
Current Assets on the December 31, 1996 balance sheet include approximately
$313,000 of prepaid royalties related to anticipated future sales of the switch
at significantly discounted royalty rates.
18
<PAGE> 20
In December 1996, the Company executed a technology licensing agreement
with TCSI Corporation ("TCSI") that grants the Company the perpetual rights to
incorporate TCSI's spread spectrum Code Division Multiple Access-based ("CDMA")
wireless technology into World Access products sold throughout the world.
Under the terms of the agreement, World Access also has the rights to use the
technology covered by seven TCSI patents, all of which address digital data
signals and wireless communication systems. As total consideration for this
license, TCSI was paid $50,000 in cash and issued 25,000 shares of restricted
common stock. These shares had an initial fair value of approximately
$150,000. In addition to the 25,000 shares noted above, TCSI was issued 25,000
restricted shares of the Company's common stock. These shares were immediately
placed in escrow and will be released to TCSI upon the earlier of the first
commercial use of the technology by the Company or the expiration of the two
year period from the date of the license was executed.
Financing Activities
Since February 1993, the Company has raised approximately $6.2 million
from four placements of Company common stock to private investors. See "Note I
to Consolidated Financial Statements". Net proceeds from these private
placements were used for operational purposes and to complete the acquisition
of AIT in 1995.
During September and October 1996, 3,487,500 shares of Company common
stock were sold in a secondary public offering at a price of $8.00 per share.
The Company received $26,156,300 from this offering, net of a 6.5% underwriter
discount fee. The Company incurred additional expenses of approximately
$825,000 in connection with this offering.
Additional sources of cash flow have included bank debt and related
payment concessions. In July 1995, the Company received a new $2 million
line of credit from its primary lender through November 1997. In March 1996, the
Company's bank agreement was amended to increase the revolving line of credit
from $2 million to $6 million, reduce the interest rate by one point and extend
the bank's commitment until March 2001. The original $4 million term loan,
scheduled to mature in November 1997, was replaced with a new $4 million term
loan requiring graduated quarterly payments through March 2001. In October
1996, this term loan was paid in full out of proceeds from the secondary public
offering noted above. In December 1996, the Company's bank agreement was
further amended to increase the revolving line of credit from $6 million to $10
million. As of December 31, 1996, there was no debt outstanding on the
Company's line of credit.
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 Director warrant plans. See "Note J to Consolidated Financial
Statements".
Net Operating Loss Carryforward
As of December 31, 1996, the Company had approximately $4.0 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
Acquisitions, it has been assumed that the Company has undergone an ownership
change under Internal Revenue Service regulations which would limit the annual
utilization of net operating loss carryforwards. The annual limitation is
estimated to be approximately $4.4 million, and accordingly, the Company began
recording income tax expense in the second quarter of 1996.
Salary Incentive Program
In December 1996, the Company implemented a voluntary salary reduction
program designed to improve the Company's cash flow during 1997, 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, 72 exempt salaried employees agreed
to forego $826,038 of their 1997 compensation in exchange for 413,019
non-qualified options to purchase shares of the Company's common stock at $8.00
per share, its then-current market value (i.e., one stock option for every $2
of compensation). The vesting is
19
<PAGE> 21
tied to the Company meeting specific operational objectives in 1997, including
the Company achieving pre-defined levels of sales growth, ISO 9001 and 9002
certification, specific cash management objectives and upgraded information
systems that will support accelerated growth and improve corporate
communications.
Under the 1997 program, employees could participate to a maximum level of
50% of their 1997 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 are achieved for 1997, a partial or full repayment of
salaries will be made. Full repayment is based on the Company realizing $13
million of pre-tax income during 1997, a $5.5 million or approximately 75%
increase over 1996 actual pre-tax income. Compensation expense related to this
program will be recorded in 1997 when it becomes probable a repayment will be
earned.
Summary
The Company's improved operating performance and completion of the
secondary public equity offering has significantly enhanced its financial
strength and improved its liquidity. As of the date of this Report, the
Company has no bank debt, approximately $20.0 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.
Quarterly Operating Results
The following table presents unaudited quarterly operating results for
each of the Company's last eight quarters. This information has been prepared
by the Company on a basis consistent with the Company's audited consolidated
financial statements and includes all adjustments, consisting only of normal
recurring accruals, that the Company considers necessary for a fair
presentation in accordance with generally accepted accounting principles. Such
quarterly results are not necessarily indicative of future operating results.
This information should be read in conjunction with the Company's Consolidated
Financial Statements, and notes thereto, included elsewhere in this Report.
The following results include the results of operations for businesses
acquired from their respective dates of acquisition as follows: (a) AIT
effective as of May 17, 1995; (b) Westec effective as of October 2, 1995; and
(c) Sunrise effective as of January 1, 1996. Net income (loss) per share is
presented on a fully diluted basis.
Sales of switching, transport and access products are subject to the timing
of customer upgrade and new installation programs and, as a result, may
contribute to significant fluctuations in the Company's future quarterly sales.
The Company's operating income performance is also subject to significant
quarterly fluctuations based on the mix of product sales and service revenues.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products(l).................................... $1,556 $1,914 $3,392 $10,522 $ 8,354 $ 7,682 $8,125 $10,250
Service revenues........................................ 3,064 2,844 3,268 3,578 4,039 3,881 4,294 4,375
------ ------ ------ ------- ------- ------- ------ ------
Total sales............................................ 4,620 4,758 6,660 14,100 12,393 11,563 12,419 14,625
------ ------ ------ ------- ------- ------- ------ ------
Cost of products sold................................... 1,074 1,239 1,925 8,419 6,215 4,597 4,810 5,863
Cost of services........................................ 2,711 2,519 2,892 2,996 3,403 3,541 3,591 3,985
------ ------ ------ ------- ------- ------- ------ ------
Total cost of sales.................................... 3,785 3,758 4,817 11,415 9,618 8,138 8,401 9,848
------ ------ ------ ------- ------- ------- ------ ------
Gross profit........................................... 835 1,000 1,843 2,685 2,775 3,425 4,018 4,777
Engineering and development............................. 142 144 165 126 177 193 243 280
Selling, general and administrative..................... 557 611 938 1,019 1,277 1,430 1,679 1,824
Amortization of goodwill................................ 5 18 44 90 111 111 142 170
------ ------ ------ ------- ------- ------- ------ ------
Operating income (loss) before special charges......... 131 227 696 1,450 1,210 1,691 1,954 2,503
Special charges......................................... - 980 - - - - - -
------ ------ ------ ------- ------- ------- ------ ------
Operating income (loss)................................ 131 (753) 696 1,450 1,210 1,691 1,954 2,503
Interest expense........................................ 126 120 110 138 103 104 101 11
Interest and other income............................... (6) (5) (41) (90) (103) (55) (24) (303)
------ ------ ------ ------- ------- ------- ------ ------
Income (loss) before income taxes...................... 11 (868) 627 1,402 1,210 1,642 1,877 2,795
Income taxes............................................ - - - - - 224 234 287
------ ------ ------ ------- ------- ------- ------ ------
Net income (loss)...................................... $ 11 $ (868) $ 627 $ 1,402 $ 1,210 $ 1,418 $1,643 $2,508
====== ======= ====== ======= ======= ======= ====== ======
Net income (loss) per comma share...................... $ - $ (.13) $ .10 $ .15 $ .09 $ .10 $ .12 $ .15
====== ======= ====== ======= ======= ======= ====== ======
</TABLE>
20
<PAGE> 22
The following table sets forth the above unaudited quarterly financial
information as a percentage of total sales:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products(l)......................... 33.7% 40.2% 50.9% 74.6% 67.4% 66.4% 65.4% 70.1%
Service revenues............................. 66.3 59.8 49.1 25.4 32.6 33.6 34.6 29.9
----- ----- ----- ----- ----- ----- ----- -----
Total sales................................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of products sold........................ 23.2 26.1 28.9 59.7 50.1 39.8 38.7 40.1
Cost of services............................. 58.7 52.9 43.4 21.3 27.5 30.6 29.0 27.2
----- ----- ----- ----- ----- ----- ----- -----
Total cost of sales......................... 81.9 79.0 72.3 81.0 77.6 70.4 67.7 67.3
----- ----- ----- ----- ----- ----- ----- -----
Gross profit(2)............................. 18.1 21.0 27.7 19.0 22.4 29.6 32.3 32.7
Engineering and development.................. 3.1 3.0 2.5 0.9 1.4 1.7 2.0 1.9
Selling, general and administrative.......... 12.1 12.8 14.1 7.2 10.3 12.3 13.5 12.5
Amortization of goodwill..................... 0.1 0.4 0.7 0.6 0.9 1.0 1.1 1.2
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) before special charges 2.8 4.8 10.4 10.3 9.8 14.6 15.7 17.1
Special charges.............................. - 20.6 - - - - - -
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)..................... 2.8 (15.8) 10.4 10.3 9.8 14.6 15.7 17.1
Interest expense............................. 2.7 2.5 1.6 1.0 0.8 0.9 0.8 0.1
Interest and other income.................... (0.1) (0.1) (0.6) (0.6) (0.8) (0.5) (0.2) (2.1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes........... 0.2 (18.2) 9.4 9.9 9.8 14.2 15.1 19.1
Income taxes................................. - - - - - 1.9 1.9 2.0
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)........................... 0.2% (18.2)% 9.4% 9.9% 9.8% 12.3% 13.2% 17.1%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) The significant increase in product sales beginning in mid-1995 is a
result of the Acquisitions and approximately $10.4 million of distributed
DSC access products sold during the nine months ended June 30, 1996.
(2) Excluding the sales of distributed DSC products, gross profit margins for
the quarters ended December 31, 1995, March 31, 1996 and June 30, 1996
were 22.0%, 27.6% and 31.6%, respectively.
21
<PAGE> 23
ITEM 8 - FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Certified Public Accountants....................................... 23
Consolidated Balance Sheets as of December 31, 1996 and 1995............................. 24
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994............................................................................ 25
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994......................................................... 26
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994............................................................................ 27
Notes to Consolidated Financial Statements............................................... 28
</TABLE>
22
<PAGE> 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of World Access, Inc.,
In our opinion, the financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 43 present fairly,
in all material respects, the financial position of World Access,
Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are
the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Orlando, Florida
February 28, 1997, except as to Note M,
which is as of March 28, 1997
23
<PAGE> 25
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 22,480,082 $ 1,886,819
Accounts receivable 9,651,884 9,648,817
Inventories 10,657,412 4,549,721
Notes receivable from stockholders --- 3,879,728
Other current assets 3,533,615 688,367
------------- -------------
Total Current Assets 46,322,993 20,653,452
Property and equipment 2,657,661 2,062,749
Technology licenses 907,489 ---
Intangible assets 9,526,140 5,084,184
Other assets 1,321,683 714,848
------------- -------------
Total Assets $ 60,735,966 $ 28,515,233
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ --- $ 5,385,220
Accounts payable 3,756,722 3,648,734
Accrued payroll and benefits 1,605,840 731,659
Other accrued liabilities 2,999,187 665,585
------------- -------------
Total Current Liabilities 8,361,749 10,431,198
Long-term debt --- 3,750,000
------------- -------------
Total Liabilities 8,361,749 14,181,198
------------- -------------
Stockholders' Equity
Common stock, $.01 par value, 20,000,000 shares
authorized, 16,328,513 and 12,558,279 issued and
outstanding at December 31, 1996 and 1995, respectively 163,285 125,583
Capital in excess of par value 58,517,279 27,641,543
Note receivable from affiliate (571,634) (919,836)
Accumulated deficit (5,734,713) (12,513,255)
------------- -------------
Total Stockholders' Equity 52,374,217 14,334,035
------------- -------------
Total Liabilities and Stockholders' Equity $ 60,735,966 $ 28,515,233
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 26
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Sales of products $ 34,411,079 $ 17,383,904 $ 2,776,094
Service revenues 16,589,123 12,754,585 12,507,302
------------- ------------- -------------
Total Sales 51,000,202 30,138,489 15,283,396
Cost of products sold 21,485,696 12,657,218 2,195,588
Cost of services 14,519,917 11,118,411 11,111,942
------------- ------------- -------------
Total Cost of Sales 36,005,613 23,775,629 13,307,530
------------- ------------- -------------
Gross Profit 14,994,589 6,362,860 1,975,866
Engineering and development 891,959 577,299 580,917
Selling, general and administrative 6,210,324 3,124,559 2,657,710
Amortization of goodwill 533,919 157,394 29,776
Special charges --- 980,000 ---
------------- ------------- -------------
Total Operating Expenses 7,636,202 4,839,252 3,268,403
------------- ------------- -------------
Operating Income (Loss) 7,358,387 1,523,608 (1,292,537)
Interest and other income 484,211 142,632 13,071
Interest expense (318,987) (493,797) (523,011)
Debt conversion costs --- --- (80,109)
------------- ------------- -------------
Income (Loss) Before Income Taxes 7,523,611 1,172,443 (1,882,586)
Income taxes 745,069 --- ---
------------- ------------- -------------
Net Income (Loss) $ 6,778,542 $ 1,172,443 $ (1,882,586)
============= ============= =============
Net Income (Loss) Per Common Share:
Primary $ .46 $ .13 $ (.41)
============= ============= =============
Assuming Full Dilution $ .46 $ .12 $ (.41)
============= ============= =============
Weighted Average Shares Outstanding:
Primary 14,423,840 8,690,563 4,630,895
============= ============= =============
Assuming Full Dilution 14,423,840 9,083,260 4,630,895
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 27
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<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, 1994 $ 47,415 $12,098,179 $ --- $(11,803,112) $ 342,482
Net loss (1,882,586) (1,882,586)
Issuance of 1,656,000 shares in
private placements, net of expenses 16,560 1,953,440 1,970,000
Issuance of 93,634 shares upon
conversion of debentures 936 196,217 197,153
Issuance of 344,000 shares upon
conversion of bank debt 3,440 401,560 405,000
Issuance of 48,578 shares for stock
options and other transactions 486 73,357 73,843
Issuance of 34,567 shares for
matching contribution to 401K plan 345 53,680 54,025
----------- ----------- ------------- ------------ ------------
Balance at December 31, 1994 69,182 14,776,433 --- (13,685,698) 1,159,917
Net income 1,172,443 1,172,443
Issuance of 2,583,988 shares for stock
warrants and options 25,840 6,703,561 6,729,401
Issuance of 1,181,770 shares in private
placement, net of expenses 11,818 2,857,607 2,869,425
Issuance of 1,351,603 shares for
AIT acquisition 13,516 2,259,902 2,273,418
Issuance of 517,050 shares for
Westec acquisition 5,171 1,023,279 1,028,450
Note receivable from affiliate, net (919,836) (919,836)
Issuance of 5,596 shares for
matching contribution to 401K plan 56 20,761 20,817
----------- ----------- ------------- ------------ ------------
Balance at December 31, 1995 125,583 27,641,543 (919,836) (12,513,255) 14,334,035
Net income 6,778,542 6,778,542
Issuance of 3,487,500 shares for secondary
public offering, net of expenses 34,875 25,296,375 25,331,250
Issuance of 655,364 shares for
Sunrise acquisition 6,553 2,990,383 2,996,936
Release of 318,654 shares from
escrow for AIT acquisition 2,042,373 2,042,373
Repayment of loan by affiliate, net 348,202 348,202
Issuance of 50,000 shares for
technology license 500 137,020 137,520
Issuance of 246,906 shares for
stock options and warrants 2,469 377,629 380,098
Retirement of 672,419 escrowed
shares from 1991 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 December 31, 1996 $ 163,285 $58,517,279 $ (571,634) $ (5,734,713) $ 52,374,217
=========== =========== ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 28
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 6,778,542 $ 1,172,443 $ (1,882,586)
Adjustments to reconcile net income (loss) to net cash
from (used by) operating activities:
Depreciation and amortization 1,420,052 894,484 966,168
Provision for inventory reserves 197,409 162,345 353,855
Provision for bad debts 167,612 7,568 160,000
Stock contributed to 401K plan 34,861 19,317 52,877
Special charges --- 823,714 (312,233)
Debt conversion costs --- --- 80,109
Changes in operating assets and liabilities, net of effects
from businesses acquired:
Accounts receivable (258,167) (6,809,851) (1,188,911)
Inventories (5,988,385) (1,627,479) (155,063)
Accounts payable (46,669) 177,090 649,938
Accrued payroll and benefits 874,181 458,935 (76,993)
Other assets and liabilities (1,191,937) (1,467,554) 105,443
-------------- -------------- --------------
Net Cash From (Used By) Operating Activities 1,987,499 (6,188,988) (1,247,396)
-------------- -------------- --------------
Cash Flows From Investing Activities:
Acquisitions of businesses (436,791) (649,769) ---
Repayments by (loans to) affiliate 348,202 (1,502,336) ---
Technology licenses (528,050) --- ---
Expenditures for property and equipment (1,176,018) (279,571) (239,741)
Prepaid rent on equipment lease 7,450 (255,544) ---
-------------- -------------- --------------
Net Cash Used By Investing Activities (1,785,207) (2,687,220) (239,741)
-------------- -------------- --------------
Cash Flows From Financing Activities:
Net proceeds from secondary public offering 25,331,250 --- ---
Net proceeds from private equity offerings --- 2,835,000 1,850,000
Proceeds from exercise of stock warrants and options 4,251,487 2,961,207 37,293
Short-term debt borrowings (repayments) (5,510,220) 4,338,556 51,510
Long-term debt repayments (3,625,000) (125,000) (322,935)
Debt issue costs (56,546) --- ---
-------------- -------------- --------------
Net Cash From Financing Activities 20,390,971 10,009,763 1,615,868
-------------- -------------- --------------
Increase in Cash and Equivalents 20,593,263 1,133,555 128,731
Cash and Equivalents at Beginning of Year 1,886,819 753,264 624,533
-------------- -------------- --------------
Cash and Equivalents at End of Year $ 22,480,082 $ 1,886,819 $ 753,264
============== ============== ==============
Supplemental Schedule of Noncash Financing and
Investing Activities:
Issuance of common stock for businesses acquired $ 5,039,309 $ 3,301,868
Issuance of common stock for stockholder notes 3,828,194
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
Issuance of common stock for technology license 137,520
Conversion of debt to common stock $ 660,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 29
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: GENERAL
Nature of Business
World Access, Inc., formerly known as Restor Industries, Inc., and its
three wholly owned subsidiaries (the "Company") operate in one business
segment as a provider of systems, products and services to the global
telecommunications marketplace. The Company develops, manufactures and markets
wireline and wireless switching, transport and access products primarily for the
United States, Caribbean Basin and Latin American telecommunications markets.
The Company's products allow telecommunications service providers to build and
upgrade their central office and outside plant networks in order to provide a
wide array of voice, data and video services to their business and residential
customers. The Company offers digital switches, intelligent multiplexers,
protection switching equipment, digital loop carriers, microwave and
millimeterwave radio equipment and other wireless communications products. The
products offered by the Company include those manufactured by the Company as
well as those manufactured by original equipment manufacturers. 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.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Restor-AIT, Inc., Westec Communications,
Inc. and Sunrise Sierra, Inc., from their effective dates of acquisition (see
"Note B"). All material intercompany accounts and transactions are eliminated
in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The fair value estimates presented herein
are based on pertinent information available to management as of the respective
balance sheet dates. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements
since that date and current estimates of fair value may differ significantly
from the amounts presented herein.
The fair values of cash equivalents, accounts receivable, notes receivable
from stockholders, accounts payable and accrued expenses approximate the
carrying values due to their short-term nature. The fair values of long-term
debt are estimated based on current market rates and instruments with the same
risk and maturities and approximate the carrying value.
Significant Customers
A portion of the Company's total sales have been derived from significant
customers. During 1996, one customer accounted for 10.9% of total sales.
During 1995, two customers individually accounted for 22.7% and 15.1% of total
sales. Four customers individually accounted for 18.5%, 13.6%, 12.3% and 11.2%
of total sales in 1994.
Cash and Equivalents
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
28
<PAGE> 30
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful
accounts of $265,000, $208,000 and $231,000 at December 31, 1996, 1995 and
1994, respectively.
Notes Receivable from Stockholders
In October 1995, the Company received approximately $4.1 million in
interest bearing notes receivable from stockholders in connection with the
exercise of warrants (see "Note J"). As of March 29, 1996, the notes were paid
in full.
Earnings Per Share
The computation of earnings per share is based on the weighted average
number of common shares outstanding during the period plus, when their effect
is dilutive, common stock equivalents consisting of shares subject to stock
options and warrants. A total of 401,267 and 895,744 shares of common stock for
the years ended December 31, 1996 and 1995, respectively, held in escrow from
the Company's initial public offering (see "Note I"), the Westec and Sunrise
Mergers (see "Note B") and the TCSI license agreement (see "Note F"), were
excluded from the earnings per share calculations because the conditions for
release of shares from escrow had not been satisfied.
Reclassifications
Certain items in the prior year financial statements have been
reclassified to conform to the current presentation.
NOTE B: ACQUISITIONS
AIT Acquisition
On May 17, 1995, the Company entered into an agreement to acquire AIT,
Inc. ("AIT"), a Lakeland, Florida based provider of new and used Northern
Telecom switching systems and related circuit boards to the telecommunications
industry. On July 11, 1995, the transaction was completed in its final form
whereby AIT was merged with and into Restor-AIT, Inc., a wholly-owned
subsidiary of the Company (the "AIT Merger"). In connection with the AIT
Merger, the sole stockholder of AIT received 685,970 restricted shares of the
Company's common stock. These shares had an initial fair value of approximately
$1.7 million.
In July 1995, the Company loaned the sole stockholder of AIT $1.3 million
in cash in connection with a $2,330,000 promissory note executed as an integral
part of the merger agreement between the two companies. An additional
$1,030,000 was to be loaned to the stockholder as specific accounts receivable,
notes receivable and inventories on AIT's May 17, 1995 balance sheet were
collected and/or realized by the Company. As of December 31, 1996, the Company
had loaned an aggregate of $2,319,134 to the stockholder. All borrowings under
the promissory note, along with interest charged at an annual rate of six
percent, are to be repaid to the Company on August 15, 1997, or earlier if
certain contingent cash payments are earned by the stockholder in connection
with AIT's gross profit performance. The principal balance of the note as of
December 31, 1996 was $571,634, which is fully collateralized by 190,970 shares
of the Company's common stock pledged by the sole stockholder. As a result of
this pledge agreement, the note receivable from the stockholder has been
accounted for as a reduction of stockholders' equity.
In addition to the 685,970 shares noted above, 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 August 15, 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 the
promissory note described above. Once repaid, the stockholder is not entitled to
reborrow such funds.
29
<PAGE> 31
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon issuance, the 637,308 escrowed shares were valued by the Company at
par value only, or $6,373. As it becomes probable that the conditions for
release from escrow will be met, the fair market value of the shares as
measured at that time, along with any contingent cash payment earned, will be
recorded as additional goodwill and stockholders' equity, respectively.
As of December 31, 1996, the Company has released 318,654 shares from
escrow and paid additional cash consideration of $1,165,000 based on AIT's
gross profit performance. In addition, as of September 30, 1996 the Company
determined that it was highly probable an additional 159,327 escrowed shares
would be released and an additional $582,500 would be paid on February 15,
1997. The net effect of the above has been to increase goodwill and
stockholders' equity by approximately $4.4 million as of December 31, 1996.
As part of the AIT Merger, the sole stockholder of AIT may also receive an
additional $3.1 million in purchase price on August 15, 1997 contingent upon
the realization of predefined levels of pre-tax income from AIT's operations
during the periods of May 17, 1995 to June 30, 1996 and July 1, 1996 to June
30, 1997. 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. If earned, this future payment will
be capitalized as additional goodwill and stockholders' equity.
The acquisition of AIT has been accounted for using the purchase method of
accounting. Accordingly, the results of AIT's operations have been included in
the accompanying consolidated financial statements from May 17, 1995, the
effective date of acquisition. 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, estimated at approximately $6.4 million at December 31, 1996,
has been recorded as goodwill and is being amortized over a 15 year period.
Westec Acquisition
On October 2, 1995, the Company entered into an agreement to acquire
Westec Communications, Inc. ("Westec"), a Scottsdale, Arizona based provider of
wireless systems and repair services to the cable television and
telecommunications industries. On October 31, 1995, the transaction was
completed in its final form whereby Westec was merged with and into
Restor-Westec, Inc., a wholly-owned subsidiary of the Company (the "Westec
Merger"). Restor-Westec, Inc. subsequently changed its name to Westec
Communications, Inc. In connection with the Westec Merger, the sole stockholder
of Westec received $550,000 and 272,050 restricted shares of the Company's
common stock. These shares had an initial fair value of approximately $900,000.
As part of the Westec Merger agreement, the sole stockholder of Westec may
also receive $1.0 million in additional purchase price contingent upon the
realization of predefined levels of pre-tax income from Westec's operations
during five calendar years beginning in 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. If
earned, this future consideration will be capitalized as additional goodwill
and stockholders' equity. As of December 31, 1996, no additional purchase
price has been earned by the sole stockholder.
In connection with the Westec Merger, the Company entered into a
Compensation Agreement with Sherman Capital Group L.L.C. ("Sherman"), a
merchant banking firm that had a pre-existing letter of intent to acquire
Westec. Pursuant to the Compensation Agreement, Sherman received $100,000 and
45,000 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $150,000. The compensation paid to Sherman
has been accounted for as part of the purchase price of Westec. In addition,
200,000 restricted shares of the Company's common stock were placed in escrow
and may be released to Sherman in installments over a four year period on
February 15 of each year beginning on February 15, 1997, contingent upon the
realization of predefined levels of pre-tax income from Westec's operations.
Upon issuance, the 200,000 escrowed shares were valued by the Company at par
value only, or $2,000. As it becomes probable that the conditions for release
from escrow will be met, the fair market value of the shares as measured at that
time will be recorded as additional goodwill and stockholders' equity.
30
<PAGE> 32
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of Westec has been accounted for using the purchase method
of accounting. Accordingly, the results of Westec's operations have been
included in the accompanying consolidated financial statements from October 2,
1995, the effective date of acquisition. 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 $1.3
million, has been recorded as goodwill and is being amortized over a 15 year
period.
Sunrise Acquisition
In February 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 $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 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.
Upon issuance, the 211,765 escrowed shares were valued by the Company at
par value only, or $2,118. As it becomes probable that the conditions for
release from escrow will be met, the fair market value of the shares as
measured at that time, along with any Additional Consideration earned, will be
recorded as additional goodwill and stockholders' equity, respectively.
The first measurement period for purposes of releasing escrowed shares and
paying Additional Consideration was January 1, 1996 to December 31, 1996. In
reviewing Sunrises's pre-tax income performance as of December 31, 1996, the
Company determined that the conditions for release and payment for this first
period were met. Accordingly, 58,823 escrowed shares were accounted for as if
released and $500,000 of Additional Consideration was accounted for as if paid
(in the form of 58,118 shares of Company common stock) as of December 31, 1996.
The net effect of this accounting was to increase goodwill and stockholders'
equity by approximately $700,000 as of December 31, 1996. The escrowed shares
were released and additional shares were issued on February 15, 1997.
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 $2.2 million, has been
recorded as goodwill and is being amortized over a 15 year period.
Pro Forma Results of Operations
On a pro forma, unaudited basis, as if the acquisitions of AIT, Westec and
Sunrise had occurred as of January 1, 1995, total sales, operating income, net
income and net income per common share for the year ended December 31, 1995
would have been approximately $38,100,000, $2,200,000, $1,800,000 and $.17,
respectively.
These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
date indicated.
31
<PAGE> 33
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C: SPECIAL CHARGES
In the second quarter of 1995, the Company recorded a one-time special
charge of $980,000 or $(.11) per share for the following items:
<TABLE>
<S> <C>
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
========
</TABLE>
As a result of the significant decline in analog 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 consisted of severance benefits, equipment relocation,
lease termination and other costs related to the consolidation 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 D: INVENTORIES
Inventories are stated at the lower of cost or market as determined
primarily on a first-in, first-out basis. To address obsolete and slow moving
inventories and related market valuation adjustments, the Company charged to
operations for the years ended December 31, 1996, 1995 and 1994 approximately
$197,000, $162,000 and $354,000, respectively.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ----------
<S> <C> <C>
Switching systems, frames and related circuit boards............ $ 6,902,886 $2,127,653
Electronic components........................................... 2,539,497 1,595,281
Pay telephone parts............................................. 494,315 346,978
Work in progress................................................ 437,926 307,438
Other finished goods............................................ 282,788 172,371
----------- ----------
$10,657,412 $4,549,721
=========== ==========
</TABLE>
32
<PAGE> 34
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E: PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation as
computed using the straight-line method. Leasehold improvements are depreciated
over their remaining estimated lease term. Estimated lives for other
depreciable assets range from three to eight years. Depreciation expense for
the years ended December 31, 1996, 1995 and 1994 was $829,000, $690,000 and
$889,000, respectively.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-------------- --------------
<S> <C> <C>
Leasehold improvements...................................... $ 686,683 $ 557,308
Technical equipment and software............................ 6,463,996 5,679,692
Office equipment ........................................... 1,328,730 847,800
Vehicles.................................................... 84,975 70,095
----------- -----------
8,564,384 7,154,895
Accumulated depreciation.................................... (5,906,723) (5,092,146)
----------- -----------
$ 2,657,661 $ 2,062,749
=========== ===========
</TABLE>
The Company leases various facilities and equipment under operating
leases. As of December 31, 1996, future minimum payments under noncancelable
operating leases with initial or remaining terms of more than one year are
approximately: 1997 -- $1,185,000, 1998 -- $956,000, 1999 -- $178,000; and 2000
- - none.
In March 1995, the Company entered into a four year agreement to lease
approximately $1 million of new surface mount assembly and automated
testing equipment. The new equipment became fully operational in the third
quarter of 1995 and the lease was declared effective at that time. As part of
the lease agreement, the Company paid approximately $220,000 as a first payment
and $24,000 for a security deposit which will be returned after the 18th month
of the lease. The remaining 47 payments approximate $24,000 for months two
through 25 and $10,000 for months 26 through 48. The transaction has been
accounted for as an operating lease with approximately $25,000 in monthly rent
expense charged to operations on a straight-line basis over a 46 month period
beginning in August 1995. Other Assets on the December 31, 1996 balance sheet
include approximately $247,000 in prepaid rent for this lease agreement.
Total rental expense under operating leases for the years ended December
31, 1996, 1995 and 1994 was approximately $1,327,000, $670,000, and $568,000,
respectively, exclusive of property taxes, insurance and other occupancy costs
generally payable by the Company.
NOTE F: TECHNOLOGY LICENSES
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 agreed to pay Eagle $250,000 in cash
and provide it $450,000 of manufacturing services, all of which have been
performed as of December 31, 1996. Effective January 1, 1997, the license fees
paid Eagle will be amortized to expense in connection with the first 300,000
lines of phone service provided for within the switches sold by the Company, i.e
approximately $2.50 per line.
In addition to the upfront consideration, the Company agreed to pay ICT
certain royalties based on future sales of the switch by the Company. Other
Current Assets on the December 31, 1996 balance sheet includes approximately
$300,000 of prepaid royalties related to anticipated future sales of the switch
at a significantly discounted royalty rate.
33
<PAGE> 35
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1996.
In December 1996, the Company executed a technology licensing agreement
with TCSI Corporation ("TCSI") that grants the Company the perpetual rights to
incorporate TCSI's spread spectrum Code Division Multiple Access-based ("CDMA")
wireless technology into World Access products sold throughout the world.
Under the terms of the agreement, World Access also has the rights to use the
technology covered by seven TCSI patents, all of which address digital data
signals and wireless communication systems. As total consideration for this
license, TCSI was paid $50,000 in cash and 25,000 shares of restricted common
stock. These shares had an initial fair value of approximately $150,000. In
addition to the 25,000 shares noted above, TCSI was issued 25,000 restricted
shares of the Company's common stock. These shares were immediately placed
into escrow and will be released to TCSI upon the earlier of the first
commercial use of the technology by the Company or the expiration of the two
year period from the date the license was executed.
NOTE G: INTANGIBLE ASSETS
Intangible assets consist entirely of goodwill from acquisitions as
follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
AIT......................................................... $ 6,403,187 $3,639,812
Westec...................................................... 1,329,035 1,276,035
Sunrise..................................................... 2,159,500 ---
Other....................................................... 384,902 384,902
----------- ----------
10,276,624 5,300,749
Accumulated amortization.................................... (750,484) (216,565)
----------- ----------
$ 9,526,140 $5,084,184
=========== ==========
</TABLE>
Net intangible assets are being amortized on a straight-line basis over
their estimated lives of 15 years. The Company reviews the net book value of
intangible assets on a regular basis, and if deemed necessary, charges are
recorded against current operations for any impairment in the value of these
assets. No significant impairment charges have been recorded to date.
Intangible assets are removed from the books when fully amortized.
NOTE H. DEBT
Summary
The Company had no debt outstanding as of December 31, 1996. Debt as of
December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
December 31,
1995
-----------
<S> <C>
Revolving credit loans payable to bank............................ $ 4,926,142
Term loan payable to bank......................................... 4,200,500
Other notes payable............................................... 8,578
-----------
Total debt........................................................ 9,135,220
Amount due within one year........................................ (5,385,220)
-----------
Long-term debt.................................................... $ 3,750,000
===========
</TABLE>
Interest paid for the years ended December 31, 1996, 1995 and 1994 was
$352,015, $507,020, and $480,395, respectively.
34
<PAGE> 36
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Debt
In December 1996, the Company's agreement with a large European
bank was amended to increase its revolving line of credit to $10 million.
Borrowings under the line are secured by a first lien on substantially all the
assets of the Company. The bank agreement, which expires in March 2001,
contains standard lending covenants including financial ratios, restrictions on
dividends and limitations on additional debt and the disposition of Company
assets. Interest is paid at the rate of prime plus 1 1/4% or LIBOR plus 2
1/2%, at the option of the Company.
The Company's principal source of debt financing since May 1992 has been
with this European bank. In connection with operating losses experienced by
the Company, restructuring programs implemented by the Company and violations
of financial covenants established by the bank, the bank agreement was amended
several times during 1992 through 1994 to defer principal payments and
restructure financial covenants. In consideration for the original credit
facility and the significant concessions provided during this period, the bank
received warrants to purchase 360,000 shares of the Company's common stock at
$1.25 per share.
In connection with a private offering completed by the Company in December
1994, the Company made a $225,000 principal prepayment to the bank and the bank
converted $430,000 of debt into shares of the Company's common stock at its
then current market price of $1.25 per share.
In July 1995, the Company received a new $2 million revolving line of
credit from the bank. In consideration for the line of credit and a reduced
interest rate, the Company paid the bank a $30,000 origination fee and issued
the bank warrants to purchase 100,000 shares of the Company's common stock at
its then current market price of $3.82 per share on or prior to October 31,
1999.
In October 1995, the bank paid the Company $832,000 to exercise all
460,000 warrants (see "Note J").
In October 1996, in connection with a secondary public equity offering
completed by the Company the Company paid the bank $3.9 million to pay off the
outstanding principal balance on it's term loans.
Subordinated Debentures
In December 1994, $110,000 of 8 1/2% debentures were converted into shares
of the Company's common stock at a reduced price of $1.25 per share. In
connection with the incremental shares issued, a debt conversion expense and a
credit to stockholders' equity of $80,109 was recorded.
Bridge Loan From Major Stockholder
In March 1994, the Company executed a $250,000 note payable to a
significant stockholder, the Geocapital Funds. The note had a maturity date of
September 30, 1994 and required monthly interest payments at prime plus 2
1/2%. In connection with a May 1994 private equity offering completed by the
Company, $120,000 of the note was converted into common stock at $1.25 per
share and the $130,000 remaining balance was repaid. As additional
consideration for the bridge loan, the Geocapital Funds were issued 39,200
warrants to purchase common stock of the Company at its then current market
price of $1.25 per share on or prior to October 31, 1999. In October 1995, the
Geocapital Funds exercised these warrants (see "Note J").
NOTE I: STOCKHOLDERS' EQUITY
During May and June 1994, 940,000 shares of the Company's common stock
were sold in a private placement for a gross consideration of $1,175,000, or its
then current market price of $1.25 per share. Participants in the offering also
received warrants to purchase a total of 94,000 additional shares of restricted
common stock at $2.06 per share on or prior to June 30, 1999. Approximately
$480,000 of the offering was purchased by the senior management and directors of
the Company and the Geocapital Funds.
35
<PAGE> 37
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During December 1994, 716,000 shares of the Company's common stock were
sold in a private placement for a gross consideration of $895,000, or its then
current market price of $1.25 per share. Participants in the offering also
received warrants to purchase a total of 358,000 additional shares of
restricted common stock at $2.00 per share on or prior to December 22, 1999.
Approximately $270,000 of the offering was purchased by directors of the
Company and the Geocapital Funds.
During June and July 1995, 1,168,000 restricted shares of the Company's
common stock were sold in a private placement for a gross consideration
of $2,920,000, or its then current market price of $2.50 per share. Participants
in the offering also received warrants to purchase a total of 1,168,000 of
additional shares of restricted common stock at $3.50 per share on or prior to
June 30, 2000. Approximately $275,000 of the offering was purchased by the
directors and management of the Company.
In October 1995, stockholders paid the Company approximately $5 million to
exercise all warrants issued as a result of the private offerings discussed
above (see "Note J").
In connection with the Company's initial public offering in August 1991,
all of the existing holders of the Company's common stock placed in escrow an
aggregate of 672,419 shares of the Company's common stock. As of August 12,
1996, the termination date of the escrow agreement, the conditions for release
of the shares had not been met. Accordingly, the 672,419 escrowed shares of
Company common stock were returned to the Company and are now authorized but
unissued shares.
During September and October 1996, 3,487,500 shares of Company common
stock were sold in a secondary public offering at a price of $8.00 per share.
The Company received $26,156,250 from this offering, net of a 6.25% underwriter
discount fee. The Company incurred additional expenses of approximately
$825,000 in connection with this offering.
NOTE J: STOCK WARRANTS AND OPTIONS
Stock Warrants
In connection with various financial transactions completed by the Company
during 1992 to 1995, equity investors (see "Note I"), debtors (see "Note H")
and certain consultants were issued warrants to purchase shares of the
Company's common stock in the future. All of these warrants had exercise prices
that were set at or above the current market price of the Company's common
stock at the respective dates of grant.
In October 1995, the Company raised approximately $6.5 million of new
capital through the exercise of previously issued warrants and non-qualified
options to purchase 2,433,853 shares of the Company's common stock. Of the $6.5
million raised, approximately $1.6 million was invested by the directors,
management and the principal lender of the Company. In exercising their
warrants or options, investors had the option of paying cash or executing an 8%
interest bearing note payable to the Company. Approximately $2.4 million of the
total proceeds was paid in cash and $4.1 million through notes. The notes were
paid in full by March 29, 1996.
In February 1996, GKN Securities, the underwriter of the Company's initial
public offering in August 1991, exercised warrants to purchase 73,500 shares of
Company common stock at a price of $1.73 per share.
As of December 31, 1996, there were no significant warrants outstanding to
purchase Company common stock except for the Director warrant plans discussed
below.
36
<PAGE> 38
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Director Warrant Plans
In December 1994, in an effort to attract and retain experienced
executives to serve as outside directors for the Company, the Company's Board
of Directors adopted an Outside Directors' Warrant Plan (the "Plan").
In December 1994, three new outside directors of the Company were awarded
a total of 450,000 warrants. Each director received 150,000 warrants and each
warrant entitles the director to purchase one share of the Company's common
stock on or prior to December 15, 1999 per the following terms:
<TABLE>
<CAPTION>
Exercise
Warrants Price Vesting
- -------- ----- -----------------
<S> <C> <C>
50,000............................................................. $1.50 December 15, 1995
50,000............................................................. 2.25 December 15, 1995
50,000............................................................. 4.00 December 15, 1996
</TABLE>
Concurrent with the above initial grant, a fourth outside director of the
Company representing the Geocapital Funds was awarded 126,000 warrants. The
terms of this grant were exactly as those described above except the number of
warrants at the $1.50 exercise price was set at 26,000 instead of 50,000.
In December 1994, the Company's Board of Directors awarded Steven A. Odom,
who joined the Board in October 1994 and became Chairman in November, an
initial grant of 450,000 warrants under the Plan. Each warrant entitles Mr.
Odom to purchase one share of the Company's common stock on or prior to
December 15, 1999 per the following terms:
<TABLE>
<CAPTION>
Exercise
Warrants Price Vesting
- -------- -------------- -----------------
<S> <C> <C>
150,000.......................................................... $1.50 December 15, 1995
150,000.......................................................... 2.25 December 15, 1995
150,000.......................................................... 4.00 December 15, 1996
</TABLE>
In December 1994, the Board also adopted the Directors Warrant Incentive
Plan, pursuant to which the Board, beginning in 1997, may grant to each
director on an annual basis warrants to purchase up to 50,000 shares of common
stock at an exercise price per share equal to no less than 110% of the fair
market value of the common stock at the date of grant. Warrants may only be
issued under this plan if the Company's common stock has appreciated by a
compounded annual average rate of in excess of 35% for the four years preceding
the year of grant.
The vesting of all warrants awarded pursuant to the plans above will be
subject to the director to whom such warrants have been granted attending at
least 75% of the meetings of the Board of Directors for the year in which such
warrants are scheduled to vest. Notwithstanding this limitation, the warrants
to be awarded pursuant to the plans will become immediately exercisable (i) if
the Company is to be consolidated with or acquired by another entity in a
merger, (ii) upon the sale of substantially all of the Company's assets or the
sale of at least 90% of the outstanding common stock of the Company to a third
party, (iii) upon the merger or consolidation of the Company with or into any
other corporation or the merger or consolidation of any corporation with or
into the Company (in which consolidation or merger the shareholders of the
Company receive distributions of cash or securities as a result thereof), or
(iv) upon the liquidation or dissolution of the Company.
Stock Option Plans
The Company's stockholders adopted Stock Option Plans in 1988 and 1991.
These plans allow the Board of Directors to grant incentive stock options to
purchase the Company's common stock at an exercise price not less than fair
market value as of the grant date. Options issued under these plans vest over a
one to five year period and expire generally after five years. The 1988 Stock
Option Plan, which is no longer active, provided for the granting of 150,387
options. The 1991 Stock Option Plan (the "1991 Plan") currently provides for
the granting of up to 3.5 million options.
37
<PAGE> 39
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, 843,480 options were available for future grant
under the 1991 Plan. The following table summarizes the activity relating to
both plans:
<TABLE>
<CAPTION>
Number Average
of Options Price
---------- -------
<S> <C> <C>
Balance at January 1, 1994.............................. 439,536 $ 1.99
Options granted......................................... 380,912 1.35
Options exercised....................................... (7,662) 1.07
Options lapsed or canceled.............................. (46,929) 1.74
--------- -------
Balance at December 31, 1994............................ 765,857 1.70
Options granted......................................... 1,246,327 5.62
Options exercised ...................................... (167,400) 1.86
Options lapsed or canceled.............................. (162,955) 1.93
--------- -------
Balance at December 31, 1995............................ 1,681,829 4.57
Options granted......................................... 883,269 8.03
Options exercised....................................... (170,030) 1.47
Options lapsed or canceled.............................. (67,940) 5.38
--------- -------
Balance at December 31, 1996............................ 2,327,128 $ 6.08
========= =======
Exercisable at December 31, 1996........................ 892,409 $ 5.78
========= =======
</TABLE>
The options outstanding at December 31, 1996 have been segregated into
four price ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
Weighted -Average Weighted-Average
Range of Options Remaining Exercise
Exercise Prices Outstanding at 12/31/96 Contractual Life Price
- --------------- ----------------------- ---------------- -----
<S> <C> <C> <C>
$1.25 126,027 2 $1.25
2.06 - 2.25 178,325 2 2.11
3.62 - 3.97 461,500 4 3.80
7.00 - 8.62 1,561,276 4 7.59
</TABLE>
Of the 380,912 options granted in 1994, 285,062 were granted in December
1994 at the then current market price of $1.25 per share in connection with a
$285,062 voluntary salary reduction program for the year 1995. Under this
program, the salaried employees who agreed to decrease their salaries received
in exchange an equivalent number of stock options that vested one-twelfth for
each month the Company is profitable in 1995 and 1996. As of March 31, 1996,
these options had become fully vested.
In December 1995, the Company offered a similar voluntary salary reduction
program for 1996 that resulted in the grant of 424,627 non-qualified stock
options at the then current market price of $7.00 per share. Salaried employees
voluntarily agreed to reduce their salaries by $849,254, i.e. $2 in exchange
for each stock option granted. The options vested based upon the Company
achieving pre-defined levels of pre-tax income during the four quarters of 1996
and upon the attainment of specific operational objectives during the year. As
of December 31, 1996, these options had become fully vested.
38
<PAGE> 40
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1996, the Company offered a similar voluntary salary reduction
program for 1997 that resulted in the grant of 413,019 non-qualified options at
the then current market price of $8.00 per share. Salaried employees
voluntarily agreed to reduce their salaries by $826,038, i.e. $2 in exchange of
each stock option granted. The options will vest based upon the Company
achieving key operational objectives during the year including 25% internal
sales growth, improved accounts receivable collections and inventory turnover
and specific enhancements to the Company's quality and information systems
designed to facilitate growth.
An additional element of the 1995, 1996 and 1997 voluntary salary
reduction programs provides for the potential repayment of salaries if certain
pre-tax income amounts are realized by the Company. Full repayments were earned
in both 1995 and 1996. Accrued payroll and benefits on the Company's December
31,1996 balance sheet includes approximately $450,000 paid to employees in
February 1997 under the 1996 program.
In August 1995, the Company granted its new President and Chief Operating
Officer 400,000 options at $3.78 per share, the market price of the Company's
common stock on the date his offer of employment was accepted. These options
vest 25% on each of the first four anniversaries from the initial date of
employment.
In December 1995, the Company granted its Chairman and Chief Executive
Officer, and its Vice President and Chief Financial Officer, 200,000 and 50,000
options, respectively, at $7.00 per share. The 200,000 options vest 50% on the
first two anniversaries from the date of grant. The 50,000 options vest 25%
immediately and the remaining 25% on each of the next three anniversaries from
the date of grant.
In December 1996, the Company granted its Chairman and Chief Executive
Officer, and its President and Chief Operating Officer, 50,000 and 43,750
options, respectively, at $8.38 per share. These options vest 25% on each of
the first four anniversaries from the date of grant.
Options awarded under the 1991 Plan are subject to the same vesting
acceleration provisions described above under the Director warrant plans.
Pro Forma Results of Operations
The Company has elected to follow APB No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB No. 25, because the exercise
price of the Company's employee stock options equals or exceeds the market
price of the underlying stock on the date of the grant, no compensation
expense is recognized.
Pro forma information regarding the net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options granted subsequent to 1994 under the
fair value method of that statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model for
the multiple-option approach, with the following weighted-average assumptions
for 1996 and 1995: risk-free interest rate of 5.12% and 6.01%, respectively;
volatility factor of the expected market price of the Company's Common Stock of
50%; no expected dividend payments; and a weighted-average expected life of the
option of three years and four years, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of the Company's employee stock
options.
39
<PAGE> 41
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
The Company's pro forma information for the years ended December 31, 1996 and
1995 follows:
<TABLE>
<CAPTION>
1996 1995
--------------- ------------
<S> <C> <C>
Pro forma net income................................................... $6,101,000 $977,000
Pro forma earnings per share.......................................... $ .42 $ .11
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
1994, its pro forma effect will not be fully reflected until 1998.
NOTE K: RETIREMENT SAVINGS PLAN
The Company has a Retirement Savings 401(K) Plan that covers
substantially all employees. The Plan provides for the employees to voluntarily
contribute a portion of their compensation on a tax deferred basis and allows
for the Company to make discretionary matching contributions as determined by
the Board of Directors. For the years ended December 31, 1996, 1995 and 1994,
the Company contributed approximately $42,000, $19,000 and $53,000,
respectively, in the form of Company common stock to the Plan. In 1996 and
1995, Company contributions were based on a 25% match to employee contributions,
up to the first six percent contributed.
NOTE L: INCOME TAXES
The Company uses the asset and liability approach for financial
accounting and reporting for income taxes. Certain expenses are reported for
financial accounting purposes in different periods than reported for income tax
purposes. These temporary differences arise primarily from differences in
depreciation, bad debt reserves, inventory valuation and various reserves.
As the Company was able to fully utilize net operating loss
carryforwards against its net income in 1995, no provision for income taxes was
recorded. The provision for 1996 income taxes was computed in accordance with
SFAS No. 109, "Accounting for Income Taxes" and consists of the following:
<TABLE>
<S> <C>
Current income taxes
Federal............................ $1,009,003
State.............................. 189,188
----------
1,198,191
----------
Deferred income taxes
Federal............................ (405,425)
State.............................. (47,697)
----------
(453,122)
----------
$ 745,069
==========
</TABLE>
As of December 31, 1996, the Company has tax net operating loss
carryforwards available to reduce future income through 2010 of approximately
$4.0 million. 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 Company common stock related to
acquisitions during 1995 and 1996 it has been assumed that the Company has
undergone an ownership change under Internal Revenue Service regulations which
would limit the annual utilization of net operating loss carryforwards. The
annual limitation is estimated to be approximately $4.4 million.
40
<PAGE> 42
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to income before income taxes.
The sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
------------------ -------------------
<S> <C> <C> <C> <C>
Federal tax at statutory rate............................ $ 2,558,028 34.0% $ 398,631 34.0%
Effect of:
state tax, net of federal benefit....................... 373,041 5.0 51,253 4.4
nondeductible purchase adjustments...................... 190,000 2.5 47,599 4.0
reduction in valuation allowance and utilization
net operating loss..................................... (2,376,000) (31.6) (497,483) (42.4)
----------- ----- --------- -----
Income tax expense....................................... $ 745,069 9.9% $ --- ---%
=========== ===== ========= =====
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Deferred tax assets
Accrued liabilities............................................ $ 793,809 $ 525,852
Net operating loss carryforwards............................... 1,519,658 3,246,535
Capital loss carryforwards..................................... 480,428 477,182
Other.......................................................... 314,646 738,560
---------- -----------
3,108,541 4,988,129
Deferred tax liabilities
Depreciation/amortization...................................... (406,481) (386,072)
Valuation allowance............................................. (480,428) (4,602,057)
---------- -----------
Net deferred tax assets......................................... $2,221,632 $ ---
========== ===========
</TABLE>
The net change in the valuation allowance for deferred tax assets was
decreased by $4,121,629 in 1996. At December 31, 1996, the Company estimated
that it was more likely than not that it would be able to realize the value of
all but $480,428 of its deferred tax asset. The remaining portion relates to
capital losses whose use is limited to capital gains the Company would record.
As a part of the reduction of its valuation allowance, the Company reduced
goodwill related to acquisitions in 1996 and 1995 by approximately $435,000.
NOTE M: SUBSEQUENT EVENT
CIS Acquisition
On March 11, 1997, the Company entered into an agreement to acquire
Cellular Infrastructure Supply, Inc. ("CIS"), a Burr Ridge, Illinois based
provider of new and/or upgraded cellular network equipment and related design,
installation and technical support services to cellular, PCS and other wireless
service providers. On March 27, 1997, the transaction was completed in its
final form whereby CIS was merged with and into CIS Acquisition Corp., a wholly
owned subsidiary of the Company (the "Merger"). In connection with the Merger,
the three stockholders of CIS received $3.5 million in cash and 440,874
restricted shares of the Company's common stock. These shares had an initial
fair value of approximately $2.5 million.
In addition to the 440,874 shares noted above, the stockholders of CIS
were issued 845,010 restricted shares of the Company's common stock. These
shares were immediately placed into escrow, and along with $6.5 million in
additional purchase price (the "Additional Consideration"), will be released
and paid to the stockholders of CIS contingent upon the realization of
predefined levels of pre-tax income from CIS's operations during three one-year
periods beginning January 1, 1997.
41
<PAGE> 43
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no such changes and disagreements with its accountants
during the period covered by this Report.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information required by this Item with respect to the Company's
directors as set forth in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held on June 10, 1997 (the "Proxy Statement") is
incorporated herein by reference. The information with respect to Item 405 of
Registration S-K as set forth under the caption "Compliance with Section 16(A)
of the Securities and Exchange Act of 1934" in the Proxy Statement is
incorporated herein by reference.
Executive Officers
The information with respect to the Company's executive officers is set forth
in Item 4.5 of Part I of this Report.
ITEM 11 - EXECUTIVE COMPENSATION
The information set forth under the caption "Compensation of Directors and
Executive Officers" in the Proxy Statement is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners" in the Proxy Statement is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
42
<PAGE> 44
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
The index to the financial statements included in this Report
within Item 8 (page 22) is incorporated herein by reference.
(2) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Page
Number Number
-------- ------
<S> <C> <C>
VIII Valuation and Qualifying Accounts 44
</TABLE>
(3) Exhibits - See Item 14 (c) below
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed by the Company during the fourth
quarter of 1996.
(c) The exhibits filed herewith and incorporated by reference herein are set
forth on the Exhibit Index on page 46 hereof. Included in those exhibits
are the following Executive Compensation Plans and Arrangements:
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
10.1 1991 Stock Option Plan
10.2 Amendment to 1991 Stock Option Plan
10.4 Second Amendment to 1991 Stock Option Plan
10.6 Third Amendment to 1991 Stock Option Plan
10.26 Outside Directors' Warrant Plan
10.27 Directors' Warrant Incentive Plan
10.32 Fourth Amendment to 1991 Stock Option Plan
10.33 Fifth Amendment to 1991 Stock Option Plan
10.34 Amendment One to Outside Directors' Warrant Plan
10.35 Amendment One to Directors' Warrant Incentive Plan
</TABLE>
43
<PAGE> 45
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED BALANCE
BALANCE AT CHARGED TO COSTS TO OTHER END OF
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------ -------------------- -------------------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Deducted from asset account
Allowance for doubtful
accounts $207,960 $167,612 $ 30,000 (B) $ (140,527) (A) $265,000
Year Ended December 31, 1995:
Deducted from asset account
Allowance for doubtful
accounts $230,911 $ 7,568 $ 25,000 (B) $ (55,519) (A) $207,960
Year Ended December 31, 1994:
Deducted from asset account
Allowance for doubtful
accounts $ 75,000 $160,000 $ ---- $ (4,089) (A) $230,911
</TABLE>
(A) Write-off of uncollectible amounts.
(B) Reserves established from businesses acquired.
44
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed, on its
behalf by the undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By /s/ Steven A. Odom
---------------------------------------
Steven A. Odom
Chairman and Chief Executive Officer
Dated as of April 9,1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ----- ------------
<S> <C> <C>
/s/ Steven A. Odom Chairman and Chief April 9,1997
- ----------------------- Executive Officer
Steven A. Odom (Principal Executive Officer)
/s/ Hensley E. West Director, President and April 9,1997
- ----------------------- Chief Operating Officer
Hensley E. West
/s/Mark A. Gergel Executive Vice President, April 9,1997
- ----------------------- Chief Financial Officer and
Mark A. Gergel Treasurer
(Principal Financial and
Accounting Officer)
/s/ Stephen J. Clearman Director April 9,1997
- -----------------------
Stephen J. Clearman
/s/ William P. O'Reilly Director April 9,1997
- -----------------------
William P. O'Reilly
/s/ John D. Phillips Director April 9,1997
- -----------------------
John D. Phillips
/s/ Stephen E. Raville Director April 9,1997
- -----------------------
Stephen E. Raville
</TABLE>
45
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant and
Amendment to Restated Certificate of Incorporation incorporated
herein by reference to the Registrant's Registration Statement on
Form S-18, Registration No. 33-41255-1, Exhibits 2 and 2.1,
respectively, and Second Amendment to Restated Certificate of
Incorporation incorporated herein by reference to Form 10-K for
the fiscal year ended December 31, 1992 Exhibit 3.2, and Third
Amendment to Restated Certificate of Incorporation incorporated
herein by reference to the Registrant's registration statement on
Form S-2, Amendment No. 2, filed on February 14, 1995, No.
33-87026, Exhibit 4.1-1.
3.2 Copy of Bylaws of the Registrant, as amended, incorporated herein
by reference to Registrant's Registration Statement on Form S-18
Registration No. 33-41255-A, Exhibit 3 and First Amendment to
Bylaws incorporated herein by reference to Form 10-K for the
fiscal year ended December 31, 1992, Exhibit 3.4.
10.1 Restor Industries, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-18, filed on July 25, 1991, No.
33-41255-A).
10.2 Amendment to Restor Industries, Inc. 1991 Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-K for the year ended December 31, 1993, filed March 31,
1994).
10.3 Lease Agreement dated August 27, 1992, by and between Batac
Corporation and Restor Industries, Inc. (incorporated by reference
to Exhibit 10.9 to the Registrant's Form 10-K for the year ended
December 31, 1993, filed March 31, 1994).
10.4 Second Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Registrants' Form 10-K for the
year ended December 31, 1993, filed March 31, 1994).
10.5 Registration Rights Agreement dated December 28, 1994, by and
between Creditanstalt-Bankverein and Restor Industries, Inc.
(incorporated by reference to Exhibit 10.24 to the Registrants
Form S-2, Amendment No. 2, filed on February 14, 1995, No
33-87026).
10.6 Third Amendment to 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.26 to the Registrant's Form S-2, Amendment
No. 2, filed on February 14, 1995, No. 33-87026.
10.7 Master Lease Agreement dated March 2, 1995, by and between Copelco
Capital, Inc. and Restor Industries, Inc. (Incorporated by
reference to Exhibit 10.27 to the Registrant's Form 10-K for the
year ended December 31, 1994, filed on March 30, 1995).
10.8 Merger Agreement dated July 11, 1995, by and between James H.
Shirkey, AIT, Inc., Restor Acquisition Corp. and Restor
Industries, Inc. (incorporated by reference to Exhibit 2 to the
Registrant's Form 8-K, filed on July 14, 1995).
10.9 Escrow Agreement dated July 11, 1995 by and between James H.
Shirkey, AIT, Inc., Restor Acquisition Corp and Restor Industries,
Inc. (incorporated by reference to Exhibit 10 to the Registrant's
Form 8-K, filed on July 14, 1995).
10.10 Promissory Note dated July 11, 1995, by and between James H.
Shirkey and Restor Industries, Inc (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K, filed on July 14,
1995).
10.11 Pledge Agreement dated July 11, 1995, by and between James H.
Shirkey and Restor Industries, Inc (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 8-K, filed on July 14,
1995).
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C>
10.12 Employment Agreement dated July 11, 1995, by and between James H.
Shirkey and Restor Industries, Inc (incorporated by reference to
Exhibit 10.3 to the Registrant's Form 8-K, filed on July 14,
1995).
10.13 Registration Rights Agreement dated July 11, 1995, by and between
James H. Shirkey and Restor Industries, Inc (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K, filed on
July 14, 1995).
10.14 Termination Agreement dated July 11, 1995, by and between AIT,
Inc. and William D. Sims (incorporated by reference to Exhibit
10.5 to the Registrant's Form 8-K, filed July 14, 1995).
10.15 Assignment and Assumption Agreement dated July 11, 1995, by and
between AIT, Inc and James H. Shirkey (Incorporated by reference
to Exhibit 10.6 to the Registrant's Form 8-K, filed July 14,
1995).
10.16 Merger Agreement dated October 31, 1995, by and between Westec
Communications, Inc., Robert N. O'Hara, Restor-Westec, Inc. and
Restor Industries, Inc. (incorporated by reference to Exhibit 2 to
the Registrant's Form 8-K, filed November 13, 1995).
10.17 Employment Agreement dated October 31, 1995, by and between Robert
N. O'Hara and Restor-Westec, Inc. (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K, filed November 13,
1995).
10.18 Registration Rights Agreement dated October 31, 1995, by and
between Robert N. O'Hara, Restor-Westec, Inc. and Restor
Industries, Inc. (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K, filed November 13, 1995).
10.19 Compensation Agreement dated October 31, 1995, by and between
Sherman Capital Group L.L.C and Restor Industries, Inc.
(incorporated by reference to Exhibit 10.3 to the Registrant's
Form 8-K, filed November 13, 1995).
10.20 Share Escrow Agreement dated October 31, 1995, by and between
Sherman Capital Group L.L.C. , Cauthen and Feldman, P.A.,
Restor-Westec, Inc and Restor Industries, Inc. (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K, filed
November 13, 1995).
10.21 Release and Termination Agreement dated October 31, 1995, by and
between Sherman Capital Group L.L.C., Robert N. O'Hara,
Restor-Westec, Inc. and Restor Industries, Inc. (incorporated by
reference to Exhibit 10.5 to the Registrant's Form 8-K, filed
November 13, 1995).
10.22 Registration Rights Agreement dated October 31, 1995, by and
between Sherman Capital Group L.L.C and Restor Industries, Inc.
(incorporated by reference to Exhibit 10.6 to the Registrant's
Form 8-K, filed November 13, 1995).
10.23 Second Amended and Restated Loan and Security Agreement dated
July 18, 1995, by and between Creditanstalt-Bankverein and Restor
Industries, Inc. (incorporated by reference to Exhibit 10.35 to
the Registrant's Form 10-K for the year ended December 31, 1995,
filed April 10, 1996).
10.24 First Amendment to Second Amended and Restated Loan and Security
Agreement dated December 28, 1995, by and between
Creditanstalt-Bankverein and Restor Industries, Inc. (incorporated
by reference to Exhibit 10.37 to the Registrant's Form 10-K for
the year ended December 31, 1995, filed April 10, 1996).
10.25 Second Amendment to Second Amended and Restated Loan and Security
Agreement dated March 29, 1996, by and between
Creditanstalt-Bankverein and Restor Industries, Inc. (incorporated
by reference to Exhibit 10.38 to the Registrant's Form 10-K for
the year ended December 31, 1995, filed April 10, 1996).
</TABLE>
47
<PAGE> 49
<TABLE>
<S> <C>
10.26 Restor Industries Inc. Outside Directors' Warrant Plan
(incorporated by reference to Exhibit 10.40 to the Registrant's
Form 10-K for the year ended December 31, 1995, filed April 10,
1996).
10.27 Restor Industries Inc. Directors' Warrant Incentive Plan
(incorporated by reference to Exhibit 10.41 to the Registrant's
Form 10-K for the year ended December 31, 1995, filed April 10,
1996).
10.28 Merger Agreement dated April 22, 1996, by and between Restor
Industries, Inc., Restor-Comtech, Inc., Michael Joe, Michael
Ramlogan, Dan Lubarsky and Comtech Sunrise, Inc. (incorporated by
reference to Exhibit 2 to the Registrant's Form 8-K, filed June
19, 1996).
10.29 Employment Agreement dated June 18, 1996, by and between Michael
R. Joe and Restor-Comtech, Inc. (incorporated by reference to
Exhibit 6.2h to the Registrant's Form 8-K, filed June 18, 1996).
10.30 Escrow Agreement dated June 18, 1996, by and between Restor
Industries, Inc., Restor-Comtech, Inc., Cauthen and Feldman, P.A
and the former shareholders of Comtech-Sunrise, Inc. (incorporated
by reference to Exhibit 2.1b to the Registrant's Form 8-K, filed
June 19, 1996).
10.31 Third Amendment to Second Amended and Restated Loan and Security
Agreement dated December 19, 1996, by and between World Access,
Inc. and Creditanstalt-Bankverien.
10.32 Fourth Amendment to 1991 Stock Option Plan.
10.33 Fifth Amendment to 1991 Stock Option Plan.
10.34 Amendment One to Outside Directors' Warrant Plan.
10.35 Amendment One to Directors' Warrant Incentive Plan.
10.36 License Agreement dated July 1, 1996, by and between International
Communication Technologies, Inc., World Access, Inc. and Eagle
Telephonics, Inc.
21.1 Subsidaries of the Registrant
23.1 Consent of Price Waterhouse L.L.P.
27.1 Financial Data Schedule (for SEC use)
</TABLE>
48
<PAGE> 1
EXHIBIT 10.31
THIRD AMENDMENT TO SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIRD AMENDMENT TO SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(the "Amendment") is made and entered into the 19th day of December, 1996 by
and between WORLD ACCESS, INC. (formerly known as Restor Industries, Inc.), a
Delaware corporation (the "Borrower"), and CREDITANSTALT-BANKVEREIN, an
Austrian banking corporation (the "Bank").
WITNESSETH :
WHEREAS, Borrower and Bank are parties to a certain Second Amended and
Restated Loan and Security Agreement, dated as of July 18, 1995 (the "Loan
Agreement"), which currently provides for a term loan in the original principal
amount of Four Million Dollars ($4,000,000) and for a revolving credit facility
from Bank to Borrower in the aggregate principal amount of up to Six Million
Dollars ($6,000,000) at any one time outstanding;
WHEREAS, the Loan Agreement was amended (i) December 28, 1995 pursuant to
the First Amendment to the Second Amended and Restated Loan and Security
Agreement and (ii) March 28, 1996 pursuant to the Second Amendment to the
Second Amended and Restated Loan and Security Agreement;
WHEREAS, Borrower has requested that Bank convert the term loan to a
revolving credit loan thereby increasing the aggregate principal amount of
Revolving Credit Loans which may be outstanding at any one time from Six
Million Dollars ($6,000,000) to Ten Million Dollars ($10,000,000); and
WHEREAS, Bank has agreed to grant Borrower's request, subject to the terms
and conditions set forth herein;
NOW, THEREFORE, for and in consideration of the premises, the terms and
conditions set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in the Loan Agreement, to the
extent defined therein.
2. AMENDMENTS. The Loan Agreement is amended as follows, subject to the
satisfaction of the conditions precedence set forth in Section 7 of this
Amendment:
2.1 Section 1.1 of the Loan Agreement is hereby further amended by
deleting the definition of "Base Rate" in its entirety and substituting in lieu
thereof a new definition of "Base Rate" to read as follows:
<PAGE> 2
"Base Rate" shall mean an interest rate per annum,
fluctuating daily, equal to the higher of (a) a rate
announced by Creditanstalt-Bankverein from time to time at
its principal office in Greenwich, Connecticut, as its prime
rate for domestic (United States) commercial loans in effect
on such date; (b) the Federal Funds Rate in effect on such
date plus one-half percent (1/2%). The Base Rate is not
necessarily intended to be the lowest rate of interest
charge by Creditanstalt-Bankverein in connections with
extension of credit. Each change in the Base Rate shall
result in the corresponding change in the interest rates
hereunder with respect to a Base Rate Loan and such change
shall be effective on the effective date of such change in
the Base Rate.
2.2 Section 1.1 of the Loan Agreement is hereby further amended by
deleting the definition of "Business Day" in its entirety and substituting in
lieu thereof a new definition of "Business Day" to read as follows:
"Business Day" shall mean a day on which Banks are not
required or authorized to close in Greenwich, Connecticut
and, if such day relates to a borrowing of, a payment or
prepayment of principal or interest on a Continuation or
Conversion of or into, or an Interest Prior for a Eurodollar
Loan or a notice by Borrower with respect to any such
borrowing, payment, prepayment, Continuation, Conversion or
Interest Period, which is also a day on which dealings by
and between banks in U.S. dollar deposits are carried out in
the interbank Eurodollar market.
2.3 Section 1.1 of the Loan Agreement is hereby further amended by
adding the following definition of "Creditanstalt-Bankverein" in the appropriate
alphabetical order:
"Creditanstalt-Bankverein" shall mean
Creditanstalt-Bankverein, an Austrian Banking Corporation,
having offices at 2 Greenwich Plaza, 4th Floor, Greenwich,
Connecticut 05830, and it successors and assigns.
2.4 Section 1.1 of the Loan Agreement is hereby further amended by
deleting the definition of "Federal Funds Rate" in its entirety and substituting
in lieu thereof a new definition of "Federal Funds Rate" to read as follows:
"Federal Funds Rate" shall mean, for any day, the
overnight Federal Funds Rate in Greenwich, Connecticut, as
published for such day (or, if such day is not a Connecticut
Business Day, for the next proceeding Business Day) in the Federal
Reserve Statistical release H.15(519) or any successor publication,
or if such rate is not so published for any day which is a
2
<PAGE> 3
Connecticut Business Day, the average of the quotations for
such day on over night Federal Funds transactions in
Connecticut received by the Lender from three Federal Funds
Brokers of recognized standing collected by the Lender.
2.5 Section 1.1 of the Loan Agreement is hereby further amended by
deleting the definition of "Quoted Rate" in its entirety and substituting in
lieu thereof a new definition of "Quoted Rate" to read as follows:
"Quoted Rate" shall mean, when used with respect to an
Interest Period for a Eurodollar Loan, the quotient of (i)
the offered rate quoted by Creditanstalt-Bankverein in the
interbank in the Eurodollar market in Greenwich, Connecticut
or London, England on or about 11:00 a.m. (prevailing
Eastern or London time, as the case may be) two Business
Days prior to such Interest Period for U.S. dollar deposits
in an aggregate amount comparable to the principal amount of
the Eurodollar Loan to which the Quoted Rate is to be
applicable and for a period comparable to such Interest
Period, divided by (ii) one minus the Reserved Percentage.
For purposes of its definition, (a) "Reserved Percentage"
shall mean with respect to any Interest Period, the
percentage which is in effect on the first day of such
Interest Period under Regulation D as the maximum reserved
requirement from member banks of the Federal Reserve System
in Greenwich, Connecticut with deposits comparable to an
amount to those of Creditanstalt-Bankverein against
Eurocurrency Liabilities (b) "Eurocurrency Liabilities" has
the meaning assigned to that term in Regulation D, as in
effect from time to time. The Quoted Rate for the
applicable period shall be adjusted automatically on as of
the effective date of any change in the applicable Reserved
Percentage.
2.6 Section 1.1 of the Loan Agreement is hereby further amended by
deleting the amount "Six Million Dollars ($6,000,000)" appearing in the
definition "Revolving Credit Commitment" and substituting the amount "Ten
Million Dollars ($10,000,000)."
2.7 Section 1.1 of the Loan Agreement is hereby amended by deleting
in their entirety the definitions of "Borrowing Base," "Eligible Accounts,"
"Eligible Inventory," "Facility A Loan," "Facility A Note," "Facility B Loan,"
"Facility B Note" contained therein.
2.8 Section 2.1 of the Loan Agreement is hereby amended by deleting
the first sentence thereof in its entirety and substituting the following new
first sentence of Section 2.1 in lieu thereof:
3
<PAGE> 4
Subject to the terms and conditions hereof and provided that
there exists no Default or Event of Default, the Bank agrees
to make loans (the "Revolving Credit Loans"), as requested
by the Borrower in accordance with Section 2.3 hereof, to
Borrower from time to time on and after the date hereof and
up to, but not including, the Revolving Credit Termination
Date, in an aggregate principal amount not to exceed at any
one time outstanding an amount equal to the Revolving Credit
Commitment.
2.9 Section 2.3 of the Loan Agreement is hereby amended by deleting
the reference to "New York" time contained in the fifth line thereof and
replacing it with a reference to "prevailing Eastern" time.
2.10 Section 2.7 of the Loan Agreement is hereby amended by deleting
such section in it entirety and substituting the following in lieu thereof:
2.7 LOAN IN EXCESS OF REVOLVING CREDIT COMMITMENT.
Borrower acknowledges that the Bank is not obligated and
does not presently intend to make Revolving Credit Loans,
incur Letter of Credit Obligation, or make other extensions
of credit to Borrower the principal amount of which, in the
aggregate, at any time would exceed the Revolving Credit
Commitment. However, it is agreed that, should the
Revolving Credit Loan, Letter of Credit Obligation or other
extensions of credit incurred hereunder exceed the Revolving
Credit Commitment or any other limitations set forth herein,
all of the obligations of Borrower to the Bank with respect
to such Revolving Credit Loan, Letter of Credit Obligation
and extensions of credit shall nevertheless constitute
Obligation under this Agreement and shall be entitled to the
benefit of all security interests granted under this
Agreement and all other Loan Documents. Notwithstanding the
foregoing, if any amounts outstanding hereunder shall exceed
any such limitation, Borrower shall immediately repay such
excess amounts to the Bank.
2.11 Section 2.8(a) of the Loan Agreement is hereby amended by
deleting such section in its entirety and substituting the following new Section
2.8(a) in lieu thereof:
(a) Each payment by the Borrower to Lender pursuant to
this Agreement or the Notes shall be made prior to 1:00 p.m.
(prevailing Eastern time) on the date due and shall be made
without set-off-or counterclaim to the account of the Lender
maintained with Creditanstalt-Bankverein in Greenwich,
Connecticut or at such other place or places as Lender may
designate from time to time in writing to Borrower and in
such amounts as may be necessary in order that all such
payments (after withholding for or
4
<PAGE> 5
on account of any present or future taxes, levies, imposts,
duties or other similar charges of whatsoever nature imposed
by any government or any political subdivision or taxing
authority thereof, other than any tax on or measured by the
net income of the Bank pursuant to the income tax laws of
the jurisdiction where the Bank's principal or lending
office is located) shall not be less than the amounts
otherwise specified to be paid under the Notes. Each such
payment shall be in lawful currency of the United States of
America and on immediately available funds. If the due date
of any payment hereunder or under the revolving Credit Note
would otherwise fall on a day which is not a Business Day,
then such payment shall be due on the next succeeding
Business Day and interest shall be payable on the principal
amount o such payment for the period of such extension. If
the Bank has not received any payment due hereunder by the
close of business on the date five (5) days following the
date on which such payment is due, Borrower authorizes the
Bank, at its option, to charge such payment as a Revolving
Credit Loan. Each such payment shall be in lawful currency
of the United States of America in immediately available
funds.
2.12 Section 2.10 of the Loan Agreement is hereby amended by
deleting such subsection in it entirety and substituting the following in lieu
thereof:
2.10 CERTAIN NOTICES. All notices given by Borrower to
the Bank hereunder of terminations or reductions of the
Revolving Credit Commitment or of borrowing, Conversions,
Continuations or prepayments of Loans hereunder or request
for the issuance of Letters of Credit shall either be oral,
with written confirmation, which may be by telecopy; or in
writing, with such written confirmation or writing in the
case of a borrowing, Conversion or Continuation, to be
substantially in the form of Exhibit C attached hereto (a
"Notice of Borrowing"), and in the case of a request for a
Letter of Credit, to be substantially in the form of Exhibit
J attached hereto (a "Request for Letter of Credit"); shall
be irrevocable; shall be effective only if received by the
Bank prior to 10:00 a.m. (prevailing Eastern time) on a
business day which is: (a) at least fifteen (15) days prior
to such termination or reduction of the Revolving Credit
Commitment; (b) on a date such Loan is to be made as,
Converted to or Continued as a Base Rate Loan; (c) at least
three (3) Business Days prior to the date such Loan is to be
made as, Converted to or Continued as a Eurodollar Loan; or
(d) at least three (3) Business Days prior to the date such
Letter of Credit is to be issued. Each such notice to
reduce the Revolving Credit Commitment shall specify the
amount of the Revolving Credit Commitment to be reduced and
the date of such reduction, which date, in the case of
prepayment of a Eurodollar Loan, shall not be prior
to the last day of the Interest Period then
5
<PAGE> 6
applicable to such Eurodollar Loan. Each such notice of
borrowing, Conversion or Continuation shall specify: (i)
the amount of such borrowing, Conversion or Continuation
(which shall be in integral multiples of $100,000); (ii)
whether such Loan will be made, Converted or Continued as a
Eurodollar Loan or as a Base Rate Loan; (iii) the date such
Loan is to be made, Converted or Continuation (which shall
be a Business Day and, if such Loan is to Convert Continue a
Eurodollar Loan then outstanding, shall not be prior to the
last day of the then current Interest Period for such
outstanding Loan ); and (iv) if such Loan is a Eurodollar
Loan, the duration of the Interest Period with respect
thereto. Each request for a borrowing, Conversion or a
Continuation of a Loan, for the issuance of a Letter of
Credit or for any other financial accommodation by Borrower
pursuant to this Agreement or the other Loan Documents shall
constitute (x) an automatic warranty and representation by
Borrower to the Bank if there does not then exist a Default
or Event of Default or any event or condition which, with
the making of such Loan or the issuance of such Letter of
Credit, will constitute a Default Event of Default and (y)
an affirmation that as of the date of such request all of
the representations and warranties of the Borrower contained
in this Agreement and the other Loan Documents are true and
correct in all material respects, both before and after
giving effect to the making of such Loan or the issuance of
such Letter of Credit. If on the last day of the Interest
Period of any Eurodollar Loan hereunder, the Bank has not
received a timely notice hereunder to Convert, Continue or
prepay such Loan, Borrower shall be deemed to have submitted
a notice to Convert such Loan to a Base Rate Loan.
2.13 Section 2.11(a) of the Loan Agreement is hereby amended by
deleting such subsection in it entirety and substituting the following in lieu
thereof:
(a) Subject to the terms and conditions hereof and
provided that there exists no Default or Event of Default,
at any time and from time to time from the Closing Date to
(but not including) the Revolving Credit Termination Date,
Bank shall, in its discretion, issue such Letters of Credit
as Borrower may request by a Request for a Letter of Credit
(in the manner described in Section 2.10 hereof), each in a
minimum principal amount of $100,000; provided, however,
that the Bank shall be under no obligation to so issue any
such Letter of Credit unless, after giving effect to the
issuance of such Letter of Credit, (i) the aggregate amount
of all Letter of Credit Obligation of Borrower then
outstanding does not exceed the $1,000,000, and (ii) the
aggregate amount of all outstanding Revolving Credit Loans,
together with all outstanding Letter of Credit Obligation
with respect to Letters of Credit, will not exceed at any one time
outstanding the Revolving
6
<PAGE> 7
Credit Commitment. No Letter of Credit shall be issued by
Bank hereunder except to the extent reasonably necessary in
connection with transactions in the ordinary course of
business of Borrower. The expiration date of any Letter of
Credit shall not extend beyond the earliest of (i) one year
from the date of issuance thereof, (ii) the Maturity Date,
and (iii) any date fixed for termination of the Revolving
Credit Commitment pursuant to Section 2.9 hereof.
2.14 Section 6.2 of the Loan Agreement is hereby amended by deleting
subsections (a) and (e) thereof in their entirety and substituting the following
new subsections (a) and (e) in lieu thereof:
(a) As soon as practicable, and in any event within thirty (30)
days after the end of each quarter, consolidating interim unaudited
financial statements, including a balance sheet, income statement
and statement of cash flow, for the quarter and year-to-date period
then ended, prepared in accordance with GAAP, consistent with the
past practice or Borrower and its Subsidiaries, and certified as to
truth and accuracy thereof by the chief financial officer of
Borrower;
(e) [Intentionally Omitted].
2.15 Section 7.2 of the Loan Agreement is hereby amended by deleting
such section in its entirety and substituting the following new Section 7.2 in
lieu thereof:
7.2 INDEBTEDNESS. Incur, assume, or suffer to exist any
Indebtedness for borrowed money or Capital Lease Obligations except
for (a) Indebtedness existing on the date hereof and listed on
Schedule 7.2 hereof (provided that there shall be no increase in
the amount or change in the terms of any such Indebtedness without
the prior written consent of the Bank); (b) trade payables arising
in the ordinary course of Borrower's business; (c) the Obligations;
(d) Capital Lease Obligations in an aggregate principal amount not
to exceed $2,000,000 at any one time outstanding; and (e) the
Landlord Subordinated Debt (provided that there shall be no
increase in the amount or change in the terms of any such
Indebtedness without the prior written consent of the Bank).
2.16 Section 7.3 of the Loan Agreement is hereby amended by deleting
such section in its entirety and substituting the following new Section 7.3 in
lieu thereof:
7
<PAGE> 8
7.3 ASSET SALES. Sell, lease or dispose of any of the
Collateral or any interest therein or any of its other assets
except for (a) the sale of Inventory in the ordinary course of
business and (b) the sale of assets having an aggregate value of
not more than $500,000 during any fiscal year.
2.17 Section 7.13 of the Loan Agreement is hereby amended by
deleting such section in its entirety and substituting the following new Section
7.13 in lieu thereof:
7.13 OPERATING LEASES. Enter into or be a party to any
Operating Lease, except for those set forth on Schedule 5.27
attached hereto as they may be renewed or extended pursuant to
similar terms and conditions unless the aggregate monthly rentals
to be paid by Borrower under all Operating Leases (including those
listed on Schedule 5.27, and any new Operating Leases and all other
Operating Leases) will not at any time exceed $175,000.00.
2.18 Section 7.9 of the Loan Agreement is hereby amended by deleting
the words "Eligible Inventory" appearing in the sixth line thereof in their
entirety and substituting the word "Inventory" in lieu thereof.
2.19 Section 8.1 of the Loan Agreement is hereby amended by deleting
such section in its entirety and substituing therefore the following new Section
8.1 in lieu thereof:
8.1 NET WORTH. Maintain at all times during the applicable
periods set forth below, an Adjusted Net Worth of not less than the
amount set forth opposite each such applicable period:
<TABLE>
<CAPTION>
APPLICABLE PERIOD AMOUNT
----------------------- ---------------
<S> <C>
09/30/96 - 12/31/96 $35,000,000
01/01/97 - 12/31/97 $40,000,000
At all times thereafter $45,000,000
</TABLE>
Notwithstanding the foregoing, in the event that Borrower makes an
offering of additional shares of its capital stock after the
Closing Date in a single transaction or related series of
transactions and, as a result of the issuance of such shares,
Borrower's stockholders' equity is increased, the amount set forth
above for each applicable period, commencing as of the beginning of
the fiscal year immediately following the issuance of Borrower's
capital stock as a part of such offering occurs shall be increased
by an amount equal to seventy-five percent (75%) of the amount by
which Borrower's stockholders' equity is increased as a result of
the issuance of said shares of its capital stock.
8
<PAGE> 9
2.20 Section 8.2 of the Loan Agreement is hereby amended by deleting
such section in its entirety and substituting therefore the following new
Section 8.2 in lieu thereof:
8.2 FIXED CHARGE COVERAGE RATIO. Maintain as of the last day
of each fiscal quarter of Borrower, commencing with the fiscal
quarter ending December 31, 1996, a Fixed Charge Coverage Ratio for
such quarter of not less than 2.0 to 1.0.
2.21 Section 8.3 of the Loan Agreement is hereby amended by deleting
such section in its entirety and substituting therefore the following new
Section 8.3 in lieu thereof:
8.3 CAPITAL EXPENDITURES. Make no Capital Expenditure in any
fiscal year in excess of $2,000,000.
2.22 The Loan Agreement is hereby further amended by deleting
Exhibit A, the Form of Revolving Credit Note, attached thereto and substituting
a new Exhibit A thereto in the form of Exhibit A attached hereto and
incorporated herein by reference.
2.23 The Loan Agreement is hereby further amended by deleting
Exhibit D, the Form of Borrowing Base Certificate, attached thereto.
2.24 The Loan Agreement is hereby amended by deleting by Schedules
1.1, 5.2, 5.5, 5.8, 5.9, 5.10, 5.14, 5.19, 5.22, 5.27, 5.29, and 7.2 attached
thereto and substituting new Schedules 1.1, 5.2, 5.5, 5.8, 5.9, 5.10, 5.14,
5.19, 5.22, 5.27, 5.29, and 7.2 thereto in the forms of Exhibits B, C, D, E, F,
G, H, I, J, K, L and M, respectively, attached hereto and incorporated by
reference.
3. EXPENSES. Borrower agrees to pay, immediately upon demand by Bank, all
costs, expenses, attorneys' fees, and other charges and expenses incurred by
Bank in connection with the negotiation, preparation, execution and delivery of
this Amendment.
4. DEFAULTS HEREUNDER. The breach of any representation, warranty or
covenant contained herein or in any document executed in connection herewith,
or the failure to observe or comply with any term or agreement contained herein
or in any document executed in conjunction herewith, shall constitute an Event
of Default under the Loan Documents and Bank shall be entitled to exercise all
rights and remedies it may have under the Loan Agreement, any of the other Loan
Documents and applicable law.
5. REPRESENTATIONS AND WARRANTIES. All of the representations and
warranties made by Borrower under the Loan Agreement and the Loan Documents
shall be true and correct in all material respects as of the date hereof with
the same force and effect as if made on and as
9
<PAGE> 10
the date hereof except for such changes in such representations and warranties
which do not constitute a Default or Event of Default, which do not,
individually or in the aggregate, have a Material Adverse Effect and which
have, to the extent required, been disclosed to the Bank pursuant to Section
6.2 of the Loan Agreement or otherwise. Borrower further represents and
warrants to Bank on and as of the date of this Amendment, and after giving
effect thereto, no Default or Event of Default has occurred and is continuing.
6. CONDITIONS PRECEDENT. Subject to other terms and conditions hereof,
this Amendment shall not become effective unless and until the Bank shall have
received the following documents, each duly executed and delivered to Bank, and
each to be satisfactory in form and substance to Bank and its counsel:
(a) the Amendment;
(b) the Replacement Revolving Credit Note, in the form of Exhibit A
attached hereto;
(c) a certificate signed by the president and chief financial
officer of Borrower, stating that, giving effect to this Amendment, the
representations and warranties set forth in Article 5 of the Loan
Agreement are true and correct in all material respects on the date
hereof, Borrower is on the date hereof in compliance with all the terms
and conditions set forth in the Loan Agreement, as amended hereby, and
the Loan Documents on its part to be observed performed, and on the date
hereof, after giving effect to this Amendment, no Default or Event of
Default has occurred or is continuing;
(d) a certificate of the Secretary of Borrower certifying that
attached thereto is a true and correct copy of the resolutions adopted by
its Board of Directors, authorizing the execution, delivery and
performance of the Amendment, the Replacement Term Note and the other
documents contemplated hereby;
(e) good standing certificates for the Borrower, issued as of a date
close to the date hereof by the Secretaries of State of each of the
states in which the Borrower is required to be qualified to do business;
(f) the written opinion of Cauthen & Feldman, P.A., counsel to
Borrower, in the form and substance satisfactory to Bank;
(g) an Acknowledgment and Agreement of Guarantor, executed by
Restor-AIT, Inc., a Delaware corporation;
(h) an Acknowledgment and Agreement of Guarantor, executed by Westec
Communications, Inc., a Delaware corporation;
10
<PAGE> 11
(i) a Guaranty and Agreement executed by Sunrise Sierra, Inc., a
Delaware corporation ("Sunrise");
(j) a Stock Pledge Agreement executed by Borrower with respect to
all the outstanding stock of Sunrise;
(k) such other documents, instruments and agreements with respect to
the transactions contemplated by this Amendment, in each case in such
form and containing such additional terms and conditions as may be
reasonably satisfactory to Bank, and containing, without limitation,
representations and warranties which are customary and usual in such
documents.
7. REFERENCES IN LOAN DOCUMENTS. All references in the Loan Agreement and
the other Loan Documents to the Loan Agreement shall hereafter be deemed to be
references to the Loan Agreement as amended hereby and as the same may
hereafter be amended from time to time.
8. NO CLAIMS, OFFSET. Borrower hereby represents, warrants, acknowledges
and agrees to and with Bank that (a) Borrower does not hold or claim any right
of action, claim, cause of action or damages, either at law or in equity,
against Bank which arises from, may arise from, allegedly arise from, are based
upon or are related in any manner whatsoever to the Loan Agreement and the Loan
Documents or which are based upon acts or omissions of Bank in connection
therewith and (b) the Obligations are absolutely owed to Bank, without offset,
deduction or counterclaim.
9. NO NOVATION. The terms of this Amendment are not intended to and do
not serve to effect a novation as to the Loan Agreement. The parties hereto
expressly do not intend to extinguish any debt or security interest created
pursuant to the Loan Agreement. Instead, it is the express intention of the
parties hereto to affirm the Loan Agreement and the security created thereby.
10. LIMITATION OF AMENDMENT. Except as expressly set forth herein, this
Amendment shall not be deemed to waive, amend or modify any term or condition
of the Loan Agreement or any of the other Loan Documents, each of which is
hereby ratified and reaffirmed, and which shall remain in full force and
effect, nor to serve as a consent to any matter prohibited by the terms and
conditions thereof.
11. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and any party hereto may execute any counterpart, each of which,
when executed and delivered, will be deemed to be an original and all of which,
taken together, will be deemed to be but one and the same agreement. Any
signature page to this Amendment may be witnessed by a telecopy or
11
<PAGE> 12
other facsimile of any original signature page or any counterpart hereof may be
appended to any other counterpart hereof to form a completely executed
counterpart hereof.
12. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the successors and permitted assigns of the parties
hereto.
13. SECTION REFERENCES. Section titles and references used in this
Amendment shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreements among the parties hereto
evidenced hereby.
14. GOVERNING LAW. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment under
seal as of the date first written above.
"BORROWER"
WORLD ACCESS, INC., f/k/a Restor Industries, Inc.
By:
---------------------------------------------
Name:
Title:
"BANK"
CREDITANSTALT-BANKVEREIN
By:
---------------------------------------------
Robert M. Biringer
Executive Vice President
By:
---------------------------------------------
Joseph P. Longosz
Vice President
12
<PAGE> 13
Exhibit A
to the Third Amendment to
Second Amended and Restated Credit Agreement
dated as of December __, 1996
FORM OF REVOLVING CREDIT NOTE
$10,000,000.00 December __, 1996
FOR VALUE RECEIVED, the undersigned, WORLD ACCESS, INC. (formerly known as
Restor Industries, Inc.), a Delaware corporation (hereinafter referred to as
"Maker"), promises to pay to the order of Creditanstalt-Bankverein (hereinafter
referred to as the "Holder"), at the office of Creditanstalt-Bankverein located
at Two Greenwich Plaza, Greenwich, Connecticut 06830 or at such other place as
Holder may from time to time designate in writing, the principal sum of TEN
MILLION AND 00/100 United States Dollars (U.S. $10,000,000.00) or, if less, the
aggregate outstanding principal amount of Revolving Credit Loans, as such term
is defined in the Loan Agreement referred to hereinbelow, made or issued by
Holder to Maker, in lawful money of the United States, payable in full on the
Revolving Credit Maturity Date.
Interest on the principal balance from time to time outstanding hereunder
shall accrue at the rates and shall be payable in the manner set forth in that
certain Second Amended and Restated Loan and Security Agreement dated as of
July 18, 1995 (as the same has been, and as the same may be further amended,
restated, supplemented or otherwise modified from time to time, the "Loan
Agreement"; capitalized terms contained herein and not otherwise defined herein
shall have the respective meanings given to such terms in the Loan Agreement)
by and between Maker and Holder. In no contingency or event whatsoever shall
the interest rate charged pursuant to the terms of this Revolving Credit Note
(this "Note") exceed the highest rate permissible under any law which a court
of competent jurisdiction shall, in a final determination, deem applicable
hereto. In the event that such a court determines that Holder has received
interest hereunder in excess of the highest applicable rate, Holder shall
promptly refund such excess interest to Maker.
The date and amount of each Revolving Credit Loan made by the Holder to
the Maker of this Note under the Loan Agreement, and each payment of principal
thereof, shall be recorded by Holder on its books and, prior to any transfer of
this Note, endorsed by Holder on the Schedule attached hereto or on any
continuation thereof.
This Note is, in part, a renewal and extension of and replacement for that
certain Revolving Credit Note dated as of March 28, 1996 by Maker and payable
to the order of Holder in the original principal amount of $6,000,000.
This Note is the "Revolving Credit Note" referred to in the Loan
Agreement, and is subject to all of the terms and conditions of the Loan
Agreement, including, but not limited to,
<PAGE> 14
those related to the acceleration of the indebtedness represented hereby upon
the occurrence of an Event of Default or the reduction of the Revolving Credit
Commitment. Payment of this Note is secured by the Collateral.
In the event that all or any portion of the indebtedness evidenced hereby
shall be collected by or through an attorney-at-law, Holder shall be entitled
to collect from Maker all costs of collection, including reasonable attorneys'
fees.
Maker hereby waives presentment, demand for payment, protest and notice of
protest, notice of dishonor and all other notices in connection with this Note.
This Note shall be payable without right of setoff, any defense of want or
failure of consideration, nonperformance of any condition precedent,
nondelivery or delivery for a special purpose or any other defense of any
nature whatsoever.
THIS NOTE, AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER, SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW). MAKER HEREBY (A)
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING
IN NEW YORK CITY FOR THE PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR
RELATING TO THIS NOTE AND (B) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE REGARDING
THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY
CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, NOTHING
HEREIN SHALL LIMIT THE RIGHT OF THE HOLDER TO BRING PROCEEDINGS AGAINST MAKER
IN THE COURTS OF ANY OTHER JURISDICTION WITHIN THE UNITED STATES OF AMERICA OR
IN WHICH ANY COLLATERAL IS LOCATED.
AFTER REVIEWING THIS PROVISION SPECIFICALLY WITH ITS COUNSEL, MAKER HEREBY
KNOWINGLY, INTELLIGENTLY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING BASED ON OR ARISING
OUT OF, UNDER, IN CONNECTION WITH, OR RELATING TO THIS NOTE, THE TRANSACTIONS
CONTEMPLATED HEREBY, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN), OR ACTIONS OF MAKER OR HOLDER. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE HOLDER TO MAKE THE LOANS EVIDENCED BY THIS NOTE TO
MAKER.
<PAGE> 15
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
under seal by its duly authorized officer as of the day and year first written
above.
"MAKER"
WORLD ACCESS, INC.,
a Delaware corporation
By:
---------------------------------------------
Title:
------------------------------------
Attest:
---------------------------------------------
Title:
------------------------------------
[CORPORATE SEAL]
<PAGE> 16
Schedule to
Revolving Credit Note
Dated as of December ___, 1996
of World Access, Inc.,
a Delaware corporation
Principal Principal
Amount of Interest Amount of Outstanding
Date Loan Rate Payment Balance
- ---- --------- -------- --------- -----------
<PAGE> 17
Exhibit B
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 1.1
PERMITTED LIENS
1. A.D.M. Ventures, Inc., d/b/a Yale Industrial
Trucks-Gulf/Atlantic lien against one (1) hand truck (Lease)
2. Credential Leasing Corp. lien against Orlando facility's
telephone equipment and auxiliary equipment (Lease Purchase)
3. IBM Credit Corporation lien against AS400 computer (Model
F20) and related equipment and software (Lease Purchase)
4. AT&T Capital Corporation and/or Affiliated Service Corp. lien
against Universal VCD Inserter and related equipment and software
(Lease Purchase)
5. Copelco Capital, Inc. lien against Quad Surface Mount
equipment, Genrad Test equipment and other assembly equipment (Lease
Purchase)
6. Midwest Commerce Leasing lien against one Yale forklift
(Lease Purchase)
<PAGE> 18
Exhibit C
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.2
CHIEF EXECUTIVE OFFICE: COLLATERAL LOCATIONS
Borrower's principal place of business and chief executive office:
945 E. Paces Ferry Road, Suite 2240
Atlanta, Fulton County, Georgia 30326
Borrower's principal place of business and chief executive office
prior to November 1996:
4501 Vineland Road
Orlando, Florida 32811
Locations Where Collateral is Located
945 E. Paces Ferry Road, Suite 2240
Atlanta, Georgia 30326
4501 Vineland Road
Orlando, Florida 32811
11220 Page Mill Road
Dallas, TX 75243
1915 North Bendix Drive
South Bend, IN 46628
3612 Ventura Drive East
Lakeland, Florida 33811
3610 Ventura Drive West
Lakeland, Florida 33811
3712 Ventura Drive West
<PAGE> 19
Lakeland, Florida 33811
3612 Medulla Road
Lakeland, Florida 33811
13402 N. Scottsdale Road
Scottsdale, Arizona 85254
4569 #D Las Positas Road
Livermore, California 94550
<PAGE> 20
Exhibit D
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.5
LITIGATION AND RELATED PROCEEDINGS
PENDING
1. Olympia Holding Corporation, Debtor, Lloyd T. Whitaker
Trustee, Plaintiff vs. Restor Industries, Inc., Defendant (United
States Bankruptcy Court, Middle District of Florida, Jacksonville
Division)
2. Mil-Pro Services, Inc., Third Party Plaintiff vs Rytek
Corporation, Restor Industries, Inc. and Atmel, Inc., Third Party
Defendants (Circuit Court in and for Orange County, Florida)
3. R. Darby Boland, d/b/a Technology Resources Ltd., Plaintiff
vs. World Access, Inc. Mr. Boland, an Illinois based outside sales
representative for the Company, claims the Company is liable for
sales commissions on certain sales to DSC Communications, Inc.
THREATENED:
1. Circuit Concepts, Inc., dispute involving $36,473 of
fabricated circuit boards purchased by Restor in early 1994, but not
paid for due to a troubled customer program and poor vendor
performance.
<PAGE> 21
Exhibit E
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.8
INTANGIBLE ASSETS
1. Trademark Registration No. 1585081 for Restor valid 02/27/90
- 02/26/00
2. Trademark Application No. 75/170153 for the World Access
logo.
3. Trademark Application No. 75/170154 for CDX, Compact Digital
Exchange.
4. Trademark Application No. 75/170250 for the World Access
alternate logo.
<PAGE> 22
Exhibit F
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.9
TAXES
Borrower has not yet filed its Florida state tax return for the
years ended December 31, 1994 and December 31, 1995.
<PAGE> 23
Exhibit G
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.10
ERISA MATTERS
(a) The only formal plans maintained as Restor Industries, Inc.
are:
(i) Restor Industries, Inc. Profit Sharing and
Retirement Savings Plan (401k)
(ii) Restor Industries, Inc. Flexible Benefits Plan (Section 125)
<PAGE> 24
Exhibit H
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.14
ENVIRONMENTAL MATTERS
NONE
<PAGE> 25
Exhibit I
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.19
CORPORATE AND TRADE OR FICTITIOUS NAMES
Restor Supply
Restor Telephone Products
REMS (1992-93)
Subscriber Systems (Pre-1990)
AIT, Inc.
American & International Telephone
Westec Communications, Inc.
Sunrise Sierra, Inc.
Restor Industries, Inc.
Restor-AIT, Inc.
<PAGE> 26
Exhibit J
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.22
1. The following companies all represent 100% owned subsidiaries
of World Access, Inc.
Company State of Incorporation
Restor-AIT, Inc. Delaware
Westec Communications, Inc. Delaware
Sunrise Sierra, Inc. Delaware
2. The following company is a 50% owned subsidiary of World
Access, Inc.
Company State of Incorporation
ICC, Inc. Florida
ICC, Inc. has no known assets or liabilities and is expected to be
liquidated in December 1996.
<PAGE> 27
Exhibit K
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.27
OPERATING LEASES
<TABLE>
<S> <C> <C>
Facilities Monthly Rent Expiration
Date
Orlando - Manufacturing Facility 3,400.00 November 1998
Orlando - Corporate Apartment 965.00 July 1997
Atlanta - Corporate Office 7,500.00 October 1998
Atlanta - Corporate Apartment 1,000.00 May 1997
South Bend 4,032.00 July 1997
Dallas 8,961.00 July 1999
Beaverton 3,557.00(1) June 1997
Lakeland - 3612 Ventura Road 3,710.00 March 1997
Lakeland - 3610 Venture Dr. 3,115.00 June 1998
Lakeland - 3712 Venture Dr. 1,700.00 March 1997
Lakeland - Medilla Road 2,915.00 December, 1998
California 7,200.00 ----------------
Scottsdale 7,214.00 November 1999
INFORMATION SYSTEMS:
Digital Equipment-personal computers 3,500.00 March 1998
PRODUCTION EQUIPMENT:
Copelco Capital - Surface Mount Line &
Testing Equipment 25,335.00(2) May-July 1990
Yale-motorized hand truck 100.00 -----------------
Pitney Bowes - carrier manifest system (SB) 150.00 Monthly
L.H. Leasing - trailer storage 105.00 Monthly
Midwest Commerce Leasing - Yale forklift (SB) 130.00 May 1996
Penskc Truck Rental - 24 foot truck 900.00 Monthly
AT&T Capital - Universal VCD Inserter 1,478.00 July 1998
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
OFFICE EQUIPMENT:
Copytronics - Minolta equipment (3 machines) 1,215.00 November 1997
Toshiba - 2 fax machines, 2 copiers 400.00 May 1999
First United - Sharp fax (SB) 73.00 Monthly
Meridan - Sharp fax 143.00 _________
Neopost - Parcel Shipping system (OR) 100.00 _________
Ascom Hasler - Postage Meter (Orlando) 40.00 Quarterly
Ascom Hasler - Postrage Meter (Atlanta) 54.00 November 2000
Pitney Bowes - Postage meter (TX) 36.00 Quarterly
Pitney Bowes - Postage meter (AZ) 211.00 July 1999
TOTAL MONTHLY RENTALS 119,239.00
==========
</TABLE>
(1) Facility has been subleased for the full rental rate through the
remaining term of the lease.
(2) Payments 2-25 of Equipment Lease will be $25,335. Payments 26-48 will be
$10,760. Rent expense for the equipment is being charged to operations
on a straight-line basis (total rents due/48 months).
<PAGE> 29
Exhibit L
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 5.29
LABOR MATTERS
1. Written Employment Agreements with Management:
<TABLE>
<CAPTION>
Name Title Agreement
---- ----- ---------
<S> <C> <C>
Stephen Jack (RTP) V.P. & General Dated April 1991, renewed
Manager on an annual basis
James Shirkey (AIT) President Two year agreement
expiring July 10, 1997
William Sims (AIT) V.P. & General Two year agreement
Manager expiring August 21, 1997
Robert O'Hara (Westec) President One year agreement
expiring October 31, 1996
Michael R. Joe (Sunrise) President Three year agreement
expiring December 31, 1998
2. No collective bargaining agreements exist.
3. No strikes or other labor disputes are pending or threatened.
</TABLE>
<PAGE> 30
Exhibit M
to Third Amendment to
Second Amended and Restated Loan
and Security Agreement
dated as of December 19, 1996
SCHEDULE 7.2
PERMITTED INDEBTEDNESS
None
<PAGE> 1
EXHIBIT 10.32
AMENDMENT FOUR TO THE
WORLD ACCESS, INC.
1991 STOCK OPTION PLAN
Pursuant to Paragraph 15 of the Restor Industries, Inc. 1991 Stock Option
Plan, as amended (also so amended, the "Plan"), World Access, Inc., formerly
known as Restor Industries, Inc. (the "Corporation"), does hereby amend the
Plan as follows:
Paragraph 4 of the Plan is hereby amended by deleting Paragraph 11.a of the
Plan in its entirety and substituting the following in lieu thereof:
"11. Assignment, Transfer or Sale.
No ISO or any Option granted to an employee who is an officer, director or
beneficial owner of 10% or more of the Company's securities shall be assignable
or transferable by the grantee except by will or by the laws of descent and
distribution, and during the lifetime of the grantee, each Option shall be
exercisable only by him, his guardian or legal representative. Shares
underlying the ISO(s) may be assigned, transferred or sold subject to the
restrictions of Paragraph 20 herein.";
Except as specifically amended hereby, all other terms and provisions of the
Plan shall remain in full force and effect. If not otherwise defined herein,
all capitalized terms contained in this Amendment shall have the meanings
ascribed to them in the Plan.
IN WITNESS WHEREOF, pursuant to the authority granted to the undersigned by the
Board of Directors of the Company, the Plan is hereby amended, effective as of
this 8th day of October, 1996.
WORLD ACCESS, INC.
(f/k/a Restor Industries, Inc.)
/s/ Steven A. Odom
------------------
Steven A. Odom, Chairman of the
Board and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.33
AMENDMENT FIVE TO THE
WORLD ACCESS, INC.
1991 STOCK OPTION PLAN
Pursuant to Paragraph 15 of the Restor Industries, Inc. 1991 Stock Option
Plan, as amended (as so amended, the "Plan"), World Access, Inc., formerly
known as Restor industries, Inc. (the "Corporation"), does hereby amend the
Plan as follows:
Paragraph 4 of the Plan is hereby amended by deleting paragraph 4 of the Plan
in its entirety and substituting the following in lieu thereof:
"4. Stock. The stock subject to Options shall be authorized but unissued
shares of common stock, par value $.01 per share (the "Common Stock"), or
shares of the Common Stock reacquired by the Company in any manner. The
aggregate number of shares of Common Stock which may be issued pursuant to the
Plan is 2,500,000 subject to adjustment as provided in Paragraph 13. Any such
shares of Common Stock may be issued as ISOs or Non-Qualified Options so long
as the number of shares so issued does not exceed such number, as adjusted.
Notwithstanding the foregoing, the Company shall not be required reserve for
issuance hereunder any shares of Common Stock unless such shares are subject to
currently issued and outstanding Options. If any option granted under the Plan
shall expire or terminate for any reason without having been exercised in full
or shall cease for any reason to be exercisable in whole or in part the
unpurchased shares subject to such Options shall again be available for grants
of Options under the Plan."
Except as specifically amended hereby, all other terms and provisions of the
Plan shall remain in full force and effect. If not otherwise defined herein,
all capitalized terms contained in this Amendment shall have the meanings
ascribed to them in the Plan.
IN WITNESS WHEREOF, pursuant to the authority granted to the undersigned by the
Board of Directors of the Company, the Plan is hereby amended, effective as of
this 23rd day of August, 1996.
WORLD ACCESS, INC.
(f/k/a Restor Industries, Inc.)
/s/ Steven A. Odom
------------------
Steven A. Odom, Chairman of the
Board and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.34
AMENDMENT ONE TO THE
WORLD ACCESS, INC.
DIRECTORS' WARRANT INCENTIVE PLAN
Pursuant to Section 13 of the Restor Industries, Inc. Directors' Warrant
Incentive Plan (the "Plan"), World Access, Inc., formerly known as Restor
Industries, Inc. (the "Corporation"), does hereby amend the Plan as follows:
Section 15 of the Plan is hereby amended by deleting Section 15 of the Plan in
its entirety and substituting the following in lieu thereof:
"15. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of all Warrants that are issued and
outstanding under the Plan at any one time."
Except as specifically amended hereby, all other terms and provisions of the
Plan shall remain in full force and effect. If not otherwise defined herein,
all capitalized terms contained in this Amendment shall have the meanings
ascribed to them in the Plan.
IN WITNESS WHEREOF, pursuant to the authority granted to the undersigned by the
Board of Directors of the Company, the Plan is hereby amended, effective as of
this 23rd day of August, 1996.
WORLD ACCESS, INC.
(f/k/a Restor Industries, Inc.)
/s/ Steven A. Odom
------------------
Steven A. Odom, Chairman of the
Board and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.35
AMENDMENT ONE TO THE
WORLD ACCESS, INC.
OUTSIDE DIRECTORS' WARRANT PLAN
Pursuant to Section 13 of the Restor Industries, Inc. Outside Directors'
Warrant Plan (the "Plan"), World Access, Inc., formerly known as Restor
Industries, Inc. (the "Corporation"), does hereby amend the Plan as follows:
Section 15 of the Plan is hereby amended by deleting Section 15 of the Plan in
its entirety and substituting the following in lieu thereof:
"15. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of all Warrants that are issued and
outstanding under the Plan at any one time."
Except as specifically amended hereby, all other terms and provisions of the
Plan shall remain in full force and effect. If not otherwise defined herein,
all capitalized terms contained in this Amendment shall have the meanings
ascribed to them in the Plan.
IN WITNESS WHEREOF, pursuant to the authority granted to the undersigned by the
Board of Directors of the Company, the Plan is hereby amended, effective as of
this 23rd day of August, 1996.
WORLD ACCESS, INC.
(f/k/a Restor Industries, Inc.)
/s/ Steven A. Odom
------------------
Steven A. Odom, Chairman of the
Board and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.36
AGREEMENT
THIS AGREEMENT is effective as of July 1, 1996 (the "Effective Date") by and
between International Communication Technologies Inc., a corporation duly
organized and existing under the laws of the State of Delaware ("ICT') and
World Access, Inc., a corporation duly organized under the laws of the State of
Delaware ('World"). World and ICT are each a "Party" and, collectively, the
"Parties."
Eagle Telephonics, Inc., a New York corporation ("Eagle") is a signatory to
this Agreement in both acknowledging ICT's power and right to enter into this
Agreement and to the extent this Agreement creates any duties, obligations, or
rights with respect to Eagle.
WITNESSETH
WHEREAS, Eagle has developed a microprocessor based digital central office
switch ("Eagle DSCO"), and other telephone technology, Eagle Technology and
Eagle Products (as hereinafter defined); and
WHEREAS, Eagle and ICT have entered into an agreement dated as of February 22,
1995 (the "ICT/Eagle Agreement") in which Eagle granted to ICT the exclusive
rights to distribute, sell, license, and otherwise provide Eagle Technology
and Eagle Products to third parties throughout the United States and the rest
of the world and has granted a license to ICT under its trademarks and other
proprietary rights; and
WHEREAS, World desires to manufacture Eagle Products and have certain
distribution
and sales rights; and
WHEREAS, World, Eagle, and ICT entered into that certain Memorandum of
Understanding dated March 21, 1996 (the "Memorandum") which set forth the basis
for this Agreement; and
WHEREAS, ICT is willing to grant to World the right to manufacture, distribute,
and sell Eagle Products to third parties in the Territory and under the terms
and conditions contained in this Agreement:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows:
ARTICLE 1 - DEFINITIONS
For the purposes of this Agreement, the following phrases shall have the
following
meanings:
1.1 "Consideration" shall mean, $700,000 to be paid by World to Eagle in such
arrangement of cash, credit and allocations to accounts payable as set forth in
the Memorandum in addition to other valuable consideration including but not
limited to value engineering of the Eagle DSCO.
1.2 "Eagle Technology" shall mean all patented, unpatented and unpatentable
technical information, software, including source code, formats and executable
code, trade secrets, devices, models, protocols, things, management procedures,
data, know-how, methods, documents, materials, products, documentation,
copyrights, works of authorship, trademarks and all confidential information
and any other existing rights including disputed rights related to making,
using, selling, marketing, and compliance with regulatory requirements for
standard switches and related telecommunications equipment, including, without
limitation, Eagle DSCO switch technology, and all new technology designed
relating to standard switches and related telecommunications equipment,
developed or used by, for or on behalf of Eagle, its directors, employees or
agents which World uses in the manufacture of Eagle Products and distributes in
the Territory.
<PAGE> 2
1.3 "Eagle Products" shall mean any product designed by Eagle for use as
standard telephone switches and related telecommunications equipment and which
includes Eagle Technology or whose structure or operation falls within the
scope of one or more claims of any Licensed Patent and which World manufactures
and distributes in the Territory under the terms of this Agreement. Standard
telephone switches and related telecommunications equipment are those products
designed by Eagle which rely solely on established US and International
protocols (CCITT) including country specific modifications of these established
protocols mandated by the appropriate governmental authority and does not
include Custom Products which include proprietary technology from third parties.
1.4 "Eagle Proprietary Components" shall mean custom components developed or
designed by Eagle which are used in Eagle Products and manufacturing and
customer documentation necessary or used to make or have made, market, and
deliver Eagle Products.
1.5 "ICT Company" shall mean any parent of ICT, any direct or indirect
subsidiary of ICT, and any commonly controlled company majority owned BY ICT
or any parent of ICT including, without limitation, at the present time,
International Communication Technologies, Inc. and International Manufacturing
and Licensing, Inc.
1.6 "Licensed Patents" shall mean all patents, utility models and design
patents now issued or which shall issue on applications now on file or
which shall hereafter be filed, including all reissues, reexaminations and
extensions in the United States or anywhere in the world, owned or invented by
Eagle, its officers or employees, directed to or related in any way to the
Eagle Technology. All such Licensed Patents now issued or on file are
identified in Schedule A - Licensed Patents.
1.7 "Licensed Rights" shall mean all Eagle Technology, Licensed Patents, and
Technology Rights, ICT and Eagle Trademarks as such terms are defined herein
which collectively shall, for the purposes of this Agreement constitute
"intellectual property", as such term is defined in 11 U.S.C. Section 101(35A)
of the United States Code, and incorporated into 11 U.S.C. Section 365(n) of
the United States Code.
1.8 "OEM Integrated Products" shall mean telecommunication network systems in
which Eagle Products are sold as an integrated part of such systems and
not as a stand-alone product and in which the Eagle Products do not comprise
more than 40% of the sales price of such system and are marketed under the OEM
brand name.
1.9 "Prospective Customers" shall mean potential purchasers of Eagle Products
from World with whom World has had significant and direct contact within the
previous 12 months with regard to the purchase of Eagle Products. As used
herein 'significant' shall mean the direct expenditure by World of at least
$50,000 not including the salaries of World employees for each Prospective
Customer in furtherance of their purchase of Eagle Products.
1.10 "Prototype" shall mean a model or sample representative of any item or
Eagle Product, the sale of which is within the scope of this Agreement.
1.11 "Royalty" shall mean a fee charged by ICT for the use of the Licensed
Rights by World. This Royalty shall be set for each new Eagle product by ICT
and shall apply to all Licensees. The Royalty for the Eagle DSCO (the "DSCO
Royalty") is set at $20.00 a port.
1.12 "Technology Rights" shall mean the rights to manufacture, distribute, and
sell Eagle Products to third parties throughout the Territory pursuant to the
terms of this Agreement.
1.13 "Territory" shall mean the "Regions", and a "Region" may be a country or
part of a country or combinations thereof, as set forth on Schedule F. Schedule
F will also set forth which regions are exclusive to World and which are
non-exclusive. A Region may at a subsequent date be converted from exclusive to
<PAGE> 3
non-exclusive or from non-exclusive to withdrawn from the Territory pursuant to
the terms of this Agreement.
ARTICLE 2 - LICENSE GRANT
2.1 ICT ("Licensor') hereby grants to World ("Licensee") the Licensed Rights
in connection with the manufacture and distribution of Eagle Products
throughout the Territory.
2.2 World shall not assign, sublicense, or otherwise transfer the Rights
granted herein without the prior written consent of Licensor. Any such
prohibited act shall be invalid and void and Licensor, at its option, shall
have the right to terminate this Agreement immediately.
2.3 The License granted herein is subject to and incorporates the provisions
of Articles VII, X and XII of the ICT/Eagle Agreement, provided, however, that
World shall have the right to change the name, color, and styling of any Eagle
Products manufactured and sold by World in the Exclusive Region, and further
providing that all such products shall be prominently and permanently marked
"Manufactured under License from ICT/Eagle." The change of name, color, and
styling shall not constitute a Custom Product under this Agreement.
2.4 The License granted herein is valid only for the exclusive and
non-exclusive Territory as defined in Schedule F hereof as modified from time
to time and specifically excludes Regions listed in Schedule C, ICT Reserved
Territory, provided however, ICT may not designate a Region as a Reserved
Territory if it has been granted to World on an exclusive basis and World is
not in breach of this Agreement and has met the minimum Royalty requirements to
maintain the Region as a part of its exclusive Territory. Notwithstanding the
foregoing, the Parties agree that OEM Integrated Products may be sold, leased,
or otherwise distributed by either Party and by other ICT licensees to OEMs
who shall have the right to distribute such OEM Integrated Products throughout
the world, including the Territory and ICT's Reserved Territory.
If ICT enters into a license, manufacturing, distribution, and/or
representation agreement which provides a party other than World with exclusive
rights with regard to the manufacture, distribution, or sale of Eagle
Technology and/or Eagle Products in a Region or Regions which are designated
non-exclusive, If World, pursuant to this paragraph, wishes to retain rights
with current World customers or Prospective Customers in such Region or
Regions, within 10 days of such notice to World, World shall provide ICT with a
list of (i) World customers within the designated non-exclusive area which had
purchased Eagle Products within the 12 months prior to World's receipt of such
notice together with evidence of the actual shipments made to such World
customers during the such 12 month period and (ii) World's Prospective
Customers. World may continue to supply all such listed World customers and
Prospective Customers in the withdrawn Region, and only such listed World
customers and Prospective Customers during the 24 months following such notice.
Thirty (30) days after such ICT notice that Region and/or Regions shall
be deemed withdrawn from the Territory and World shall have no further right to
exploit the Licensed Rights in such Region and/or Regions, including, without
limitation, making any sales, leases or transfers to customers,
representatives, and/or distributors in such Regions or for retransfer to such
Regions regardless of where the Eagle Products are manufactured except as
otherwise provided for in this Section.
2.5 Regardless of where the Eagle Products are manufactured by World, World
may not sell, lease or otherwise transfer them and/or Eagle Technology
to customers outside of the Territory and is responsible for ensuring that
World's customers do not sell, lease or otherwise transfer Eagle Products
and/or Eagle Technology outside of the Territory. World agrees it shall not,
in the exclusive Territory, sell or otherwise distribute or promote any
products which are directly competitive with, or act as a substitute for Eagle
Product. For the purposes of this Agreement the terms "directly competitive"
or "act as a substitute" do not
<PAGE> 4
include switches which are larger than Eagle's largest switch configuration or
which use required protocols or interfaces which Eagle does not provide.
ARTICLE 3 - ROYALTIES AND PROPRIETARY COMPONENTS
3.1 ICT will make available and sell Eagle Proprietary Components to World.
World shall obtain Eagle Proprietary Components from ICT and shall incorporate
such Eagle Proprietary Components in all Eagle Products.
3.2 The price of the Eagle Proprietary Components shall be set annually on
the basis of ICT/Eagle's actual cost for the Eagle Proprietary Components (if
there is more than one type of Eagle Proprietary Component, the price will be
calculated based on the particular type ordered by World) plus a Net DSCO
Royalty as herein defined for each Eagle Product manufactured, payable at the
time of purchase of Eagle Proprietary Components.
3.3 World shall not procure Eagle Proprietary Components from any source other
than ICT. World shall not attempt to produce Eagle Proprietary Components
whether through development or reverse engineering or any other manner except
under the circumstances set forth in Article 10.
3.4 It is ICT's intention to purchase or direct its customers to purchase
Eagle Products from World. Upon the written request of ICT or ICT customers,
World shall manufacture Eagle Products, which ICT may use or transfer in ICT's
sole discretion, ICT or its customers holding sole title to such Eagle Products
upon payment. World shall charge ICT for such Eagle Products ordered by ICT or
its customers (i) the lowest price such Eagle Product has been sold by World,
during the year of such sale, or (ii) the sum of (a) one hundred fifty percent
(150%) of the actual material cost of components of such Eagle Product other
than Eagle Proprietary Components and (b) the price of such Eagle Proprietary
Components, whichever is less. In the event ICT directs its customers purchase
and pay World directly for Eagle Products, World shall promptly, upon receipt
of payment or partial payment, pay to ICT any difference between the amount
received from ICT customers and the amount to be charged to ICT pursuant to the
formula set forth in this paragraph.
3.5 The Licensed Rights are granted for the Consideration contained herein.
If the Consideration is not fully paid or performed, the grant of Licensed
Rights and License in Article 2 may be terminated by ICT.
3.6 ICT and Eagle acknowledge that World has been of great assistance to
Eagle and ICT. This assistance has come by way of extension of liberal credit
terms, an investment in Eagle, and assistance in value engineering of the Eagle
DSCO at a very important time in the development of Eagle Technology. For
these reasons, ICT and Eagle have agreed to grant World a discount of $11.00 a
port on the DSCO Royalty. The "Net DSCO Royalty" shall be $9 a port.
ARTICLE 4 - REPORTS AND RECORDS
4.1 World will make and deliver written reports to ICT quarterly within
thirty (30) days after the last day of each calendar quarter, during the term
of this Agreement, and as of such dates, stating in each such report the number
and description of Eagle Products sold during the preceding calendar quarter
with specific statement as to the number of ports or units contained in such
Eagle Products. The first such report, which shall be due thirty days after
the quarter in which the first sale occurs, shall include all Eagle Products
sold between the Effective Date of this Agreement and the date of such report.
Reports shall include a special report which provides the name of OEM customers
and sales of all OEM Integrated Products, including the detail called for above
plus the countries into which such OEM Products are sold or shipped.
<PAGE> 5
4.2 World shall keep full, true and accurate books of account containing all
particulars that may be necessary to calculate the amounts payable to
ICT hereunder and to support the charges (in an itemized fashion), if any,
charged to ICT for the manufacture of Eagle Products for ICT by World, pursuant
to paragraph 3.4. Such books of account shall be maintained for six (6) years
following the end of the calendar year to which they pertain and during the
pendency of any action brought for enforcement of proprietary rights in the
Eagle Technology, whichever last concludes.
World will permit such books of account to be examined from time to time to the
extent necessary to verify the reports provided for in paragraph 4.1, the
charges for manufacture of Eagle Products for ICT by World, and for the
enforcement of such proprietary rights. Upon termination of this Agreement,
ICT shall have the right to have a final audit conducted in accordance herewith.
ARTICLE 5 - MINIMUM SALES
5.1 On Schedule F, next to each exclusive Region is a minimum Net DSCO
Royalty to be paid by World during 1997, 1998, and 1999 for that exclusive
Region in order for World to maintain exclusivity for such Region (there are no
minimums for 1996). After 1999, the minimum DSCO Royalties for each exclusive
Region increases by 10% per year until 2005, at which point it remains
constant. If World does not pay the minimum Net DSCO Royalties for a
particular exclusive Region, ICT shall have the right on thirty (30) days
notice to World to convert such Region from exclusive to non-exclusive.
Notwithstanding the foregoing, World shall be obligated to pay such
minimum Net DSCO Royalties for the exclusive Regions for the year 1997 only if
Eagle has demonstrated to World that its 1024 line switch functions in
accordance with Eagle's specifications manual (as contemplated in the
Memorandum) by September 30, 1996. If Eagle has not demonstrated to World that
its 1024 line switch functions in accordance with Eagle's specifications manual
by September 30, 1996 and such delay is not the result of World's failure to
complete its manufacturing tasks, the Parties hereto agree that the minimum Net
DSCO Royalties hereunder for the exclusive Regions for 1997 shall be reduced by
20%. If Eagle has not demonstrated to World that its 1024 line switch
functions in accordance with Eagle's specifications manual by December 31, 1996
and such delay is not the result of World's failure to complete its
manufacturing tasks, the Parties hereto agree that the minimum Net DSCO
Royalties hereunder for the exclusive Regions for 1997 shall be reduced by
100%, 1998 minimum Net DSCO royalties for the exclusive Regions shall be those
now shown for 1997, and 1999 minimum Net DSCO Royalties shall be those now
shown for the exclusive Regions for 1998 and 2000 minimum Net DSCO Royalties
shall be those now shown for the exclusive Regions for 1999.
5.2 On Schedule F, next to the non-exclusive Regions is an aggregate minimum
Net DSCO Royalty payment to be paid by World during 1997, 1998, and
1999 for the non-exclusive Regions in order for World to maintain its right to
market Eagle Products in such Regions (there are no minimums for 1996). After
1999, the minimum Net DSCO Royalties increases by 5% per year until 2005, at
which point it remains constant. If World does not meet this minimum
requirement for the non-exclusive Regions, ICT shall have the right on thirty
(30) days notice to World to withdraw such non-exclusive Regions from the
Territory.
If Eagle has not demonstrated to World that its 1024 line switch functions in
accordance with Eagle's specifications manual by September 30, 1996 and such
delay is not the result of World's failure to complete its manufacturing tasks,
the Parties hereto agree that the minimum Net DSCO Royalties hereunder for the
non-exclusive Regions for 1997 shall be reduced by 20%. If Eagle has not
demonstrated to World that its 1024 line switch functions in accordance with
Eagle's specifications manual by December 31, 1996 and such delay is not the
result of World's failure to complete its manufacturing tasks, the Parties
hereto agree that the minimum Net DSCO Royalties hereunder for the
non-exclusive Regions for 1997 shall be reduced by 100%, 1998 minimum Net DSCO
royalties for the non-exclusive Regions shall be those now shown for 1997, and
1999 minimum Net DSCO Royalties for
<PAGE> 6
the non-exclusive Regions shall be those now shown for 1998 and 2000
minimum Net DSCO Royalties for the non-exclusive Regions shall be those now
shown for 1999.
5.3 In the event World elects to manufacture and sell Eagle Products in
addition to the DSCO, the Parties shall, in good faith, negotiate minimum
royalty payments to retain territorial rights.
ARTICLE 6 - TECHNOLOGY TRANSFER
6.1 ICT and Eagle agree to provide, within a reasonable time after World's
reasonable written request, technology transfer information, technical
documentation and technical training regarding Eagle Technology to World
sufficient to enable World to effectively manufacture, test, install, maintain
and service Eagle Products (hereinafter Technical Cooperation). It is expressly
agreed that such Technical Cooperation and any other obligation, requirement,
right or provision of this Agreement shall not constitute a marketing plan or
system prescribed in part by ICT or undertaken by World.
6.2 World may not subcontract its right to manufacture Eagle Products without
the prior express written permission of ICT which ICT may grant or withhold in
ICT's sole discretion. ICT shall have the right to specify and/or approve
standards of workmanship and quality control and other standards concerning the
manufacture of Eagle Products by World.
6.3 ICT shall have the right to inspect or designate another party to inspect
World's facilities during normal business hours and upon reasonable notice to
ascertain that World's workmanship standards meet ICT's minimum requirements.
6.4 It is hereby understood and agreed that (i) this Agreement is not an
employment agreement, (ii) that World and its employees or designees shall at
no time and under no circumstances be deemed an employee or agent of ICT or
Eagle, and (iii) that World is an independent contractor and ICT and Eagle
shall exercise no immediate control over World. ICT and Eagle shall not
be liable for any injury (including death) to employees or designees of World,
or for workmen's compensation, employer's liability, social security,
withholding tax, or other taxes of similar nature for or on behalf of World or
any other person, persons, firms or corporations consulted by World in carrying
out this Agreement.
6.5 It is specifically understood that World shall at no time be an agent of
ICT or Eagle and shall not have the authority to accept legal service of
process or have power to bind or commit ICT or Eagle to any contractual
obligations.
6.6 It is hereby understood and agreed that (i) this Agreement is not an
employment agreement, (ii) that ICT and its employees or designees shall at no
time and under no circumstances be deemed an employee or agent of World, and
(iii) that ICT and Eagle are each an independent contractor and World shall
exercise no immediate control over ICT or Eagle. World shall not be liable for
any injury (including death) to employees or designees of ICT or Eagle, or for
workmen's compensation, employer's liability, social security, withholding tax,
or other taxes of similar nature for or on behalf of ICT or Eagle or any other
person, persons, firms or corporations consulted by ICT or Eagle in carrying
out this Agreement.
ARTICLE 7- SUBLICENSE AGREEMENTS, TRADEMARKS, QUALITY CONTROL
AND MARKING
7.1 World shall make available to ICT, throughout the term of this Agreement,
Prototypes of all items of Eagle Products which Licensee intends to market
under any mark set forth in Schedule B - Trademarks prior to distributing such
Eagle Products under such mark. World may market any Eagle Products under the
name ICT/Eagle. Each such available Prototype of Eagle Product shall be deemed
accepted and approved by ICT unless ICT provides Licensee with written notice
of its objections thereto within forty-five (45) business days after receipt
of notice of availability of such Prototypes.
<PAGE> 7
Eagle and Licensee shall consult and cooperate with each other for
purposes of modifying the Prototype and resolving such objections as
expeditiously as possible. Licensee shall then re-notice the availability of
the modified Prototype and the above forty-five (45) days acceptance period
shall again be applicable.
The above approval process shall be repeated until such time as the
Prototype has been approved by ICT or the Parties agree that the Prototype
shall not be marketed as an Eagle Product under any mark set forth in Schedule
B. Except as set forth in this Agreement, Licensee shall not manufacture, use
or sell any Eagle Products under any mark set forth in Schedule B without the
Prototype being approved or deemed approved pursuant to this paragraph 7.1.
7.2 The Eagle Products manufactured and sold by Licensee shall be
substantially the same in materials, workmanship, designs, dimensions, and
quality to the Prototypes made available and approved by ICT. Licensee shall
have the right to change the name, color, and styling of any Eagle Products
manufactured and sold by World in the Exclusive Region, and further
providing that all such products shall be prominently and permanently marked
"Manufactured under License from ICT/Eagle." The change of name, color, and
styling shall not constitute a Custom Product under this Agreement.
7.3 Licensee will comply with all laws, rules, regulations and requirements
of any governmental body which may be applicable to the manufacture,
distribution, sale or promotion of the Eagle Products.
7.4 ICT and its duly authorized representatives shall have the right, during
normal business hours and upon reasonable notice, during the term of this
Agreement to inspect all facilities utilized by Licensee (and its contractors
and suppliers to the extent Licensee may employ the same) in connection with
its manufacture, sale, storage or distribution of the Eagle Products in the
process of manufacture and when offered for sale.
7.5 All Eagle Products sold in the United States shall be marked with all
applicable United States Patent numbers in a manner consistent with 35
U.S.C. Section 287. Any Eagle Products shipped to or sold in other countries
shall be marked in such a manner as to conform with the patent laws and
practice of the country of manufacture or sale.
7.6 ICT and Eagle each covenant and agree that the grant of the Licensed
Rights to World hereunder shall be considered to be the transfer of
"Intellectual Property", as such term is defined in 11 U.S.C. Section 101
(35A) of the United States Code and incorporated into 11 U.S.C. Section 365(n)
of the United States Code, and, accordingly, neither the bankruptcy nor the
insolvency of ICT or Eagle shall result in a termination of this Agreement or
result in a revocation of the Licensed Rights granted to World hereunder.
ARTICLE 8- ENFORCEMENT
World and ICT shall promptly notify each other of any infringements or
suspected infringements of any proprietary aspect of the Eagle Technology by
third parties, or any act of unfair competition by third parties relating to
the Eagle Technology, whenever such infringement, suspected infringement or act
shall come to World's attention. After receipt of such notice from World or
otherwise learning of any such infringements or suspected infringements, ICT
shall notify Eagle of any such infringements or suspected infringements and
Eagle shall act in accordance with the terms of the Eagle Agreement.
ARTICLE 9 - TERMINATION
Either World or ICT may initiate termination of this Agreement by giving notice
in writing to the other Party in the event the other Party is in material
breach of this Agreement and shall have failed to act to diligently cure such
breach within thirty (30) days of receipt of written notice thereof from the
first Party.
<PAGE> 8
ARTICLE 10 - DEPOSIT MATERIALS
10.1 Pursuant to the terms of the ICT/Eagle Agreement, Eagle is to deliver
Deposit Materials (as that term is defined in the ICT/Eagle Agreement)
and Additional Deposit Materials (as that term is defined in the ICT/Eagle
Agreement) to a Holder (as that term is defined in the ICT/Eagle Agreement).
Under the circumstances and according to the procedures set forth in the
ICT/Eagle Agreement, the Deposit Materials and Additional Deposit Materials may
be released to ICT if Eagle is unable or unwilling to provide ICT with Eagle
Proprietary Components, if Eagle has failed to support the Eagle Products, or
if ICT has been unable to immediately procure from Eagle suppliers whatever ICT
requires to make or have made the Eagle Products provided there is no order by
any executive, legislative, or judicial person, body, or forum prohibiting the
release of the Deposit Materials and the Additional Deposit Materials.
Except (i) if Eagle Proprietary Components have not been fully
developed and tested and are ready for sale, (ii) for reasonable manufacturing
lead times, (iii) reasonable debugging and testing time for changes and
improvements, and (iv) subject to World accepting suppliers payment terms, if
ICT and Eagle are unable or unwilling to provide Eagle Proprietary Components
to World for a time period in excess of ninety (90) days World may request the
Holder to release the Deposit Materials and additional Deposit Materials to
World provided there is no order by any executive, legislative, or judicial
person, body, or forum prohibiting the release of the Deposit Materials and
the Additional Deposit Materials. World may obtain the release of the Deposit
Materials and Additional Deposit Materials by the Holder pursuant to the
following procedure: Holder must receive from World (i) written notification
(the "Notice") setting forth the reason for World's request for such release
and stating that World is entitled to use and access such Deposit Materials and
Additional Deposit Materials, (ii) a written undertaking from World that the
Deposit Materials and Additional Deposit Materials being supplied to World will
be used only as permitted under the terms of this Agreement, and (iii)
specific instructions from World for this delivery. Upon receipt of such
Notice from World, Holder shall notify ICT of World's Notice to Holder,
enclosing therein a copy of such request which sets forth ICT's or Eagle's
failure to supply ("Holder's Original Notice").
If ICT or Eagle, as the case may be, does not commence delivery of the
Eagle Proprietary Components or resume ICT's or Eagle's support of World's
development and manufacture of the Eagle Products within thirty (30) days of
the receipt of Holder's Original Notice to ICT or Eagle, Holder will
immediately commence delivery of the Deposit Materials and Additional Deposit
Materials to World as provided in the Notice. Holder shall have no specific
obligation to ICT or Eagle. ICT's and Eagle's sole remedy for any improper
handling or release of Deposit Materials and Additional Deposit Materials shall
be exclusively against World.
Eagle hereby agrees that World shall have the right to enforce against
Eagle the provisions of Article XI of the ICT/Eagle Agreement relating to the
deposit and maintenance of the Deposit Materials and Additional Deposit
Materials as if World had been assigned ICT's rights under such article of the
ICT/Eagle Agreement.
10.2 If ICT is able to provide World with Eagle Proprietary Components within
eighteen (18) months after World has received the Deposit Materials and
Additional Deposit Materials, World shall purchase all such Eagle Proprietary
Components from ICT on an ongoing basis and shall redeposit the Deposit
Materials and Additional Deposit Materials with Holder when ICT has provided
Eagle Proprietary Components to World for a period of ninety days.
10.3 World, ICT, and Eagle shall, jointly and severally, indemnify and hold
harmless Holder and each of its directors, officers, member, partners, agents,
employees and stockholders ("Holder lndemnitees") absolutely and forever, from
and against any and all claims, actions, damages, suits, liabilities,
obligations, costs, fees, charges, and any other expenses whatsoever, including
reasonable attorneys' fees and costs, that may be asserted against any Holder
Indemnitee in connection with this Agreement or the performance of Holder or
any Holder Indemnitee hereunder.
<PAGE> 9
10.4 Subject to the terms of 10.2 hereof, the Deposit Materials may only be
used by World to manufacture Eagle Proprietary Components to be incorporated in
Eagle products manufactured by World and only so long as the Proprietary
Components are not supplied by ICT. The Deposit Materials may not be used for
research and development purposes and all Deposit Materials are subject to the
confidentiality provisions of this Agreement.
10.5 In the event that the Deposit Materials are released to World and World
makes or has made Eagle Proprietary Components, ICT shall be paid the cost of
such components only to the extent ICT has costs relating to such Eagle
Proprietary Components. However, ICT shall receive an amount equal to the
Royalty under Article 3.
ARTICLE 11 - CONFIDENTIALITY
11.1 ICT and World may from time to time provide Confidential Information (as
hereinafter defined) to each other. Each of ICT and World agrees that
they shall not at any time use or disclose, nor permit the use or disclosure
of, directly or indirectly, any Confidential Information for any Unauthorized
(as hereinafter defined) purpose. Nothing contained herein prohibits the
disclosure of Confidential Information pursuant to judicial or regulatory
order. World and ICT hereby agree that they shall not use, disclose,
reproduce, summarize or distribute Confidential Information except in
connection with their business relationship or as otherwise provided for in
this Agreement.
World and ICT each agree that they shall take any and all lawful
measures to prevent the Unauthorized use and disclosure of Confidential
Information, to prevent Unauthorized persons or entities from obtaining or
using such information and to refrain from directly or indirectly taking any
action which would constitute or facilitate the Unauthorized use or disclosure
of such information.
World and ICT each may disclose Confidential Information to their
officers and employees to the extent necessary to enable performance of the
activities contemplated hereunder; provided, that such officers and employees
have entered into an appropriate confidentiality agreement for secrecy and
non-use of Confidential Information substantially consistent herewith which by
its terms shall be enforceable by injunctive relief at the insistence of World
or ICT. World and ICT shall each be liable to the other for any unauthorized
use and disclosure of Confidential Information by its own officers and
employees.
11.2 As used in this Agreement, the term "Confidential Information"
shall mean trade secrets, confidential or proprietary information, and all
other knowledge, information, documents or materials, owned, developed or
possessed by the disclosing party, whether in tangible or intangible form,
which the disclosing party makes reasonable efforts to keep confidential and
which pertains, in any manner, to the Eagle Technology or Eagle Products,
improvements thereto, research operations, Customers (including identities of
Customers and prospective Customers, identities of individual contacts at
Customers, preferences, business or habits), business relationships, products
(including prices, costs, sales or content and including released or unreleased
products), financial information or measures, marketing or promotion
information, business methods, future business plans, databases, computer
programs, designs, models and operating procedures.
Notwithstanding the foregoing, Confidential Information shall not
include knowledge, information, documents or materials which the receiving
party can conclusively establish: (i) have entered the public domain without
breach of any obligation owed to the disclosing party; (ii) have become known
to the receiving party prior to the disclosing party's disclosure of such
information to the receiving party; (iii) are permitted to be disclosed by
prior written consent of the disclosing party; or (iv) have become known to the
receiving party from a source other than the disclosing party or its affiliates
other than by breach of an obligation of confidentiality.
11.3 As used in this Agreement, the term "Unauthorized" shall mean
inconsistent with the commercial operation of the Parties and: (i) in
contravention of disclosing party's policies or procedures in place or
<PAGE> 10
which are issued from time to time; (ii) otherwise inconsistent with disclosing
party's measures to protect its interests in its Confidential Information;
(iii) in contravention of any lawful instruction or directive, whether written
or oral, of disclosing party or any of its employees empowered to issue such
instruction or directive; (iv) in contravention of any duty existing under law
or contract; or (v) to the detriment of World or ICT in a manner inconsistent
with this Agreement.
11.4 The receiving party shall notify the disclosing party immediately upon
discovery of any Unauthorized use of disclosure of Confidential Information, or
any other breach of this Agreement by the receiving party and shall fully
cooperate with the disclosing party to help regain possession of Confidential
Information and prevent the further Unauthorized use or disclosure of
Confidential Information.
11.5 The provisions of paragraphs 1 1.1 through 11.4 shall survive the
expiration or termination of this Agreement.
ARTICLE 12 - REPRESENTATIONS AND WARRANTIES OF WORLD
Except as set forth on the Schedule D - Exceptions to Representations and
Warranties attached hereto, World hereby represents and warrants to ICT as
follows as of Effective Date (unless otherwise set forth below):
12.1 All corporate action on the part of World, its directors and stockholders
necessary for the authorization, execution, delivery and performance by
World of this Agreement and the consummation of the transactions contemplated
herein has been or will be taken prior to the Effective Date.
12.2 This Agreement will be a valid and binding obligation of World,
enforceable in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization and moratorium laws and other laws of general
application affecting enforcement of creditors' rights generally and to general
equitable principles. The execution, delivery and performance by World of this
Agreement and its compliance herewith will not result in any violation of and
will not conflict with, or result in a breach of any of the terms of, or
constitute a default under, the Charter or By-Laws of World.
The execution, delivery and performance by World of this Agreement and
compliance herewith will not result in any violation of and will not conflict
with, or result in a breach of any of the terms of, or constitute a default
under, any mortgage, indenture, agreement, instrument, judgment, decree, order,
rule or regulation or other restriction to which World is a party or by which
it is bound or any provision of state or Federal law to which World is subject,
or result in the creation of any mortgage, pledge, lien, encumbrance or charge
of any kind whatsoever upon any of the properties or assets of World pursuant
to any such term or result in the suspension, revocation, impairment,
forfeiture or non-renewal of any permit, license, authorization or approval
applicable and material to World's operations or any of its assets or
properties.
12.3 There is neither pending nor, to World's knowledge, threatened any
action, suit, proceeding, claim or investigation, or any basis therefor or
threat thereof, whether or not purportedly on behalf of World, to which World
is or may be named as a party or its property is or may be subject or to
World's knowledge, after due inquiry, to which any founder, officer, key
employee or principal stockholder of World is subject.
12.4 World has not admitted in writing its inability to pay its debts generally
as they become due, filed or consented to the filing against it of a petition
in bankruptcy or a petition to take advantage of any insolvency act, made an
assignment for the benefit of creditors, consented to the appointment of a
receiver for itself or for the whole or any substantial part of its property,
or had a petition in bankruptcy filed against it, been adjudicated a bankrupt,
or filed a petition or answer seeking reorganization or arrangement under the
Federal bankruptcy laws or any other' similar law or statute of the United
States of America or any other jurisdiction.
<PAGE> 11
12.5 No consent, approval, qualification, order or authorization of, or filing
with, any other entity or governmental authority, including, without
limitation, the Secretary of State of the State of Delaware or the United
States Securities and Exchange Commission, is required in connection with
World's valid execution, delivery or performance of this Agreement or the
consummation of any other transaction contemplated on the part of World hereby.
ARTICLE 13 - REPRESENTATIONS AND WARRANTIES OF ICT
Except as set forth on the Schedule E - Exceptions to Representations and
Warranties attached hereto, ICT hereby represents and warrants to World as
follows as of the Effective Date (unless otherwise set forth below):
13.1 All corporate action on the part of ICT, its directors and stockholders
necessary for the authorization, execution, delivery and performance by
ICT of this Agreement and the consummation of the transactions contemplated
herein has been or will be taken prior to the Effective Date.
13.2 This Agreement will be a valid and binding obligation of ICT, enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization and moratorium laws including, without limitation 11 U.S.C.
Section 365(n) of the United States Code, and other laws of general
application affecting enforcement of creditors' rights generally and to general
equitable principles. The execution, delivery and performance by ICT of this
Agreement and its compliance herewith will not result in any violation of and
will not conflict with, or result in a breach of any of the terms of, or
constitute a default under, the Charter or By-Laws of ICT.
The execution, delivery and performance by ICT of this Agreement and
compliance herewith will not result in any violation of and will not conflict
with, or result in a breach of any of the terms of, or constitute a default
under, any mortgage, indenture, agreement, instrument, judgment, decree, order,
rule or regulation or other restriction to which ICT is a party or by which it
is bound or any provision of state or Federal law to which ICT is subject, or
result in the creation of any mortgage, pledge, lien, encumbrance or charge of
any kind whatsoever upon any of the properties or assets of ICT pursuant to any
such term or result in the suspension, revocation, impairment, forfeiture or
non-renewal of any permit, license, authorization or approval applicable and
material to ICT's operations or any of its assets or properties.
13.3 No consent, approval, qualification, order or authorization of, or filing
with, any other entity or governmental authority, including, without
limitation, the Secretary of State of the State of Delaware, is required in
connection with ICT's valid execution, delivery or performance of this
Agreement or the consummation of any other transaction contemplated on the part
of ICT hereby.
ARTICLE 14 - INDEMNIFICATION
14.1 ICT agrees to defend, indemnify, and hold harmless World and World's
principals, directors, officers, employees, and/or agents from and against any
and all liabilities, penalties, claims, demands, suits, and causes of action of
any nature whatsoever, whether groundless or otherwise, and any and all
damages, costs, and expenses sustained or incurred (including cost of defense,
settlement, and reasonable attorneys' fees), asserted by or on behalf of any
person or entity arising out of any breach of representation or warranty made
herein or the breach of confidentiality under Article 11 by an ICT employee.
14.2 World agrees to defend, indemnify, and hold harmless ICT and ICT's
principals, directors, officers, employees, and/or agents from and against any
and all liabilities, penalties, claims, demands, suits, and causes of action of
any nature whatsoever, whether groundless or otherwise, and any and all cost
of defense, settlement, and reasonable attorneys' fees), asserted by or on
behalf of any person or entity arising out of any breach of representation or
warranty made herein, the manufacture, promotion, distribution, and/or sale of
Eagle Products by World or any breach of confidentiality under Article 11 by
an employee of World.
<PAGE> 12
ARTICLE 15 - NOTICES AND OTHER COMMUNICATIONS
Any notice or other communication pursuant to this Agreement may be personally
served, sent by certified mail postage prepaid, or by an overnight delivery
service which has a tracking system. Notice will be deemed given on the
earlier of the date received or the date personally served, or three business
days after deposit with the United States Postal Service if by certified mail
or one business day after deposit with an overnight carrier if by overnight
delivery, provided that such notice is addressed to the receiving Party at its
address below or as it shall designate by written notice given to the other
Party:
In the case of ICT:
International Communication Technologies, Inc.
12555 West Jefferson Boulevard, Suite 300
Los Angeles, California 90060
Attention: Robert Block
Phone: (310) 301-7680
Facsimile: (310)301-7635
In the case of World:
World Access, Inc.
4501 Vineland Road
Orlando, Florida 32811
Attention: President and Chief Operating Officer
Phone: (407) 407 843-7031
Facsimile: (407) 841-0942
ARTICLE 16 - MISCELLANEOUS PROVISIONS
16.1 Any provision of this Agreement may be amended or waived if, and only if,
such amendment or waiver is in writing and signed, in the case of an
amendment, by ICT and World, or in the case of a waiver, by the Party against
whom the waiver is to be effective. No failure or delay by either Party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law.
16.2 This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the Parties hereto. World may not assign, delegate or
otherwise transfer any of its rights or obligations under this Agreement
(individually and collectively, to "Assign") without the written consent of ICT.
16.3 All representations and warranties made in this Agreement shall survive
the execution and delivery hereof and the consummation of the transactions
contemplated hereby without regard to any investigation made by World or ICT or
their representatives or employees or any other party hereto.
16.4 The Parties hereto agree that all of the provisions of this Agreement and
any questions concerning its interpretation and enforcement shall be governed
by the internal laws of the State of New York, United States of America without
regard to any applicable principles of conflicts of law and, subject to the
provisions of paragraph 16.5, the offer, acceptance, execution and delivery of
this Agreement shall be
<PAGE> 13
deemed to be a transaction of business within the State of California, United
States of America for purposes of conferring jurisdiction upon courts located
within the State of California, United States of America and for the purposes
of conferring the Technology Rights. In addition, the Parties hereto agree
that the terms of this Agreement will be governed by, construed and enforced in
accordance with the terms of 11 U.S.C. Section 365(n) of the United States Code.
Subject to the provisions of paragraph 16.5, each of the Parties
irrevocably and unconditionally (i) agrees that any suit, action or legal
proceeding arising out of or relating to this Agreement may be brought in the
District Court of the United States for the Central District of California or
in any California State court in Los Angeles County; (ii) consents to the
exclusive jurisdiction of such court in any suit, action or proceeding relating
to this Agreement; (iii) waives any objection which it may have to the laying
of venue of any such suit, action or proceeding in such court; and (iv) agrees
that service of any court paper may be effected on such Party by mail, as
provided in this Agreement, or in such other manner as may be provided under
applicable laws or court rules in said state.
16.5 Notwithstanding the provision of paragraph 16.4, any controversy or claim
arising out of or relating to this Agreement, including, but not limited to,
any controversy or claim as to the arbitrability of any controversy or claim,
shall be settled by arbitration in Los Angeles County, California in accordance
with the then rules of the American Arbitration Association ("AAA");
provided, however, that the AAA shall be directed by the Parties to appoint or
designate a single arbitrator, who shall apply the laws of the State of New
York as set forth in Article 16 hereof.
The award of such arbitrator may be confirmed or enforced in any court of
competent jurisdiction consistent with the provisions of paragraph 16.4. With
respect to any such arbitration proceeding, the Parties shall have all rights
of discovery available pursuant to the California Code of Civil Procedure, and
they hereby incorporate the provisions of California Code of Civil Procedure
Section 1283.05 into this Agreement. Either Party may request the arbitrator
to prepare findings of fact and conclusions of law, and if either Party does so
request, the arbitrator shall prepare such findings and conclusions.
The decision of the arbitrator shall be final and not appealable by either
party, absent a clear error of law which may be appealed to any court of
competent jurisdiction. Nothing contained herein shall be construed to limit
or preclude a Party from bringing an action in court, under the provisions of
paragraph 16.4, for injunctive or other provisional relief to compel another
Party hereto to comply with its obligations under this Agreement.
16.6 Neither ICT nor World shall be held responsible for any failure of
performance hereunder or for damages caused by any delay or default due
to any contingency beyond its control preventing performance hereunder,
including, without limitation, war, governmental regulations, embargoes,
export, shipping or remittance restrictions, strikes, lockouts, accidents,
fires, delays or defaults caused by carriers, floods or governmental seizure,
control or rationing.
16.7 This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
16.8 This Agreement and the Schedules hereto constitute the entire agreement
between the Parties with respect to the subject matter hereof and supersede all
other prior agreements, understandings and negotiations, both written and oral,
between the Parties with respect to the subject matter of this Agreement. No
representation, inducement, promise, understanding, condition or warranty not
set forth herein has been made or relied upon by either Party hereto.
16.9 The captions herein are included for convenience of reference only and
shall be ignored in the construction or interpretation hereof.
<PAGE> 14
16.10 This Agreement shall be deemed severable; the invalidity of
unenforceability of any term or provision of this Agreement shall not effect
the validity or enforceability of this Agreement or of any other term hereof.
The provisions of this Agreement were negotiated BY World and ICT and this
Agreement shall be deemed to have been jointly drafted BY World and ICT. In
reaching this Agreement, each of World and ICT have relied upon its own
knowledge and judgment and upon the advice of attorneys or other counselors of
its own free choice.
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the
Effective Date.
International Communication World Access, Inc.
Technologies, Inc.
By: /s/ Robert S. Block By: /s/ Hensley E. West
-------------------- -------------------
Robert S. Block, Chairman & CEO Hensley E. West, President
For purposes of acknowledging ICT's power and right to enter into the foregoing
Agreement and agreeing to abide by all terms and provisions affecting or
imposing obligations on Eagle.
Eagle Telephonics, Inc.
By: /s/ R.Riccoboni
---------------
R. Riccoboni, President
<PAGE> 15
SCHEDULE A
LICENSED PATENTS
None (based on Eagle's representation in the ICT/Eagle Agreement)
<PAGE> 16
SCHEDULE B
TRADEMARKS, TRADENAMES, & SERVICE MARKS
EAGLE
ICT/EAGLE
DSCO
DIGILINK
WORLDPHONE
SUPERCABLE
TOTALCOMM
COMMUNICATION SUPERHIGHWAY
<PAGE> 17
SCHEDULE C
ICT RESERVED TERRITORY RIGHTS
The following Regions are specifically excluded from the non-exclusive
Territory:
<TABLE>
<CAPTION>
Region Region Region Region
<S> <C> <C> <C>
Armenia
Bangladesh
Belarus
Bhutan
Czech Republic
Ethiopia
Hungary
India
Indonesia
Kazakstan
Laos
Malaysia
Maldives
Myanmar
Nepal
Pakistan
Philippines
Poland
Russia
Slovakia
Sri Lanka
Thailand
Ukraine
Uzbekistan
Viet Nam
Yemen
</TABLE>
<PAGE> 18
SCHEDULE D
EXCEPTIONS TO WORLD'S REPRESENTATIONS AND WARRANTIES
None
<PAGE> 19
SCHEDULE E
EXCEPTIONS TO ICT'S REPRESENTATIONS AND WARRANTIES
None
<PAGE> 20
SCHEDULE F
WORLD EXCLUSIVE TERRITORY AND ROYALTY MINIMUMS
<TABLE>
<CAPTION>
EXCLUSIVE 1997 1998 1999
TERRITORY MINIMUM MINIMUM MINIMUM
NET DSCO NET DSCO NET DSCO
ROYALTY ROYALTY ROYALTY
<S> <C> <C> <C>
Columbia $ 90,000 $225,000 $360,000
Dominican Republic $ 45,000 $135,000 $225,000
Mexico $180,000 $450,000 $675,000
Honduras $ 45,000 $135,000 $225,000
Guyana $ 45,000 $135,000 $225,000
Equador $ 45,000 $135,000 $225,000
Venezuela $ 90,000 $225,000 $360,000
El Salvador $ 27,000 $ 90,000 $180,000
Guatemala $ 27,000 $ 90,000 $180,000
Bolivia $ 45,000 $135,000 $225,000
</TABLE>
Pursuant to the terms of this Agreement, all the areas of the world that are
not exclusive Regions are non-exclusive Regions except for any reserved Regions
set forth on Schedule C hereof or any Regions which are withdrawn from the
non-exclusive Regions by ICT pursuant to the terms of the Agreement. Subject
to Section 5.1 hereof, to retain its exclusive and non-exclusive Territory
rights, World must make the minimum Royalty payments shown on this Schedule F:
<TABLE>
<CAPTION>
NON-EXCLUSIVE 1997 1998 1999
TERRITORY MINIMUM MINIMUM MINIMUM
NET DSCO NET DSCO NET DSCO
ROYALTY ROYALTY ROYALTY
<S> <C> <C> <C>
Aggregate Minimum Royalty $750,000 $1,350,000 $2,000,000
</TABLE>
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Legal
Name D.B.A. Jurisdiction
- ---------------------- -------------------- ------------------
<S> <C> <C>
Restor-AIT, INC. AIT, American & International Deleware
Telephone
Westec Communications, Inc. - Delaware
Sunrise Sierra, Inc. Comtech-Sunrise, Inc. Delaware
CIS Acquisition Corp. CIS, Cellular Infrastructure Delaware
Supply, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-77918, 33-47752 and 333-17741) and Form S-3 (No.
333-21079) of World Access, Inc. of our report dated February 28, 1997,
appearing on page 23 of this Form 10-K.
Price Waterhouse LLP
April 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,480
<SECURITIES> 0
<RECEIVABLES> 9,917
<ALLOWANCES> 265
<INVENTORY> 10,657
<CURRENT-ASSETS> 46,323
<PP&E> 8,564
<DEPRECIATION> 5,906
<TOTAL-ASSETS> 60,736
<CURRENT-LIABILITIES> 8,362
<BONDS> 0
0
0
<COMMON> 163
<OTHER-SE> 52,211
<TOTAL-LIABILITY-AND-EQUITY> 60,736
<SALES> 34,411
<TOTAL-REVENUES> 51,000
<CGS> 21,486
<TOTAL-COSTS> 36,006
<OTHER-EXPENSES> 7,636
<LOSS-PROVISION> 168
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> 7,524
<INCOME-TAX> 745
<INCOME-CONTINUING> 6,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,779
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
