UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Three Months Ended June 30, 1997.
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to
________.
Commission file number 0-19998
WORLD ACCESS, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 65-0044209
(State of Incorporation) (I.R.S. Employer Identification No.)
945 E. Paces Ferry Road, Suite 2240,
Atlanta Georgia 30326
(Address of principal executive offices) (Zip Code)
(404) 231-2025
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, Par Value $.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares outstanding of the Registrant's common stock, par
value $.01 per share, at August 13, 1997 was 18,712,034.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
World Access, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
June 30 December 31
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and investments $ 21,595,079 $ 22,480,082
Accounts receivable 15,908,764 9,651,884
Inventories 16,752,391 10,657,412
Other current assets 3,272,651 3,533,615
------------ ------------
Total Current Assets 57,528,885 46,322,993
Property and equipment 3,534,591 2,657,661
Intangible assets 25,116,573 9,526,140
Technology licenses 932,387 907,489
Other assets 1,924,459 1,321,683
------------ ------------
Total Assets $ 89,036,895 $ 60,735,966
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 4,063,648 $ ---
Accounts payable 6,205,879 3,756,722
Income taxes payable 1,949,975 2,532,755
Accrued payroll and benefits 2,034,642 1,605,840
CIS purchase price payable 3,500,000 ---
Other accrued liabilities 772,716 466,432
------------ ------------
Total Current Liabilities 18,526,860 8,361,749
Long-term liabilities 212,939 ---
------------ ------------
Total Liabilities 18,739,799 8,361,749
------------ ------------
Stockholders' Equity
Common stock 181,598 163,285
Capital in excess of par value 69,809,533 58,517,279
Note receivable from affiliate --- (571,634)
Retained earnings 305,965 (5,734,713)
------------ ------------
Total Stockholders' Equity 70,297,096 52,374,217
------------ ------------
Total Liabilities and
Stockholders' Equity $ 89,036,895 $ 60,735,966
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
1
</TABLE>
<PAGE>
<TABLE>
World Access, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Quarter Ended June 30 Six Months Ended June 30
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of products $ 19,444,256 $ 7,681,988 $ 34,914,306 $ 16,036,298
Service revenues 4,571,822 3,880,930 9,353,196 7,919,865
------------ ------------ ------------ ------------
Total Sales 24,016,078 11,562,918 44,267,502 23,956,163
Cost of products sold 11,525,183 4,596,917 21,494,810 10,811,761
Cost of services 4,005,782 3,541,134 8,089,263 6,944,275
------------ ------------ ------------ ------------
Total Cost of Sales 15,530,965 8,138,051 29,584,073 17,756,036
------------ ------------ ------------ ------------
Gross Profit 8,485,113 3,424,867 14,683,429 6,200,127
Engineering and development 428,595 193,403 745,005 369,898
Selling, general
and administrative 2,434,951 1,429,506 4,352,514 2,706,567
Amortization of goodwill 380,404 111,172 664,535 222,344
------------ ------------ ------------ ------------
Operating Income 5,241,163 1,690,786 8,921,375 2,901,318
Interest and other income 225,091 55,294 592,277 158,085
Interest expense (24,044) (104,227) (52,974) (207,232)
------------ ------------ ------------ ------------
Income Before Income Taxes 5,442,210 1,641,853 9,460,678 2,852,171
Income taxes 2,014,000 224,100 3,420,000 224,100
------------ ------------ ------------ ------------
Net Income $ 3,428,210 $ 1,417,753 $ 6,040,678 $ 2,628,071
============ ============ ============ ============
Net Income Per Common Share:
Primary $ .19 $ .10 $ .33 $ .19
============ ============ ============ ============
Assuming Full Dilution $ .18 $ .10 $ .33 $ .19
============ ============ ============ ============
Weighted Average Shares Outstanding:
Primary 18,407,289 13,691,237 18,075,453 13,656,064
============ ============ ============ ============
Assuming Full Dilution 19,259,596 13,768,455 18,501,607 13,733,282
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
2
</TABLE>
<PAGE>
<TABLE>
World Access, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<CAPTION>
Capital in Note
Common Excess of Receivable Retained
Stock Par Value from Affiliate Earnings Total
---------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 163,285 $ 58,517,279 $ (571,634) $ (5,734,713) $ 52,374,217
Net income 6,040,678 6,040,678
Issuance of 1,285,884 shares for
CIS acquisition 12,859 2,580,215 2,593,074
Release of 304,615 shares from
escrow for CIS acquisition 3,021,345 3,021,345
Release of 159,327 shares from
escrow for AIT acquisition 892,231 892,231
Issuance of 137,800 shares for
AIT acquisition 1,378 2,168,622 2,170,000
Repayment of loan by affiliate 571,634 571,634
Issuance of 403,033 shares for
stock options and warrants 4,030 1,386,700 1,390,730
Tax benefit from exercises of stock
options and warrants 1,200,000 1,200,000
Issuance of 4,567 shares for matching
contribution to 401K plan 46 43,141 43,187
---------- ------------ -------------- -------------- ------------
Balance at June 30, 1997 $ 181,598 $ 69,809,533 $ --- $ 305,965 $ 70,297,096
========== ============ ============== ============== ============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
World Access, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended June 30
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 6,040,678 $ 2,628,071
Adjustments to reconcile net income
to net cash from (used by)
operating activities:
Depreciation and amortization 1,105,303 623,710
Provision for inventory reserves 243,001 84,400
Provision for bad debts 68,755 39,300
Stock contributed to employee benefit plan 43,187 16,975
Changes in operating assets and
liabilities, net of effects
from businesses acquired:
Accounts receivable (5,474,956) 1,433,160
Inventories (6,170,980) (3,442,801)
Accounts payable 1,859,535 (35,377)
Other assets and liabilities (345,967) (465,711)
------------ ------------
Net Cash From (Used By)
Operating Activities (2,631,444) 881,727
------------ ------------
Cash Flows From Investing Activities:
Acquisitions of businesses (4,099,852) 86,947
Repayments by (loans to) affiliate, net 582,500 438,499
Expenditures for property and equipment (1,115,745) (473,124)
Prepaid rent on equipment lease 13,119 3,907
Technology licenses (24,898) (320,539)
------------ ------------
Net Cash Used By Investing Activities (4,644,876) (264,310)
------------ ------------
Cash Flows From Financing Activities:
Short-term debt borrowings (repayments) 3,509,087 (4,935,220)
Proceeds from exercise of stock
warrants and options 2,590,730 4,080,075
Issuance of long-term debt for capital lease 291,500 ---
Long-term debt repayments --- (200,000)
Debt issue costs --- (56,546)
------------ ------------
Net Cash From (Used By)
Financing Activities 6,391,317 (1,111,691)
------------ ------------
Decrease in Cash and Equivalents (885,003) (494,274)
Cash and Equivalents at
Beginning of Period 22,480,082 1,886,819
------------ ------------
Cash and Equivalents at End of Period $ 21,595,079 $ 1,392,545
============ ============
Supplemental Schedule of Noncash
Financing and Investing Activities:
Issuance of common stock for
businesses acquired $ 8,676,650 $ 3,404,047
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
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
4
</TABLE>
<PAGE>
World Access, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
June 30, 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q. Accordingly, the
financial information does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of the interim periods covered have been included. For further information,
refer to the audited consolidated financial statements and footnotes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
The results of operations for the three and six months ended June 30, 1997
are not necessarily indicative of the results of the full year.
Certain reclassifications have been made to the prior period's financial
information to conform with the presentations used in 1997.
NOTE 2. ACQUISITIONS
CIS Acquisition
On March 11, 1997, the Company entered into an agreement to acquire
Cellular Infrastructure Supply, Inc. ("CIS"), a Burr Ridge, Illinois based
provider of new and/or upgraded equipment and related design, installation and
technical support services to cellular, PCS and other wireless service
providers. On March 27, 1997, the transaction was completed in its final form
whereby CIS was merged with and into CIS Acquisition Corp., a wholly-owned
subsidiary of the Company (the "Merger"). CIS Acquisition Corp. subsequently
changed its name to Cellular Infrastructure Supply, Inc. 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 $2.6 million.
In addition to the 440,874 shares noted above, the stockholders of CIS were
issued 845,010 restricted shares of the Company's common stock. These shares
were immediately placed into escrow, and along with $6.5 million in additional
purchase price (the "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.
<PAGE>
The shares placed in escrow were valued by the Company at par value only,
or $8,450. Once conditions for release from escrow have been met, the fair
market value of the shares as measured at that time, along with any 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 contingent cash consideration is January 1, 1997 to December 31, 1997. In
reviewing CIS's pre-tax income performance as of April 30, 1997, the Company
determined that it was highly probable that the conditions for release and
payment for this first period would be met. Accordingly, 304,615 escrowed shares
were accounted for as if released and $3,500,000 in contingent cash payments
were accounted for as if paid as of April 30, 1997. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$6.5 million at April 30, 1997. These shares will be released and payment will
be made to the former stockholders of CIS on February 15, 1998.
The acquisition of CIS has been accounted for using the purchase method of
accounting. Accordingly, the results of CIS's operations have been included in
the accompanying consolidated financial statements from January 1, 1997, the
effective date of acquisition as defined in the definitive agreement and plan of
merger. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as of the date of acquisition. The
excess of purchase price over the fair value of net assets acquired, currently
estimated at approximately $12.5 million, has been recorded as goodwill and is
being amortized over a 15 year period.
AIT Contingent Purchase Price Earned
In May 1995, the Company acquired AIT, Inc. ("AIT"), a provider of new and
used Northern Telecom switching systems, add-on frames and related circuit
boards to the telecommunications industry. As part of the total consideration
paid by the Company, the sole stockholder of AIT was issued 637,308 restricted
shares of the Company's common stock. These shares were immediately placed into
escrow, and along with $2,330,000 in potential cash payments, were to be
released to the sole stockholder over a two year period ending June 30, 1997
contingent upon the realization of predefined levels of gross profit from AIT's
operations during this same period. To the extent cash consideration is paid,
the sole stockholder will immediately be required to repay the equivalent amount
of borrowings outstanding under a promissory note entered into with the Company
in connection with the acquisition. Once repaid, the stockholder will not be
entitled to reborrow such funds.
As of June 30, 1997, the Company has released 477,981 shares from escrow
and paid additional cash consideration of $1,747,500 based on AIT's gross profit
performance. As of March 31, 1997, 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 August 15, 1997. The sole stockholder of
AIT also will receive an additional $3.1 million in purchase price, payable in
the form of approximately 137,800 restricted shares of the Company's common
stock, on August 15, 1997 for the attainment 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. These future payment have been capitalized as
additional goodwill and stockholders' equity. The net effect of the above has
been to increase goodwill and stockholders' equity by approximately $8.0 million
as of June 30, 1997.
<PAGE>
Pro Forma Results of Operations
On a pro forma, unaudited basis, as if the acquisition of CIS had occurred
as of January 1, 1996, total sales, operating income, net income and net income
per common share for the six months ended June 30, 1996 would have been
approximately $28,432,000, $3,990,000, $3,127,000 and $.22, 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 CIS acquisition been in effect on the
date indicated.
NOTE 3. INVENTORIES
Inventories consist of the following:
June 30 December 31
1997 1996
------------ ------------
Telecom systems, frames and circuit boards $ 10,537,000 $ 6,903,000
Electronic components 3,342,000 2,539,000
Pay telephone parts 973,000 494,000
Work in progress 946,000 438,000
Other finished goods 954,000 283,000
------------ ------------
$ 16,752,000 $ 10,657,000
============ ============
NOTE 4. DEBT
The Company has a $10 million revolving line of credit with a large
European bank. As of June 30, 1997, the Company had borrowings of $4.0 million
outstanding under the line.
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.
<PAGE>
NOTE 5. EARNINGS PER SHARE
The computation of earnings per share is based on the weighted average
number of outstanding common shares during the period plus, when their effect is
dilutive, common stock equivalents consisting of shares subject to stock options
and warrants. A total of 942,000 common shares held in escrow from certain
acquisitions and a license agreement have been excluded from the earnings per
share calculations for the three and six months ended June 30, 1997 because the
conditions for release of shares from escrow have not been satisfied.
Effective December 27, 1997, the Company will adopt Statement of Financial
Accounting Standards No. 128, "Earnings per Share." At that time, the Company
will be required to change the method currently used to calculate earnings per
share and to restate all prior periods. The new requirements will include a
calculation of basic earnings per share, from which the dilutive effect of stock
options and warrants will be excluded. The basic earnings per share are expected
to reflect an increase of $.02 per share for the three month periods ended June
30, 1997 and 1996, and $.03 per share for the six month periods ended June 30,
1997 and 1996 over the primary earnings per share reported for those periods.
Common stock issued and outstanding at June 30, 1997 and December 31, 1996
was 18,159,797 and 16,328,513 shares, respectively.
NOTE 6. SUBSEQUENT EVENT
Galaxy Acquisition
On July 29, 1997, the Company entered into a letter of intent to
acquire Galaxy Personal Communications Services, Inc. ("Galaxy"), for a
combination of cash and Company common stock. Galaxy, based in Norcross, Georgia
provides system design, implementation, optimization and other value-added radio
engineering and consulting services to PCS, cellular and other wireless
telecommunications service providers. The transaction is subject to, among other
things, the satisfactory completion by the Company of its due diligence
investigation of Galaxy and the preparation and execution of a definitive
agreement by August 30, 1997.
<PAGE>
Item 2. 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 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.
During 1995 and early 1996, the Company acquired three businesses 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.
In January 1997, the Company acquired Cellular Infrastructure Supply, Inc.
("CIS"), a provider of equipment and related design, installation and technical
support services to cellular, PCS and other wireless service providers. The
wireless service markets served by CIS complement the Company's traditional
telephone service provider and private network operator markets, and is expected
to provide the Company with additional new cross-selling opportunities.
The Company realized significant improvements in its sales and operating
results during the last two years primarily as a result of the acquisitions. The
Company's total annual sales increased by 97.2% in 1995 and 69.2% in 1996 when
compared to 1994 and 1995, respectively. Total sales for the first six months of
1997 increased by 63.7% over the last six months of 1996. 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 the first six months of 1997 (78.9% of total
sales), the Company's gross profit margin increased from 12.9% in 1994 to 21.1%
in 1995, 29.4% in 1996 and 33.2% in the first six months of 1997. 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, 14.4% in 1996 and 20.2%
in the first six months of 1997. Management will continue to seek further
improvements in gross profit margin over time as the Company's product offerings
include more internally developed and acquired products containing proprietary
technology.
<PAGE>
Since January 1, 1995, the Company has significantly strengthened its
balance sheet through improved operating results, a $26.2 million secondary
public equity offering, a private equity offering 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 $39.0
million and $70.3 million, respectively, at June 30, 1997.
Results of Operations
The following table sets forth items in the Company's Consolidated
Statements of Operations as a percentage of total revenues:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1997 1996 1997 1996
------- -------- ------- ------
Sales of products 81.0% 66.4% 78.9% 66.9%
Service revenues 19.0 33.6 21.1 33.1
------- -------- ------- ------
Total sales 100.0 100.0 100.0 100.0
Cost of products sold 48.0 39.8 48.5 45.1
Cost of services 16.7 30.6 18.3 29.0
------- -------- ------- ------
Total cost of sales 64.7 70.4 66.8 74.1
------- -------- ------- ------
Gross profit 35.3 29.6 33.2 25.9
Engineering and development 1.8 1.7 1.7 1.6
Selling, general
and administrative 10.1 12.3 9.8 11.3
Amortization of goodwill 1.6 1.0 1.5 0.9
------- -------- ------- ------
Operating income 21.8 14.6 20.2 12.1
Interest and other income 0.9 0.5 1.3 0.7
Interest expense --- (0.9) (0.1) (0.9)
------- -------- ------- ------
Income before income taxes 22.7 14.2 21.4 11.9
Income taxes 8.4 1.9 7.8 0.9
------- -------- ------- ------
Net income 14.3% 12.3% 13.6% 11.0%
======= ======== ======= ======
<PAGE>
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Sales. Total sales increased $12,453,000, or 107.7%, to $24,016,000 in
the second quarter of 1997 from $11,563,000 in the second quarter of 1996. The
percentage of product sales to total sales increased to 81.0% in the second
quarter of 1997 from 66.4% in the second quarter of 1996.
Product sales increased $11,762,000, or 153.1%, to $19,444,000 in the
second quarter of 1997 from $7,682,000 in the second quarter of 1996. The
increase related to $10.8 million of cellular equipment sold by CIS, which was
acquired effective January 1, 1997, an additional $1.8 million of switching
products sold by AIT and approximately $500,000 in sales of the Company's new
international products, the Compact Digital Exchange (TM) switch ("CDX") and
Wireless Local Loop-2000(TM) system ("WLL-2000"). The second quarter 1996
product sales included approximately $1.1 million in special one-time sales of a
distributed product.
Service revenues increased $691,000, or 17.8%, to $4,572,000 in the
second quarter of 1997 from $3,881,000 in the second quarter of 1996. The
increase related to an additional $1.3 million in pay telephone refurbishment
revenues. The increase was offset by a decline in electronic manufacturing
revenues resulting from a strategic decision to begin utilizing the Company's
manufacturing capacity for new World Access products rather than service outside
contract manufacturing customers.
Gross Profit. Gross profit increased $5,060,000, or 147.8%, to
$8,485,000 in the second quarter of 1997 from $3,425,000 in the second quarter
of 1996. Gross profit margin increased to 35.3% in the second quarter of 1997
from 29.6% in the second quarter of 1996. The improved performance resulted from
the 107.7% 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 40.7% in the second
quarter of 1997 from 40.2% in the second quarter of 1996. The improved margin
performance relates to the $10.8 million of cellular and PCS products sold by
CIS and the sale of the new international CDX and WLL-2000. In addition, the
second quarter of 1996 included $1.1 million of distributed product sales which
carry margins substantially lower than the Company's other products
Gross profit margin on service revenues increased to 12.4% in the second
quarter of 1997 from 8.8% in the second quarter of 1996. The relatively low
gross profit margin on service revenues in the second quarter of 1996 was
primarily due to losses experienced on the outsourced circuit board repair
business. The Company implemented selected pricing increases and streamlined
operating systems and procedures designed to improve its margins on outsourced
repair revenues.
<PAGE>
Engineering and Development. Engineering and development expenses
increased $236,000, or 121.6%, to $429,000 in the second quarter of 1997 from
$193,000 in the second quarter of 1996. The increase in expenses was
attributable to the formation of a corporate product development function during
the third quarter of 1996. Despite the increase in total engineering and
development expenses, engineering and development expenses increased to only
1.8% of total sales in the second quarter of 1997 from 1.7% of total sales in
the second quarter of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,005,000, or 70.3%, to $2,435,000 in the
second quarter of 1997 from $1,430,000 in the second quarter of 1996. The
increase primarily related to expenses associated with the operations of CIS,
which was acquired effective January 1, 1997, and the Company's establishment of
a dedicated international sales and marketing group and corporate business
development function late in the first quarter of 1996. In addition, the Company
recorded approximately $700,000 of incentive compensation expense in the second
quarter of 1997 as compared to a provision of approximately $100,000 in the
second quarter of 1996. As a percentage of total sales, selling, general and
administrative expenses decreased to 10.1% in the second quarter of 1997 from
12.3% in the second quarter of 1996.
Amortization of Goodwill. Amortization of goodwill increased $269,000
to $380,000 in the second quarter of 1997 from $111,000 in the second quarter of
1996, as a result of the goodwill acquired in connection with the CIS
acquisition and contingent purchase price earned by CIS and AIT.
Operating Income. Operating income increased $3,550,000, or 210.0%, to
$5,241,000 in the second quarter of 1997 from $1,691,000 in the second quarter
of 1996. Operating income margin increased to 21.8% in the second quarter of
1997 from 14.6% in the second quarter of 1996.
Interest and Other Income. Interest and other income increased
$170,000, or 307.1%, in the second quarter of 1997 from $55,000 in the second
quarter of 1996 due to increased invested cash balances of the Company,
resulting primarily from proceeds received from a $26.2 million secondary public
equity offering completed in October 1996.
Interest Expense. Interest expense decreased $80,000, or 76.9%, to
$24,000 in the second quarter of 1997 from $104,000 in the second quarter of
1996. The decrease is due to the reduction in average debt outstanding during
the second quarter of 1997 resulting from the October 1996 repayment of a $3.9
million bank term loan.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Sales. Total sales increased $20,312,000, or 84.8%, to $44,268,000 in
the first six months of 1997 from $23,956,000 in the first six months of 1996.
The percentage of product sales to total sales increased to 78.9% in the first
six months of 1997 from 66.9% in the first six months of 1996.
<PAGE>
Product sales increased $18,878,000, or 117.7%, to $34,914,000 in the
first six months of 1997 from $16,036,000 in the first six months of 1996. The
increase related to $16.2 million of cellular equipment sold by CIS, which was
acquired effective January 1, 1997, an additional $7.3 million of switching
products sold by AIT and approximately $500,000 in sales of the Company's new
international products, the CDX switch and WLL-2000 system. Product sales for
the first six months of 1996 included approximately $4.6 million in special
on-time sales of a distributed product.
Service revenues increased $1,433,000, or 18.1%, to $9,353,000 in the
first six months of 1997 from $7,920,000 in the first six months of 1996. The
increase related to an additional $2.7 million in pay telephone refurbishment
revenues. This increase was offset by a decline in electronic manufacturing
revenues resulting from a strategic decision to begin utilizing the Company's
manufacturing capacity for new World Access products rather than service outside
contract manufacturing customers.
Gross Profit. Gross profit increased $8,483,000, or 136.8%, to
$14,683,000 in the first six months of 1997 from $6,200,000 in the first six
months of 1996. Gross profit margin increased to 33.2% in the first six months
of 1997 from 25.9% in the first six months of 1996. The improved performance
resulted from the 84.8% increase in total sales and the change in sales mix to
products, which generally carry a higher gross profit margin than service
revenues.
Gross profit margin on products sold increased to 38.4% in the first
six months of 1997 from 32.6% in the first six months of 1996. The improved
margin performance relates to the $16.2 million of cellular and PCS products
sold by CIS and the sale of the new international CDX switch and WLL-2000
system. In addition, the first six months of 1996 included $4.6 million of
distributed product sales which carry margins substantially lower than the
Company's other products.
Gross profit margin on service revenues increased to 13.5% in the first
six months of 1997 from 12.3% in the first six months of 1996. The improvement
was due to improved gross profit margin on outsourced circuit board repair
revenues. The Company implemented selected pricing increases and streamlined
operating systems and procedures designed to improve its margins on outsourced
repair revenues. The improvement on the outsourced circuit board revenues was
partially offset by a decline in pay telephone refurbishment profit margins
related to increased revenues with a RBOC which carried lower overall gross
margins than the regular pay telephone refurbishment revenues.
Engineering and Development. Engineering and development expenses
increased $375,000, or 101.4%, to $745,000 in the first six months of 1997 from
$370,000 in the first six months of 1996. The increase in expenses was
attributable to the formation of a corporate product development function during
the third quarter of 1996. Despite the increase in total engineering and
development expenses, engineering and development expenses increased to only
1.7% of total sales in the first six months of 1997 from 1.6% of total sales in
the first six months of 1996.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,646,000, or 60.8%, to $4,353,000 in the
first six months of 1997 from $2,707,000 in the first six months of 1996. The
increase primarily related to expenses associated with the operations of CIS,
which was acquired effective January 1, 1997, and the Company's establishment of
a dedicated international sales and marketing group and corporate business
development function late in the first quarter of 1996. In addition, the Company
recorded approximately $900,000 of incentive compensation expense in the first
six months of 1997 as compared to a provision of approximately $100,000 in the
first six months of 1996. As a percentage of total sales, selling, general and
administrative expenses decreased to 9.8% in the first six months of 1997 from
11.3% in the first six months of 1996.
Amortization of Goodwill. Amortization of goodwill increased $443,000
to $665,000 in the first six months of 1997 from $222,000 in the first six
months of 1996, as a result of the goodwill acquired in connection with the CIS
acquisition and contingent purchase price earned by CIS and AIT.
Operating Income. Operating income increased $6,020,000, or 207.5%, to
$8,921,000 in the first six months of 1997 from $2,901,000 in the first six
months of 1996. Operating income margin increased to 20.2% in the first six
months of 1997 from 12.1% in the first six months of 1996.
Interest and Other Income. Interest and other income increased
$434,000, or 274.7%, in the first six months of 1997 from $158,000 in the first
six months of 1996 due to increased invested cash balances of the Company,
resulting primarily from proceeds received from a $26.2 million secondary public
equity offering completed in October 1996.
Interest Expense. Interest expense decreased $154,000, or 74.4%, to
$53,000 in the first six months of 1997 from $207,000 in the first six months of
1996. The decrease is due to the reduction in average debt outstanding during
1997 resulting from the October 1996 repayment of a $3.9 million bank term loan.
Liquidity and Capital Resources
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.
In October 1996, the Company received net cash proceeds of approximately
$25.4 million from the sale of 3,487,500 shares of common stock in a secondary
public offering at a price of $8.00 per share. In October 1996, the Company used
approximately $3.9 million of the net proceeds to repay all amounts borrowed
under its bank term loan. 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 $6.0 million to
$10.0 million. In March 1997, the Company paid $3.5 million for the acquisition
of CIS. The Company intends to use the remaining $18.0 million of net proceeds
from the offering for the acquisition of businesses and technology licenses and
other strategic initiatives related to the growth and development of the
Company's telecommunications products business and for general corporate
purposes, including new product development, the expansion of domestic and
international sales and marketing efforts and working capital.
<PAGE>
Operating Activities
Cash used by operating activities increased $3,513,000 to $(2,631,000) in
the first six months of 1997 from $882,000 in the first six months of 1996
primarily as a result of increased accounts receivable and inventory balances at
June 30, 1997.
Accounts receivable increased $6,257,000, or 64.8%, to $15,909,000 at June
30, 1997 from $9,652,000 at December 31, 1996. The increase is due to the
acquisition of CIS and increased sales activity at the Company, i.e., second
quarter 1997 sales of $24.0 million as compared to fourth quarter 1996 sales of
$14.6 million. Average days sales outstanding at June 30, 1997 were 47 days as
compared to 50 days at December 31, 1996.
Inventories increased $6,095,000, or 57.2%, to $16,752,000 at June 30, 1997
from $10,657,000 at December 31, 1996. This increase is due to the acquisition
of CIS, a planned build-up of AIT inventories to support the increased demand
for its switching products and inventories required to support the roll out of
the Company's new products, including the World Access CDX switch, WLL-2000
system and the WX-5501 line card.
Investing Activities
In the first quarter of 1997, the Company acquired CIS, a provider of new
and/or upgraded equipment and related design, installation and technical support
services to cellular, PCS and other wireless service providers, for $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.
The first measurement period for purposes of releasing escrowed shares and
paying contingent cash consideration is January 1, 1997 to December 31, 1997. In
reviewing CIS's pre-tax income performance as of April 30, 1997, the Company
determined that it was highly probable that the conditions for release and
payment for this first period would be met. Accordingly, 304,615 escrowed shares
were accounted for as if released and $3,500,000 in contingent cash payments
were accounted for as if paid as of April 30, 1997. The net effect of this
accounting was to increase goodwill and stockholders' equity by approximately
$6.5 million at April 30, 1997. These shares will be released and payment will
be made to the former stockholders of CIS on February 15, 1998.
<PAGE>
Prior to the acquisition of CIS, the Company completed the acquisitions of
AIT, Westec and Sunrise. These four acquisitions 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 Company
common stock and cash, as well as contingent consideration tied to the future
profitability of the ongoing business. The majority of the contingent
consideration may be paid, at the option of the Company, in the form of common
stock valued at its then-current market price. At the time it becomes highly
probable that contingent consideration will be earned, it will be measured and
recorded on the Company's balance sheet as additional goodwill and stockholder's
equity.
Through June 30, 1997, the Company has paid approximately $6.0 million in
cash consideration in connection with the four acquisitions, including
$1,747,500 in contingent consideration paid to the previous owner of AIT
($582,500 in February 1997) as a result of AIT's gross profit performance during
1995 and 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
stockholder 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 June 30, 1997, the Company had loaned an
aggregate of $2,319,000 to such stockholder. All amounts borrowed have been
effectively repaid to the Company through contingent consideration earned.
During the first six months of 1997, the Company invested $1,116,000 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 in connection with AIT's
growth.
Financing Activities
As of June 30, 1997, there was $4.0 million outstanding on the Company's
line of credit. In early July 1997, the Company repaid these borrowings in full.
During the first six months of 1997, the Company has received
approximately $2.6 million in proceeds, including the related tax benefits of
approximately $1.2 million, from the exercises of previously issued stock
options and warrants by the Company's directors and employees.
<PAGE>
Income Taxes
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.
As a result of the exercises of non-qualified stock options and
warrants by the Company's directors and employees, the Company has realized a
tax benefit of approximately $1.2 million as of June 30, 1997. This tax benefit
results in a decrease in current income taxes payable and an increase in capital
in excess of par value.
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 tied to the Company meeting specific operational objectives in
1996, including the Company achieving pre-defined levels of sales growth, ISO
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 highly probable a repayment will be earned. In
connection with the Company's pre-tax income performance in the first six months
of 1997, a $410,000 expense was recorded for the pro rata portion of the
potential repayment of 1997 salaries under this program. The related liability
is included in Accrued Payroll and Benefits on the Company's June 30, 1997
balance sheet.
<PAGE>
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, in excess of $15.0 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 Annual Meeting of the stockholders of World Access, Inc. was
held on June 10,1997 at the Company's headquarters in Atlanta, Georgia. There
were 17,662,232 shares of Common Stock issued and outstanding and entitled to
vote at the meeting, of which 14,951,885 were present in person or by proxy. At
the meeting, the following matters were voted on:
Voting Results
------------ ----------- ------------
For Against Withheld
Election of directors:
Steven A. Odom 14,946,439 5,446
Stephen J. Clearman 14,946,439 5,446
William P. O'Reilly 14,946,439 5,446
John D. Phillips 14,876,239 75,646
Stephen E. Raville 14,946,439 5,446
Hensley E. West 14,946,439 5,446
To approve an amendment to the
Company's Restated Certificate
of Incorporation to provide for
the classification of the Board
of Directors and related matters. 9,714,481 1,282,365 3,955,039
To approve an amendment to the
Company's Restated Certificate of
Incorporation to prohibit stockholder
action by written consent. 9,613,088 1,374,160 3,964,637
To approve an amendment to the
Company's Restated Certificate of
Incorporation to increase the
authorized capital of the Company,
authorize a new class of
preferred stock and eliminate
the Class B Common Stock. 9,696,036 1,295,060 3,960,789
To approve an amendment to the
1991 Stock Option Plan to increase
the number of options under such
plan from 2,500,000 to 3,500,000. 9,650,711 1,338,920 3,962,254
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
<PAGE>
(b) Report on Form 8-K
On March 27, 1997 the Company filed a Report on Form 8-K, announcing
the acquisition of Cellular Infrastructure Supply, Inc., a Burr Ridge, Illinois
based provider based provider of new and/or upgraded equipment and related
design, installation and technical support services to cellular, PCS and other
wireless service providers. On June 9, 1997, this Report was amended to include
the financial statements of CIS and the pro forma financial statements of the
Company.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ Mark A. Gergel
------------------------------
Mark A. Gergel
Executive Vice President
and Chief Financial Officer
Dated: August 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH DOCUMENT.
</LEGEND>
<CIK> 0000876279
<NAME> WORLD ACCESS, INC.
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