<PAGE> 1
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 March 31, 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 EAST 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 May 13, 1997 was 17,688,007.
<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
-------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and equivalents $ 21,376,381 $ 22,480,082
Accounts receivable 14,024,108 9,651,884
Inventories 14,285,426 10,657,412
Other current assets 3,719,602 3,533,615
-------------- --------------
Total Current Assets 53,405,517 46,322,993
Property and equipment 3,359,655 2,657,661
Intangible assets 16,805,632 9,526,140
Technology licenses 916,667 907,489
Other assets 1,782,442 1,321,683
-------------- --------------
Total Assets $ 76,269,913 $ 60,735,966
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 4,562,000 $ ---
Accounts payable 6,433,691 3,756,722
Income taxes payable 3,938,365 2,532,755
Accrued payroll and benefits 1,157,653 1,605,840
Other accrued liabilities 731,332 466,432
-------------- --------------
Total Current Liabilities 16,823,041 8,361,749
Long-term liabilities 229,500 ---
-------------- --------------
Total Liabilities 17,052,541 8,361,749
-------------- --------------
Stockholders' Equity
Common stock 176,631 163,285
Capital in excess of par value 62,162,986 58,517,279
Note receivable from affiliate --- (571,634)
Accumulated deficit (3,122,245) (5,734,713)
-------------- --------------
Total Stockholders' Equity 59,217,372 52,374,217
-------------- --------------
Total Liabilities and Stockholders' Equity $ 76,269,913 $ 60,735,966
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE> 3
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Sales of products $ 15,470,050 $ 8,354,310
Service revenues 4,781,374 4,038,935
-------------- --------------
Total Sales 20,251,424 12,393,245
Cost of products sold 9,969,627 6,214,844
Cost of services 4,083,481 3,403,141
-------------- --------------
Total Cost of Sales 14,053,108 9,617,985
-------------- --------------
Gross Profit 6,198,316 2,775,260
Engineering and development 316,410 176,495
Selling, general and administrative 1,917,563 1,277,061
Amortization of goodwill 284,131 111,172
-------------- --------------
Operating Income 3,680,212 1,210,532
Interest and other income 367,186 102,791
Interest expense (28,930) (103,005)
-------------- --------------
Income Before Income Taxes 4,018,468 1,210,318
Income taxes 1,406,000 ---
-------------- --------------
Net Income $ 2,612,468 $ 1,210,318
============== ==============
Net Income Per Common Share $ .15 $ .09
============== ==============
Weighted Average Shares Outstanding 17,743,617 13,548,727
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 4
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
CAPITAL IN NOTE
COMMON EXCESS OF RECEIVABLE ACCUMULATED
STOCK PAR VALUE FROM AFFILIATE DEFICIT TOTAL
-------------- ------------- -------------- -------------- -------------
<S> <C> <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 2,612,468 2,612,468
Issuance of 1,285,884 shares for
CIS acquisition 12,859 2,580,215 2,593,074
Release of 159,327 shares from escrow
for AIT acquisition 892,231 892,231
Repayment of loan by affiliate 571,634 571,634
Issuance of 46,960 shares
for stock options 470 160,078 160,548
Issuance of 1,650 shares for matching
contribution to 401(K) plan 17 13,183 13,200
------------- ------------- ------------- ------------- -------------
Balance at March 31, 1997 $ 176,631 $ 62,162,986 $ --- $ (3,122,245) $ 59,217,372
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 5
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
--------------------------------
1997 1996
-------------- --------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income $ 2,612,468 $ 1,210,318
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 503,439 309,632
Provision for inventory reserves 60,000 41,250
Provision for bad debts 32,755 18,300
Stock contributed to 401(K) plan 13,200 6,825
Changes in operating assets and liabilities, net of effects
from businesses acquired:
Accounts receivable (3,554,300) (297,023)
Inventories (3,521,014) (2,007,482)
Accounts payable 2,087,347 (39,026)
Other assets and liabilities 449,983 (406,958)
-------------- --------------
Net Cash Used By Operating Activities (1,316,122) (1,164,164)
-------------- --------------
Cash Flows From Investing Activities:
Acquisitions of businesses (4,099,852) 805,360
Repayments by (loans to) affiliate 582,500 (62,916)
Expenditures for property and equipment (725,793) (165,992)
Prepaid rent on equipment lease (11,304) 1,907
Technology licenses (9,178) (62,859)
-------------- --------------
Net Cash From (Used By) Investing Activities (4,263,627) 515,500
-------------- --------------
Cash Flows From Financing Activities:
Short-term debt borrowings (repayments) 4,024,000 (3,128,287)
Proceeds from exercise of stock warrants and options 160,548 4,029,971
Capital lease obligations 291,500 ---
Debt issue costs --- (56,546)
-------------- --------------
Net Cash From Financing Activities 4,476,048 845,138
-------------- --------------
Increase (Decrease) in Cash and Equivalents (1,103,701) 196,474
Cash and Equivalents at Beginning of Period 22,480,082 1,886,819
-------------- --------------
Cash and Equivalents at End of Period $ 21,376,381 $ 2,083,293
============== ==============
Supplemental Schedule of Noncash Financing and
Investing Activities:
Issuance of common stock for businesses acquired $ 3,485,305 $ 2,088,118
Reduction in note receivable from affiliate to recognize
contingent purchase price earned 582,500
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 6
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 months ended March 31, 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"). 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.
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.
5
<PAGE> 7
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 $6.0 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 March 31, 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. In addition, 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 net effect of the
above has been to increase goodwill and stockholders' equity by approximately
$5.8 million as of March 31, 1997.
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.
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 three months ended March 31, 1996 would have
been approximately $13,496,000, $1,436,000, $1,436,000 and $.10., 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.
6
<PAGE> 8
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
-------------- --------------
<S> <C> <C>
Telecom systems, frames and circuit boards $ 9,830,000 $ 6,903,000
Electronic components 2,532,000 2,539,000
Pay telephone parts 626,000 494,000
Work in progress 917,000 438,000
Other finished goods 380,000 283,000
-------------- --------------
$ 14,285,000 $ 10,657,000
============== ==============
</TABLE>
NOTE 4. DEBT
The Company has a $10 million revolving line of credit with a large
European bank. As of March 31, 1997, the Company had borrowings of $4.5 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.
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 1,246,000 common shares held in escrow from certain
acquisitions and a license agreement have been excluded from the earnings per
share calculations for the three months ended March 31, 1997 because the
conditions for release of shares from escrow have not been satisfied.
Common stock issued and outstanding at March 31, 1997 and December 31,
1996 was 17,663,007 and 16,328,513 shares, respectively.
7
<PAGE> 9
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 are a perfect complement
to the Company's traditional telephone service provider and private network
operator markets, which is expected to provide the Company with substantial 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 quarter of
1997 increased by 38.5% over the fourth quarter 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 quarter of 1997 (76.4% 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 30.6% in the first quarter 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 18.2% in the
first quarter 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.
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 $36.5
million and $59.2 million, respectively, at March 31, 1997.
8
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated
Statements of Operations as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Sales of products 76.4% 67.4%
Service revenues 23.6 32.6
--------- ---------
Total sales 100.0 100.0
Cost of products sold 49.2 50.1
Cost of services 20.2 27.5
--------- ---------
Total cost of sales 69.4 77.6
--------- ---------
Gross profit 30.6 22.4
Engineering and development 1.6 1.4
Selling, general and administrative 9.4 10.3
Amortization of goodwill 1.4 0.9
--------- ---------
Operating income 18.2 9.8
Interest and other income 1.6 0.8
Interest expense --- (0.8)
--------- ---------
Income (loss) before income taxes 19.8 9.8
Income taxes 6.9 ---
--------- ---------
Net income (loss) 12.9% 9.8%
========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Sales. Total sales increased $7,858,000, or 63.4%, to $21,251,000 in the
first quarter of 1997 from $12,393,000 in the first quarter of 1996. The
percentage of product sales to total sales increased to 76.4% in the first
quarter of 1997 from 67.4% in the first quarter of 1996.
Product sales increased $7,116,000, or 85.2%, to $15,470,000 in the first
quarter of 1997 from $8,354,000 in the first quarter of 1996. The increase
related to an additional $5.2 million of switching products sold by AIT and $5.4
million of cellular equipment sold by CIS, which was acquired effective January
1, 1997. The first quarter 1996 product sales included approximately $3.5
million in special one-time sales of distributed products.
The Company had no such sales in the first quarter of 1997.
Service revenues increased $742,000, or 18.4%, to $4,781,000 in the first
quarter of 1997 from $4,039,000 in the first quarter of 1996. The increase
related to an additional $1.6 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.
9
<PAGE> 11
Gross Profit. Gross profit increased $3,423,000, or 123.3%, to $6,198,000
in the first quarter of 1997 from $2,775,000 in the first quarter of 1996. Gross
profit margin increased to 30.6% in the first quarter of 1997 from 22.4% in the
first quarter of 1996. The improved performance resulted from the 63.4% 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 35.6% in the first
quarter of 1997 from 25.6% in the first quarter of 1996. The improved margin
performance relates to the $5.2 million increase in switching products sold by
AIT and $5.4 million of cellular and PCS products sold by CIS. In addition, the
first quarter of 1996 included $3.5 million of distributed product sales which
carry margins substantially lower than the Company's other products
Gross profit margin on service revenues decreased to 14.6% in the first
quarter of 1997 from 15.7% in the first quarter of 1996, primarily due to
increased pay telephone refurbishment 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 $140,000, or 79.3%, to $316,000 in the first quarter of 1997 from
$176,000 in the first quarter of 1996. The increase in expenses was attributable
to the formation of a corporate product development function during the third
quarter of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $641,000, or 50.2%, to $1,918,000 in the first
quarter of 1997 from $1,277,000 in the first 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 $200,000 of incentive compensation expense in the first
quarter of 1997 as compared to no provision in the first quarter of 1996. As a
percentage of total sales, selling, general and administrative expenses
decreased to 9.4% in the first quarter of 1997 from 10.3% in the first quarter
of 1996.
Amortization of Goodwill. Amortization of goodwill increased $173,000 to
$284,000 in the first quarter of 1997 from $111,000 in the first quarter of
1996, as a result of the goodwill recorded in connection with the CIS
acquisition and contingent purchase price earned by AIT.
Operating Income. Operating income increased $2,470,000, or 204.0%, to
$3,680,000 in the first quarter of 1997 from $1,210,000 in the first quarter of
1996. As a percentage of total sales, operating income increased to 18.2% in the
first quarter of 1997 from 9.8% in the first quarter of 1996.
Interest and Other Income. Interest and other income increased $264,000,
or 257.2%, in the first quarter of 1997 from $103,000 in the first 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 $74,000, or 71.9%, to
$29,000 in the first quarter of 1997 from $103,000 in the first quarter of
1996. The decrease is due to the reduction in average debt outstanding during
the first quarter of 1997 resulting from the October 1996 repayment of a $3.9
million bank term loan.
10
<PAGE> 12
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 during the past two years, cash flows from operations are also
becoming a primary cash resource for the Company.
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.
OPERATING ACTIVITIES.
Cash used by operating activities increased $152,000 to $(1,316,000) in
the first three months of 1997 from $(1,164,000) in the first three months of
1996 primarily as a result of increased accounts receivable and inventory
balances at March 31, 1997.
Accounts receivable increased $4,372,000, or 45.3%, to $14,024,000 at
March 31, 1997 from $9,652,000 at December 31, 1996. The increase is due to the
acquisition of CIS and extended payment terms granted to one customer in
connection with a $2.3 million equipment sale in December 1996. In early May,
the $2.3 million was paid in full as scheduled. Excluding the $2.3 million
receivable, average days sales outstanding at March 31, 1997 were 42 days as
compared to 50 days at December 31, 1996.
Inventories increased $3,628,000, or 34.0%, to $14,285,000 at March 31,
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 Compact
Digital Exchange(TM) switch, Wireless Local Loop-2000(TM)system and the WX-5501
line card.
11
<PAGE> 13
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.
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 March 31, 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 March 31, 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 three months of 1996, the Company invested $726,000 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.
12
<PAGE> 14
FINANCING ACTIVITIES
As of March 31, 1997, there was $4.5 outstanding on the Company's line of
credit. In early April, the Company repaid these borrowings in full.
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.
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.
13
<PAGE> 15
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 three
months of 1997, a $210,000 expense was recorded for the prorata 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 March 31, 1997
balance sheet.
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 $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
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 28, 1997 in connection with the Company's acquisition of CIS
pursuant to an Agreement and Plan of Merger pursuant to which CIS was merged
with and into a wholly-owned subsidiary of the Company, the Company issued an
aggregate of 1,285,884 shares of common stock, of which 845,010 shares were
deposited into escrow, to the three stockholders of CIS. These securities were
issued without registration under the Securities Act of 1933, as amended, in
reliance upon the exemption in Section 4(2) of such Act as all such
stockholders represented that they were "accredited investors."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule (For SEC Use Only)
(B) REPORT ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ Mark A. Gergel
--------------------------------------------
Mark A. Gergel
Executive V.P. and Chief Financial Officer
Dated: May 14, 1997
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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