<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 20, 1998
-------------
WORLD ACCESS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-19998 65-0044209
- --------------------------------------------------------------------------------
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION
INCORPORATION) NUMBER)
945 E. PACES FERRY ROAD, SUITE 2240, ATLANTA, GEORGIA 30326
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 231-2025
--------------------------
<PAGE> 2
ITEM 5. OTHER EVENTS.
As previously reported, on May 12, 1998, World Access, Inc. (the
"Company") announced that it had entered into (i) a definitive Agreement and
Plan of Merger and Reorganization (the "Merger Agreement") with Cherry
Communications Incorporated (d/b/a Resurgens Communications Group) ("RCG")
pursuant to which the Company will acquire RCG in a merger transaction (the
"Merger"), and (ii) a Share Exchange Agreement and Plan of Reorganization (the
"Exchange Agreement") with the sole shareholder (the "Shareholder") of Cherry
Communications U.K. Limited ("Cherry U.K.") pursuant to which the Company will
acquire Cherry U.K. in a share exchange transaction (the "Exchange").
In connection with the Merger, the creditors of RCG will receive an
aggregate of 9,375,000 shares of common stock of WAXS INC. ("New World Access").
New World Access is a wholly-owned subsidiary of the Company that will become
the parent of the Company upon the completion of the previously reported
acquisition of the shares of NACT Telecommunications, Inc. ("NACT") not already
owned by the Company and the holding company reorganization to be effective in
connection therewith (the "Holding Company Reorganization"). Of the shares of
New World Access common stock to be issued to the RCG creditors, two-thirds will
be held in escrow and will be released to the RCG creditors over the two and
one-half years following the consummation of the Merger subject to the
attainment of certain earnings levels for the combined business of RCG and
Cherry U.K.
In connection with the Exchange, the Shareholder will receive an
aggregate of 1,875,000 shares of New World Access common stock, of which
one-third will be issued to the Shareholder at closing and the remaining
two-thirds will be issued and held in escrow and will be released to the
Shareholder over the two and one-half year period following the consummation of
the Exchange subject to the attainment of certain earnings levels for the
combined business of RCG and Cherry U.K. The Exchange Agreement pursuant to
which provides, however, that the number of shares of New World Access common
stock to be received by the Shareholder will be reduced to the extent that New
World Access is required to convert options to acquire shares of Cherry U.K.
capital stock, which options may only be granted with the permission of New
World Access, into options to acquire New World Access common stock. It is
currently expected that no such options will be granted.
Each of the Merger and the Exchange is subject to the satisfaction of
certain conditions customary in similar transactions, including the approval of
the Company's stockholders and the consummation of the Holding Company
Reorganization. The consummation of the Merger is also subject to the Bankruptcy
Court's approval and confirmation of RCG's Plan of Reorganization which is
expected to be filed by June 5, 1998. In addition, the Merger Agreement is
subject to the approval of the Bankruptcy Court. Finally, the consummation of
the Merger is a condition to the consummation of the Exchange, and the Exchange
is a condition to the consummation of the Merger.
1
<PAGE> 3
The foregoing description of the Merger and the Exchange is qualified
in its entirety by reference to the Merger Agreement and the Exchange Agreement
which have been filed as exhibits to the Company's Form 8-K filed with the
Commission on may 18, 1998.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statement of Business Acquired. Included in this
report are the following financial statements:
(i) The combined unaudited financial statements of RCG
and Cherry U.K. for the three months ended March 31,
1998 and 1997;
(ii) The combined financial statements of RCG and Cherry
U.K. for the year ended December 31, 1997, which have
been audited by the independent accounting firm of
Ernst & Young LLP, whose opinion thereon is included
herein;
(iii) The balance sheet of RCG for the year ended December
31, 1996 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the
two years in the period ended December 31, 1996,
which have been audited by the independent accounting
firm of Grant Thornton LLP, whose opinion thereon is
included herein; and
(iv) The financial statements of Cherry U.K. for the years
ended March 31, 1997 and 1996, which have been
audited by Munslow Messias, chartered certified
accountants and registered auditors, whose opinion
thereon is included herein.
(b) Pro Forma Financial Information. The Unaudited Pro Forma
Combined Financial Statements of New World Access give effect to the
consummation of the several transactions that World Access has completed or are
currently contemplated. The Unaudited Pro Forma Combined Statements of
Operations give effect to : (1) the acquisition of Advanced TechCom, Inc. as if
it had occurred on January 1, 1997; (2) the acquisition of a majority interest
in NACT (the "NACT Stock Purchase") as if it had occurred on January 1, 1997;
(3) the acquisition of the remainder of NACT as if it had occurred on January 1,
1997 (the "NACT Transaction"); (4) the acquisition of RCG and Cherry U.K. (the
"Resurgens Transaction") as if it had occurred on January 1, 1997; and (5) the
acquisition of Telco Systems, Inc. ("Telco Merger") as if it had occurred on
April 1, 1997. The Unaudited Pro Forma Combined Balance Sheet gives effect to:
(1) the NACT Transaction and Resurgens Transaction as if they had been completed
on March 31, 1998 and (2) the Telco Merger as if it had been completed on May
31, 1998.
The pro forma adjustments are based upon currently available
information and upon certain assumptions that the Company's management believes
are reasonable. Each of the acquisition transactions above has been accounted
for using the purchase method of accounting. The
2
<PAGE> 4
adjustments recorded in the Unaudited Pro Forma Combined Financial Statements
represent the Company's preliminary determination of these adjustments based
upon available information. There can be no assurance that the actual
adjustments will not differ significantly from the pro forma adjustments
reflected in the Unaudited Pro Forma Combined Financial Statements.
In connection with the consummation of the pending acquisition
transactions, the Company expects New World Access to record charges
representing the estimated portion of the purchase price allocated to in-process
research and development of $21.9 million and $65.0 million for the NACT
Transaction and Telco Merger, respectively. In addition, in the three month
period ended March 31, 1998, the Company recorded charges representing the
estimated portion of the purchase price allocated to in-process research and
development of $44.6 million and $5.4 million for the NACT Stock Purchase and
ATI acquisition, respectively. Since these charges are directly related to the
acquisitions and will not recur, the Unaudited Pro Forma Combined Statements of
Operations have been prepared excluding these one-time non-recurring charges.
The Unaudited Pro Forma Combined Financial Statements are not
necessarily indicative of the financial position or the future results of
operations or results that might have been achieved if the foregoing acquisition
transactions had been consummated as of the indicated dates. The Unaudited Pro
Forma Combined Financial Statements should be read in conjunction with the
historical consolidated financial statements of the Company, ATI, NACT,
Resurgens and Telco, and the related notes thereto.
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "edgar."
23.1 Consent of Ernst & Young LLP
23.2 Consent of Grant Thornton LLP
23.3 Consent of Munslow Messias
3
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Securities 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/ Martin D. Kidder
-------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of July 24, 1998
4
<PAGE> 6
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The combined unaudited financial statements of RCG and Cherry U.K. for the three months
ended March 31, 1998 and 1997
Combined balance sheets as of March 31, 1998
and December 31, 1997.............................................................. F-2
Combined statements of operations for the three
months ended March 31, 1998 and 1997............................................... F-3
Combined statements of cash flows for the three
months ended March 31, 1998 and 1997............................................... F-4
Combined statements of net stockholders' deficiency
as of March 31, 1998 and December 31, 1997......................................... F-5
Notes to combined unaudited financial statements........................................ F-6
The combined financial statements of RCG and Cherry U.K. for the year ended
December 31, 1997
Report of independent auditors.......................................................... F-9
Audited combined financial statements
Combined balance sheet as of December 31, 1997.......................................... F-11
Combined statement of operations for the year ended December 31, 1997................... F-13
Combined statement of net stockholders' deficiency for the year
ended December 31, 1997............................................................ F-14
Combined statement of cash flows for the year ended December 31, 1997................... F-15
Notes to combined financial statements.................................................. F-16
The balance sheet of RCG for the year ended December 31, 1996 and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
two years in the period ended December 31, 1996
Report of independent auditors.......................................................... F-37
Audited financial statements
Balance sheet as of December 31, 1996................................................... F-39
Statements of operations for the years
ended December 31, 1996 and 1995................................................... F-41
Statement of stockholder's equity (deficit) for the two years
ended December 31, 1996............................................................ F-42
Statements of cash flows for the years ended December 31, 1996 and 1995................. F-43
Notes to financial statements........................................................... F-45
The financial statements of Cherry U.K. for the years ended March 31, 1997 and
1996
Directors' report....................................................................... F-56
Auditors' report........................................................................ F-58
Profit and loss account for the years ended March 31, 1997 and 1996..................... F-59
Balance sheet as of March 31, 1997 and 1996
Notes to the accounts................................................................... F-60
Management profit and loss account...................................................... F-64
</TABLE>
F-1
<PAGE> 7
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
and Cherry Communications UK Limited
Combined Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,487 $ 4,347
Accounts receivable, net 1,210 1,757
Prepaid expenses 1,816 1,838
Other 659 648
--------- ---------
Total current assets 6,172 8,590
Property and equipment, net 53,784 54,958
Deposits and other assets, net 296 295
--------- ---------
Total assets $ 60,252 $ 63,843
========= =========
LIABILITIES AND NET STOCKHOLDERS' DEFICIENCY
Current liabilities not subject to compromise:
Accounts payable $ 11,117 $ 8,761
Accrued expenses 2,436 1,719
Debtor in possession facility 16,250 7,250
Current portion of capitalized lease obligations 3,569 3,630
--------- ---------
Total current liabilities 33,372 21,360
Liabilities subject to compromise 335,981 336,751
Long-term obligations not subject to compromise
Capitalized lease obligations, less current portion 30,110 30,820
--------- ---------
Total liabilities 399,463 388,931
Net stockholders' deficiency:
Common stock - Resurgens 1 1
Common stock - Cherry UK 84 84
Additional paid-in capital 61,467 61,467
Accumulated deficit (400,763) (386,640)
--------- ---------
Net stockholders' deficiency (339,211) (325,088)
--------- ---------
Total liabilities and net stockholders' deficiency $ 60,252 $ 63,843
========= =========
</TABLE>
F-2
<PAGE> 8
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
and Cherry Communications UK Limited
Combined Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------------------------------
(Unaudited)
<S> <C> <C>
Revenues $ 368 $ 70,642
Cost of services 9,084 86,758
--------- ---------
Gross margin (8,716) (16,116)
Operating expenses:
Selling, general and administrative expenses 2,549 6,174
Depreciation and amortization 1,609 504
Provision for doubtful accounts 2 9,206
--------- ---------
Total operating expenses 4,160 15,884
Operating loss (12,876) (32,000)
Other expense:
Interest expense 1,195 1,789
Other 5 472
--------- ---------
Total other expense, net 1,200 2,261
Loss before reorganization costs (14,076) (34,261)
Reorganization items 365 --
--------- ---------
Net loss ($ 14,441) ($ 34,261)
========= =========
</TABLE>
F-3
<PAGE> 9
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
and Cherry Communications UK Limited
Combined Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss $(14,441) $(34,261)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts 2 9,206
Depreciation and amortization 1,609 504
Changes in operating assets and liabilities:
Accounts receivable 545 6,061
Prepaid expenses and other 11 (5,383)
Accounts payable 2,356 20,726
Accrued expenses and other liabilities 717 --
-------- --------
Net cash used in operating activities before reorganization items (9,201) (3,147)
Decrease in liabilities subject to compromise (770) --
-------- --------
Net cash used in operating activities (9,971) (3,147)
Investing activities
Cherry UK Loss (Note 1) 318 --
Fixed asset acquisitions (435) (2,808)
Deposits and other assets (1) 1,431
-------- --------
Net cash used in investing activities 118 (1,377)
Financing activities
Proceeds from debtor-in-possession financing 9,000 --
Payments on log-term debt -- (793)
Payments on capitalized lease obligations (771) --
-------- --------
Net cash provided by (used in) financing activities 8,229 (793)
Net decrease in cash and cash equivalents (1,860) (5,317)
Cash and cash equivalents, beginning of year 4,347 4,524
======== ========
Cash and cash equivalents, end of year $ 2,487 $ (793)
======== ========
</TABLE>
F-4
<PAGE> 10
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
and Cherry Communications UK Limited
Combined Statements of Net Stockholders' Deficiency
(In Thousands, except per share data)
<TABLE>
<CAPTION>
Cherry Communications Inc. Cherry UK Limited
Common Stock Common Stock Additional Total
------------------------------------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficiency
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 1,249 $1 50,000 $84 $61,467 $(386,640) $(325,088)
Net loss (unaudited) -- -- -- -- -- (14,441) $ (14,441)
Cherry Communications UK
Limited loss for January 1, 1998
through March 31, 1998 (Note 1) -- -- -- -- -- 318 318
------------------------------------------------------------------------------------------------
Balance March 31, 1998 (unaudited) 1,249 $1 50,000 $84 $61,467 $(400,763) $(339,211)
================================================================================================
</TABLE>
F-5
<PAGE> 11
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS UK LIMITED
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited combined financial statements include the
accounts of Cherry Communications Incorporated (d/b/a Resurgens Communications
Group) and Cherry Communications UK Limited (the "Companies"). Cherry UK's
financial statements are prepared on a March 31 fiscal year end. For
combination purposes, March 31, 1998 financial statements of Cherry UK, which
were previously included in the combined entity as of December 31, 1997, have
been combined with the March 31, 1998 financial statements of Resurgens.
Therefore, the statement of net stockholders' deficiency and statement of cash
flows reflect an adjustment for Cherry UK which was previously included in
fiscal year 1997. For combination purposes, the three months ended June 30,
1997 of Cherry UK have been combined with the three months ended March 31, 1997
for Resurgens.
These financial statements do 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 combined financial statements and footnotes included
elsewhere in this Proxy.
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, 1998 are not
necessarily indicative of the results expected for the full year. Certain
reclassifications have been made to the prior period's financial information to
conform with the presentations used in 1998.
F-6
<PAGE> 12
Combined Financial Statements
Cherry Communications Incorporated,
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and
Cherry Communications UK Limited
Year ended December 31, 1997
with Report of Independent Auditors
F-7
<PAGE> 13
Cherry Communications Incorporated,
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Audited Combined Financial Statements
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.........................................................................F-9
Audited Combined Financial Statements
Combined Balance Sheet as of December 31, 1997.........................................................F-11
Combined Statement of Operations for the year ended December 31, 1997..................................F-13
Combined Statement of Net Stockholders' Deficiency for the year ended December 31, 1997................F-14
Combined Statement of Cash Flows for the year ended December 31, 1997..................................F-15
Notes to Combined Financial Statements.................................................................F-16
</TABLE>
F-8
<PAGE> 14
Report of Independent Auditors
Board of Directors
Cherry Communications Incorporated,
d/b/a Resurgens Communications Group
We have audited the accompanying combined balance sheet of Cherry Communications
Incorporated (d/b/a Resurgens Communications Group), and Cherry Communications
UK Limited (collectively referred to as the "Companies") as of December 31,
1997, and the related statements of operations, net stockholders' deficiency,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position at December 31, 1997, of
the Companies and the combined results of their operations and their cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying combined financial statements have been prepared assuming that
the Companies will continue as a going concern. As more fully described in Note
2 to the financial statements, the Companies have not complied with the
repayment schedule for several of its loan agreements and is party to
significant litigation, the outcome of which cannot be predicted. In addition,
the Companies have incurred recurring operating losses, have a working capital
deficiency and have lost virtually all of their customer base. Cherry
Communications Incorporated (d/b/a Resurgens Communications Group) filed
voluntary bankruptcy under Chapter 11 of the United States Bankruptcy Code on
October 24, 1997, and is currently operating its business as a
debtor-in-possession under the supervision of the Bankruptcy Court. These
conditions raise substantial doubt about the Companies' ability to continue as a
going concern. Although Cherry Communications Incorporated (d/b/a Resurgens
Communications Group) is currently operating as a
F-9
<PAGE> 15
Debtor-In-Possession under the jurisdiction of the Bankruptcy Court, the
continuation of the business as a going concern is contingent upon, among other
things, the ability to formulate a plan of reorganization which will gain
approval of the creditors and confirmation by the Bankruptcy Court, success of
future operations, and the ability to recover the carrying amount of assets
and/or the amount and classification of liabilities. The 1997 financial
statements do not include any adjustments to reflect the possible future effect
on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of the bankruptcy
proceedings and related uncertainties.
June 5, 1998
F-10
<PAGE> 16
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Combined Balance Sheet
December 31, 1997
(In Thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,347
Accounts receivable:
Trade, net of allowance for doubtful accounts of $1,062 1,757
Other 648
-------
2,405
Prepaid expenses 1,838
-------
Total current assets 8,590
Property and equipment:
Telecommunications equipment 50,456
Furniture, fixtures and equipment 10,266
Leasehold improvements 2,593
-------
63,315
Less accumulated depreciation and amortization (8,357)
-------
Net property and equipment 54,958
Deposits and other assets, net 295
=======
Total assets $63,843
=======
</TABLE>
F-11
<PAGE> 17
<TABLE>
<S> <C>
LIABILITIES AND NET STOCKHOLDERS' DEFICIENCY
Current liabilities not subject to compromise:
Accounts payable $ 8,761
Accrued expenses 1,719
Debtor-in-possession (DIP) loan 7,250
Current portion of capitalized lease obligations 3,630
---------
Total current liabilities 21,360
Liabilities subject to compromise (Note 3) 336,751
Long-term obligations not subject to compromise:
Capitalized lease obligations, less current portion 30,820
---------
Total liabilities 388,931
Net stockholders' deficiency:
Common stock, Resurgens, no par value,
authorized 10,000 shares,
issued 1,249 at December 31, 1997 1
Common stock, Cherry UK, no par value,
authorized and issued
50,000 shares at December 31, 1997 84
Additional paid-in capital 61,467
Accumulated deficit (386,640)
---------
Net stockholders' deficiency (325,088)
---------
Total liabilities and net stockholders' deficiency $ 63,843
=========
</TABLE>
See accompanying notes
F-12
<PAGE> 18
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Combined Statement of Operations
Year ended December 31, 1997
(In Thousands)
<TABLE>
<S> <C>
Revenues $ 165,489
Cost of services 246,494
---------
Gross margin (81,005)
Operating expenses:
Selling, general and administrative expenses 34,891
Depreciation and amortization 5,814
Provision for doubtful accounts 33,743
---------
Total operating expenses 74,448
Operating loss (155,453)
Other income (expense):
Interest and finance charges (11,939)
Loss on disposition of property (2,977)
Litigation settlements - non bankruptcy (1,328)
Other income 642
---------
Total other expense, net (15,602)
Loss before reorganization costs (171,055)
Reorganization items (Note 5) (665)
---------
Net loss $(171,720)
=========
</TABLE>
See accompanying notes
F-13
<PAGE> 19
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Combined Statement of Net Stockholders' Deficiency
(In Thousands, except share data)
<TABLE>
<CAPTION>
CHERRY
COMMUNICATIONS
CHERRY UK
COMMUNICATIONS INC. LIMITED
COMMON STOCK COMMON STOCK ADDITIONAL NET
------------------------------------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,000 $1 50,000 $84 $61,467 $(214,920) $(153,368)
Additional shares issued related to
WorldCom settlement (Note 3) 249 - - - - - -
Net loss - - - - - (171,720) (171,720)
----------------------------------------------------------------------------------
Balance, December 31, 1997 1,249 $1 50,000 $84 $61,467 $(386,640) $(325,088)
==================================================================================
</TABLE>
See accompanying notes
F-14
<PAGE> 20
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Combined Statement of Cash Flows
Year ended December 31, 1997
(In Thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $(171,720)
Adjustment to reconcile net loss to net cash provided by operating
activities:
Provision for doubtful accounts 33,743
Depreciation and amortization 5,814
Loss on disposition of property and equipment 2,977
Write-off of unrealizable deposits and other assets 1,450
Changes in operating assets and liabilities:
Accounts receivables 6,520
Prepaid expenses and other (669)
Accounts payable (181,332)
Accrued expenses and other liabilities (8,559)
---------
Net cash used in operating activities before reorganization items (311,776)
Increase in liabilities subject to compromise 314,228
---------
Net cash provided by operating activities 2,452
INVESTING ACTIVITIES
Purchases of property and equipment (9,545)
Deposits and other assets 851
---------
Net cash used in investing activities (8,694)
FINANCING ACTIVITIES
Proceeds from DIP loan 7,250
Payments on capitalized lease obligations (1,496)
---------
Net cash provided by financing activities 5,754
---------
Net decrease in cash and cash equivalents (488)
Cash and cash equivalents, beginning of year 4,835
---------
Cash and cash equivalents, end of year $ 4,347
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and finance charges paid $ 830
Supplemental schedule of noncash investing and financing
activities:
Capitalized lease obligations incurred for property and equipment 13,756
Deposits applied to capital lease obligations 1,165
</TABLE>
See accompanying notes
F-15
<PAGE> 21
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements
(Dollars In Thousands)
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Cherry Communications Incorporated (d/b/a Resurgens Communications Group)
("Resurgens") is a facilities-based international long-distance carrier
operating five long distance switch centers throughout the United States and
overseas, and has arrangements with domestic and foreign long distance carriers
for processing international calls. Resurgens primarily provides long distance
network services to U.S. based long distance carriers. Although there are a
number of domestic and foreign long distance carriers, a change in carriers
could disrupt Resurgens' ability to service its customers, which would result in
a possible loss of operating revenues. In August 1997 Resurgens began
experiencing a substantial decline in revenues, and in October 1997 Resurgens
began restructuring its network to improve quality and eliminate those costs not
necessary to implement Management's decision to focus its business efforts as a
carrier's carrier. Resurgens' bankruptcy filing (as described in Note 2) which
resulted in a substantial loss of customers and a corresponding write-off in
accounts receivable was an initial step in implementing the new business
strategy.
The combined financial statements presented herein also include financial
statements of Cherry Communications UK Limited ("Cherry UK") which is held under
common ownership. This subsidiary has licensing and operating agreements for
international telephone access in association with Resurgens. Cherry UK records
an administrative revenue fee derived solely from Resurgens, based on an agreed
upon percentage of operating expense, which is eliminated in these combined
financial statements.
In October 1996, WorldCom Network Services ("WorldCom") threatened to stop
providing private line services and switch services to Resurgens as a result of
Resurgens' failure to pay WorldCom. In response, Resurgens commenced a lawsuit
against WorldCom asserting various claims including substantial billing
disputes. Effective July 24, 1997 the Companies settled their litigation and
claims against WorldCom. The settlement resulted, among other things, in the
execution by Resurgens of two promissory notes in the aggregate principal amount
of $165,000 (terms of which are further described in Note 3), the issuance of
shares of Resurgens to WorldCom (representing 19.9% of outstanding shares) and
the executions
F-16
<PAGE> 22
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NATURE OF BUSINESS (CONTINUED)
of a pledge and security agreement for 51% of the outstanding shares of
Resurgens and 51% of the outstanding shares of Cherry UK. This pledge and
security agreement gave WorldCom the ability to effectively control 71% and 51%
of the voting common shares of Resurgens and Cherry UK, respectively.
After this settlement was reached WorldCom, Resurgens, Cherry UK, James R.
Elliott (owner of 80.1% of Resurgens and sole owner of Cherry UK), and John D.
Phillips entered into a series of agreements, effective October 1, 1997, whereby
John D. Phillips received an option to purchase ("call right") James R.
Elliott's common stock of the combined Companies (1,000 shares of Resurgens and
50,000 shares of Cherry UK) for $1,000 and James R. Elliott received the right
to require ("put right") John D. Phillips to purchase the common stock of the
companies for $1,000. John D. Phillips was also granted a revocable voting
proxy for all of the shares owned and controlled by WorldCom, thereby giving him
effective control of Resurgens and Cherry UK. In conjunction with John D.
Phillips obtaining effective control of the Companies, Resurgens filed a
voluntary petition for relief under the provisions of Chapter 11 of the Federal
Bankruptcy Code. In addition, WorldCom agreed to provide debtor-in-possession
financing (see note 5). Effective May 8, 1998, John D. Phillips closed on his
option and acquired all of the outstanding shares of common stock of Cherry UK
for $1,000. James R. Elliott's exercise of his put right related to the 1,000
shares of Resurgens stock has been enjoined by the Bankruptcy Court and the
Plan of Reorganization currently provides that Resurgens stockholders will
receive no consideration under the Plan.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Resurgens and Cherry
UK (which is commonly controlled) (collectively, the "Companies"). Cherry UK was
purchased by the major shareholder of Resurgens in November 1995. Cherry UK's
financial statements are prepared on a March 31 fiscal year end. For combination
purposes, March 31, 1998 financial statements of Cherry UK have been combined
with the December 31, 1997 financial statements of Resurgens.
Significant intercompany accounts and transactions have been eliminated in
combination.
F-17
<PAGE> 23
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
generally computed using the straight-line method over the estimated useful
lives of the related assets as indicated below:
Telecommunications equipment 5-10 years
Furniture, fixtures and equipment 4 -5 years
Leasehold improvements Life of lease
In the event facts and circumstances indicate the cost of any long-lived assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the assets would be compared to the carrying amount of the assets to
determine if a write down to fair value may be required.
REVENUE RECOGNITION
Revenues are derived primarily from the provision of long-distance
telecommunications services and are recognized when the services are provided.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all
items that are required to be recognized under accounting standards as
components of
F-18
<PAGE> 24
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the statement of financial position. SFAS 130 is effective for
fiscal years beginning after December 15, 1997.
The Companies intend to adopt the provisions of SFAS 130 in 1998 and do not
expect its application to have a material impact on the financial position or
results of operations of the Companies.
FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Companies to significant
concentrations of credit risk consist principally of cash and cash equivalents,
trade accounts receivable, accounts payable and long term debt.
The Companies maintain cash and cash equivalents and certain other financial
instruments with various financial institutions. The Companies' policy is
designed to limit exposure at any one institution by performing periodic
evaluations of the relative credit standing of those financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Companies' financial instruments classified as current
assets or liabilities, including cash and cash equivalents, accounts receivable,
and accounts payable approximate carrying value, principally because of the
short maturity of these items.
F-19
<PAGE> 25
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts of the long-term debt payable approximate fair value due to
the interest rates on these agreements approximating the Companies' incremental
borrowing rates, and the fair values of capitalized lease obligations
approximate carrying value based on their effective interest rates compared to
current market rates.
SIGNIFICANT CUSTOMERS
The Companies' revenues are derived from a variety of customers including one
customer, which accounted for 19% of the Companies' revenues during 1997.
ADVERTISING COSTS
Pursuant to American Institute of Certified Public Accountants (AICPA) Statement
of Position No. 93-7, "Reporting on Advertising Cost," the Companies expensed
advertising costs of $2,226 as incurred in 1997.
COST OF SERVICES AND PRODUCTS
Cost of services include payments primarily to local exchange carriers ("LECs")
and interexchange carriers, primarily for access and transport charges.
INCOME TAXES
Due to Resurgens' conversion from a subchapter S Corporation to a C Corporation
as of August 1, 1997, Resurgens began accounting for income taxes under the
liability method. Under this method, deferred income taxes are recorded to
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and the amounts for
income tax purposes.
F-20
<PAGE> 26
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
For the period prior to August 1, 1997, all taxable losses were allocated to the
owners of Resurgens. Accordingly no income taxes are reflected for Resurgens in
the accompanying financial statements for the period prior to the conversion.
Cherry UK accounted for income taxes under the liability method for fiscal 1997.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates and such differences could be
material.
FOREIGN OPERATIONS
Summarized financial information for Cherry UK in US dollars, prior to
intercompany elimination, is:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
BALANCE SHEET
Current assets $ 792
Property and equipment 6,932
--------
Total assets 7,724
Current liabilities, including amount due to Resurgens of $4,496 6,337
Long-term debt 3,996
--------
Total liabilities 10,333
--------
Net deficiency $ (2,609)
========
STATEMENT OF OPERATIONS
Revenues $ 2,848
Expenses 3,665
========
Net loss $ (817)
========
</TABLE>
F-21
<PAGE> 27
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
FOREIGN CURRENCY TRANSLATION
Translation adjustments arising from combining Cherry UK are reflected within
the statements of operations as the US dollar is the functional currency of
Cherry UK.
2. PETITION FOR RELIEF UNDER CHAPTER 11 BANKRUPTCY
On October 24, 1997, Resurgens filed a voluntary petition for relief under the
provisions of Chapter 11 of the Federal Bankruptcy Code ("Chapter 11") in the
United States Bankruptcy Court for the Northern District of Illinois (the
"Court"). Cherry UK was not included in this bankruptcy filing. Under Chapter
11, certain claims against Resurgens in existence prior to the filing for relief
under the federal bankruptcy laws are stayed while Resurgens continues business
operations as a Debtor-in-Possession subject to the supervision of the Court.
Management filed a plan of reorganization on June 15, 1998 which contemplates
emergence in the third quarter of 1998. There can be no assurance at this time
that a plan of reorganization will be approved or confirmed by the Bankruptcy
Court, or that such plan will be consummated.
F-22
<PAGE> 28
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
2. PETITION FOR RELIEF UNDER CHAPTER 11 BANKRUPTCY (CONTINUED)
After an exclusivity period, creditors of Resurgens have the right to propose
alternative plans of reorganization. Any plan of reorganization, among other
things, is likely to result in material dilution of the equity of existing
stockholders as a result of a possible issuance of equity to creditors or new
investors.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 filing and circumstances relating to this event,
including Resurgens' leveraged financial structure and losses from operations,
such realization of assets and liquidation of liabilities is subject to
significant uncertainty. While under protection of Chapter 11, Resurgens may
sell or otherwise dispose of assets and liquidate or settle liabilities, for
amounts other than those reflected in the financial statements. Further, a plan
of reorganization could materially change the amounts reported in the financial
statements. Accordingly such financial statements do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization or the inability of the
Companies to continue as a going concern.
The ability to continue as a going concern is dependent upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
and the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.
3. LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under the reorganization proceedings are identified below. These
amounts may be subject to future adjustment depending on the Court's action,
further developments with respect to disputed claims, determination as to the
value of any collateral securing claims, and other events. Additional claims may
arise resulting from rejection of additional executory contracts or unexpired
leases by Resurgens.
F-23
<PAGE> 29
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
3. LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Accounts payable $136,095
Long-term debt 168,545
Governmental entities 7,314
Former employees 2,485
Professional fees 2,098
Accrued interest 2,939
Other liabilities 17,275
========
$336,751
========
</TABLE>
As a result of the bankruptcy filing, no principal or interest payments will be
made on any pre-petition debt without Court approval or until a reorganization
plan defining the repayment terms has been approved. Contractual interest
expense not recorded on certain pre-petition debt totaled $2,100 for the period
from October 24, 1997 through December 31, 1997.
LONG-TERM DEBT, SUBJECT TO COMPROMISE
<TABLE>
<CAPTION>
1997
--------
<S> <C>
WorldCom installment note due December 30, 1997, interest to accrue at 18% for
default of payment. $ 50,000
WorldCom installment note due July 23, 2000, bearing interest at 10%. Interest only
payments are due quarterly beginning March 31, 1998 and payments of principal
and interest beginning October 23, 1998. 115,000
Illinois Capital Group installment note due September 1997, bearing interest at 10%
with monthly principal and interest payments of $60. Penalty of $250 added to
principal for nonpayment of principal balance on due date. 367
Esplanade at Locust Point installment note due June 1999, with monthly payments
of $100, including interest imputed at 12.5%. Includes interest penalty of
$894 added to principal in 1998 due to nonpayments on account. 3,008
Eastern Telecom installment note due on or before November 1, 1998 bearing interest
at 8%. 170
========
Total long-term debt, subject to compromise $168,545
========
</TABLE>
F-24
<PAGE> 30
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
Under the two WorldCom installment notes, which are secured by substantially all
of the Companies' assets and stock of the Corporations, any defaults allow
WorldCom to charge interest at 18% annually on all outstanding balances, and to
request the entire indebtedness to become due. The Companies have defaulted on
the $50,000 note payable due December 30, 1997, and subsequent to year end,
defaulted on the March 31, 1998 interest payment due on the $115,000 note.
Remedies of default are not waived under this agreement by any failure or delay
by any party in exercising any remedy of default.
On April 2, 1996 Resurgens settled a litigation case with Illinois Capital Group
related to delinquent payments for leased switching equipment. In connection
with this settlement, a promissory note was executed for approximately $1,300.
The note required monthly payments beginning April 15, 1996 with a penalty
amount of $250 if Resurgens did not make payments when due. Resurgens ceased
payment on this note in mid 1997 and therefore this penalty amount has been
added to the principal balance.
Resurgens entered into a settlement agreement with Esplanade at Locust Point
Limited Partnership ("Esplanade") on January 29, 1996 which released Resurgens
from litigation claims involving leased office space. In connection with this
settlement, a promissory note was issued in the amount of $4,000, with monthly
payments of $100 to begin in March 1996, with no interest. Resurgens failed to
remit the required monthly payments during 1997. The agreement stated that an
additional $1,000 would be assessed and due if the companies failed to meet the
required payment schedule. Esplanade filed a claim against Resurgens for the
outstanding balance of the loan plus the additional penalty amount. Prior to
December 31, 1997, a judgment was reached in this case and an additional amount
of $894 was granted to Esplanade. This amount is subject to an interest rate of
12.5% and is included in the principal balance amount at December 31, 1997.
F-25
<PAGE> 31
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
LONG-TERM DEBT, SUBJECT TO COMPROMISE (CONTINUED)
The Eastern Telecom installment note was signed on August 1, 1997, based upon
judicial court settlement, for $190. The amount relates to non-performance of a
purchase agreement for switching equipment by Resurgens.
As part of the Chapter 11 reorganization process, Resurgens has attempted to
notify all known or potential creditors of the Chapter 11 filing for the purpose
of identifying all pre-petition claims against Resurgens. Generally, creditors
whose claims arose prior to the Petition Date had until February 6, 1998 ("Bar
Date") to file claims or be barred from asserting claims in the future. Claims
arising from rejection of executory contracts by Resurgens, and claims related
to certain other items were permitted to be filed within other dates as set by
the Court.
F-26
<PAGE> 32
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
3. LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
Differences between amounts shown by Resurgens and claims filed by creditors are
being investigated and will either be resolved or adjudicated. The ultimate
amount of and settlement terms for such liabilities are subject to the confirmed
plan of reorganization and are not presently determinable. The total amount of
proofs of claims filed in Court approximate $434,000, while the amount accrued
by Resurgens at December 31, 1997 is $336,751. This difference of approximately
$95,000 pertains to claims that management believes to be duplicate claims,
amounts relating to outstanding litigation (See Note 11) and other disputed
claims for which management is unable to predict the ultimate outcome of and
therefore, no provision has been recorded in the financial statements for this
difference.
4. REORGANIZATION COSTS
Reorganization costs recorded in 1997 consisted of:
<TABLE>
<S> <C>
Rejected lease expense $ 956
Professional fees 233
Professional fees abated (524)
=====
$ 665
=====
</TABLE>
Professional fees incurred consisted of consulting and legal fees for bankruptcy
activity and restructuring efforts on behalf of Resurgens and the creditor's
committee.
5. DEBTOR-IN-POSSESSION (DIP) FINANCING
In November 1997, the Court authorized Resurgens to enter into a financing
agreement with WorldCom in order to facilitate continued operations as a
debtor-in-possession. The terms of this financing agreement originally provided
for maximum advances thereunder to $19,000 and required repayment on April 30,
1998 at 12% interest.
F-27
<PAGE> 33
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
5. DEBTOR-IN-POSSESSION (DIP) FINANCING (CONTINUED)
On April 16, 1998 the financing agreement was amended to provide for an
increased maximum amount of $25,000 and an extended term through July 31, 1998.
As of June 5, 1998, the Company had borrowed an additional $13,700.
6. CAPITALIZED LEASE OBLIGATIONS
The Companies lease telecommunications and other equipment through capitalized
lease arrangements.
Future minimum lease payments on these capitalized lease obligations at December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 6,930
1999 10,499
2000 10,382
2001 9,966
2002 5,493
--------
Net minimum lease payments 43,270
Less amount representing interest (8,820)
--------
Present value of minimum lease payments 34,450
Less current portion of capitalized lease obligations (3,630)
--------
Long-term portion of capitalized lease obligations, not
subject to compromise $ 30,820
========
</TABLE>
The net carrying value of assets under capital leases was $35,900 at December
31, 1997, and is included in property and equipment. Amortization of these
assets is included in depreciation expense.
F-28
<PAGE> 34
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
7. EMPLOYEE 401(K) PLAN
Effective January 1, 1997, Resurgens established a defined contribution savings
plan, intended to qualify under IRS Code Section 401(k), available to all
employees who complete six months of service and are at least age 21. Employees
may contribute up to 15% of their salary per year, subject to statutory
limitations, and Resurgens matches 100% of employee contributions up to 5% of
each employee's salary. Resurgens' matching contributions vest 20% per year.
Resurgens' expense under the plan during 1997 amounted to approximately $98.
8. INCOME TAXES
For the period from inception through July 31, 1997, Resurgens elected to have
its income taxed directly to its individual shareholders under the provisions of
Subchapter S of the Internal Revenue Code ("the Code"). Accordingly, no deferred
income taxes were established for Resurgens. Effective August 1, 1997, the
S-Corporation election was terminated due to a change in ownership and Resurgens
is now subject to federal and state income taxes. Upon conversion to C
corporation status, Resurgens recorded a net deferred tax asset which was fully
offset by the establishment of a valuation reserve. Accordingly, no charge or
benefit was made to the income tax provision to reflect the impact of this
change in tax status.
Effective August 1, 1997, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 109. With respect to
Cherry UK, the accompanying financial statements reflect provisions for income
taxes calculated under the provisions of SFAS No. 109 since acquisition. For the
period prior to the change in tax status, the provision has been presented on a
pro forma basis as if Resurgens had been liable for federal and state income
taxes since January 1, 1997.
F-29
<PAGE> 35
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
8. INCOME TAXES (CONTINUED)
The Companies have generated significant net operating losses ("NOLs") both in
the United States and in the United Kingdom. These NOLs may be available to
offset future taxable income, subject to the limitations discussed below.
Resurgens has generated NOL carryforwards totaling $128,000 in the United States
after the date of the conversion from S-Corporation to C-Corporation status.
Cherry UK has NOLs available at December 31, 1997 approximating $1,500 in the
United Kingdom. The United States federal NOL generated in 1997 expires in the
year 2012, while the United Kingdom NOLs do not expire.
The significant components of the Companies' deferred tax assets and liabilities
are:
<TABLE>
<CAPTION>
AUGUST 1, DECEMBER 31,
1997 1997
--------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts $ 2,846 $ 4,889
Net operating loss carry-forward -- 48,871
Accruals 341 319
Depreciation and amortization 452 458
Contested liabilities 31,064 6,825
Other 17 29
Valuation allowance (29,347) (56,061)
-------- --------
5,373 5,330
Deferred tax liabilities:
Depreciation and amortization 474 441
Installment sale 4,899 4,889
-------- --------
5,373 5,330
======== ========
Net deferred assets $ -- $ --
======== ========
</TABLE>
F-30
<PAGE> 36
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
8. INCOME TAXES (CONTINUED)
The pro forma reconciliation of income tax benefit attributable to operations
computed at the US federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Tax benefit at US statutory rate $(58,079)
State income tax benefit (6,833)
Permanent differences 1,025
Change in valuation allowance 63,887
========
$ -
========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Companies' offices, along with various equipment and property access rights,
are leased under operating leases expiring in 1998 through 2006. Certain leases
contain escalation clauses based upon increases in the consumer price index.
Future minimum lease payments on noncancellable operating leases at December 31
are as follows:
<TABLE>
<CAPTION>
1997
------
<S> <C>
1998 $1,347
1999 1,007
2000 765
2001 516
2002 255
Thereafter 568
======
Total future minimum lease payments $4,458
======
</TABLE>
Rent expense for the year ended December 31, 1997 was approximately $3,538.
F-31
<PAGE> 37
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
10. RELATED PARTY TRANSACTIONS
Effective April 1, 1997, Resurgens entered into a ten-year lease agreement for
an office building with shareholder related trusts. Until occupancy on or about
January 1, 1998, Resurgens is required to pay 50% of the monthly lease amount or
approximately $11 per month. For the year ended December 31, 1997, the Companies
recorded rent expense of $200 associated with this lease. In December 1997,
Resurgens recorded a liability of $444 for rejecting the lease in accordance
with Chapter 11 provisions.
During fiscal 1997, Resurgens utilized WorldCom, a shareholder, for transport
services aggregating $27,834, which have been expensed by the Companies in
cost of service. The amount owed to WorldCom at December 31, 1997 is $188,992,
of which $178,863 is recorded as liabilities subject to compromise.
Effective April 1998, Resurgens entered into a Carrier Service Agreement with
WorldCom pursuant to which WorldCom is obligated to purchase international long
distance services up to $25,000 a month provided the services are of acceptable
quality and the rates are at least equal to rates from other third parties. The
contract is for a one year initial term but automatically renews each month,
subject to a one year termination notice.
11. LITIGATION
The Companies are subject to numerous lawsuits, investigations and claims (a
number of which involve amounts that are material to these financial statements)
arising out of the conduct of its business, including those relating to
commercial transactions and regulatory matters. Such items generally relate to
claims made previous to Resurgens filing bankruptcy; therefore, the ultimate
liability of Resurgens is generally included in the liabilities subject to
compromise (see Note 3).
Resurgens is party to an action with AT&T in which AT&T filed suit against
Resurgens. Resurgens purchased long distance and international service from AT&T
from January 1996 through February 1997, and disputed the accuracy of certain
charges which prompted AT&T to terminate all services. AT&T seeks in excess of
$16,000 for alleged unpaid services. Resurgens has filed a counterclaim against
AT&T, alleging offset claims
F-32
<PAGE> 38
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
11. LITIGATION (CONTINUED)
for the full amount of AT&T's claims, resulting from alleged inaccurate billing
by AT&T. Resurgens also alleges false and deceptive advertising claims, unfair
competition and deceptive business practices claims against AT&T. Resurgens has
recorded all disputed invoices aggregating $16,528 and cannot predict the
ultimate outcome of this case.
Resurgens is party to an action with MidCom Communications Inc. (MidCom).
Resurgens initially sued MidCom during 1996 and MidCom subsequently filed a case
against Resurgens. Resurgens sold a portion of its commercial customer base to
MidCom during 1995, but did not receive the full payment for the customer base
and sued MidCom for $16,200. MidCom filed a counter suit against the Company
asserting that Resurgens' actions related to the sale of the customer base
allegedly breached the contract, violated the Uniform Commercial Code, and
constituted tortious interference with the contract. MidCom filed a $36,000
proof of claim in Resurgens' bankruptcy case. The litigation of both parties has
been stayed and remanded to a bankruptcy court hearing. Given the uncertainty of
this matter, Management is unable to predict the ultimate outcome of this case
and accordingly, has not accrued any liability for this claim.
Coast to Coast Plus, Inc., a former customer, filed suit in November 1996
alleging that it suffered $10,000 in damages from Resurgens' "wrongful"
termination of its long-distance telecommunications services and overbillings
for services Resurgens did not provide. Resurgens filed an answer denying
liability and filed a counterclaim and a third party claim against the
principals of Coast to Coast which asserted four claims: two RICO claims, a
fraud claim, and a breach of contract, including $250 owed for long-distance
services. Management is unable to predict the ultimate outcome of this case and
accordingly, has not accrued any liability for this claim.
First Premier Bank asserted a claim for approximately $44,000 against Cherry
Payment Systems and Dallas Leasing Group, which are companies that were merged
into Resurgens in prior years, for non-payment on past due loans. First Premier
Bank did not file a proof of claim as of the bar date with the Court and
therefore, Management does not believe it is obligated for this amount. Given
the uncertainty of this asserted claim, Management can not predict the ultimate
outcome of this matter and accordingly, has not accrued any liability for this
claim.
F-33
<PAGE> 39
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
LITIGATION (CONTINUED)
The Companies are also involved in other claims, inquiries and litigation
arising in the ordinary course of business. The Companies believe that these
matters, taken individually or in the aggregate, would not have a material
adverse impact on the Companies' financial position or results of operations.
12. YEAR 2000 COMPUTER ISSUE (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Companies'
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Companies have determined that the vendors of its significant software
programs have existing upgrades which specifically address the Year 2000 Issue.
This includes the software programs for the Companies' switches, billing system
and accounting software. The Companies presently believe that with modifications
to existing software and conversions to new software, the Year 2000 Issue will
not pose significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Companies.
The Companies will initiate during 1998 formal communications with all of its
significant vendors and customers to determine the extent to which the
Companies' interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issues. However, there can be no assurance that
the systems of other companies on which the Companies' systems rely will be
timely converted and would not have an adverse effect on the Companies' systems.
The Companies have determined they have no exposure to contingencies related to
the Year 2000 Issue for the services it has sold.
F-34
<PAGE> 40
Cherry Communications Incorporated
(d/b/a Resurgens Communications Group)
(Debtor-in-Possession) and Cherry Communications UK Limited
Notes to Combined Financial Statements (continued)
(Dollars In Thousands)
12. YEAR 2000 COMPUTER ISSUE (UNAUDITED) (CONTINUED)
The Companies recognize the need to ensure operations will not be adversely
impacted by Year 2000 software failures. The Companies intend to take the
actions necessary to ensure that its systems and applications will appropriately
recognize and process transactions in the year 2000 and beyond. The Companies do
not expect the cost of year 2000 compliance to be material to its financial
statements; however, the costs of such compliance have not been determined.
13. SUBSEQUENT EVENTS
On May 12, 1998 the Companies and World Access, Inc. ("World Access") entered
into a merger agreement whereby World Access will acquire the Companies. The
agreement is subject to, among other things, Bankruptcy Court approval, certain
monthly revenue and gross margin levels, confirmation of Resurgens' Plan of
Reorganization and World Access shareholder approval. Pursuant to the terms of
the agreements, the creditors of Resurgens and shareholders of Cherry-UK will
receive 3,125,000 and 625,000 shares of World Access common stock, respectively,
in the aggregate at the closing of the mergers. In addition, Resurgens'
creditors and Cherry-UK shareholders would have the right to receive additional
consideration of up to 6,250,000 and 1,250,000 shares of World Access common
stock, respectively, over the next two and one-half years contingent upon the
achievement of certain financial criteria by the Companies.
F-35
<PAGE> 41
Cherry Communications Incorporated
Audited Financial Statements
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................... F-37
Audited Financial Statements
Balance Sheet as of December 31, 1996........................ F-39
Statements of Operations for the years
ended December 31, 1996 and 1995........................ F-41
Statement of Stockholder's Equity (Deficit)
for the two years ended
December 31, 1996....................................... F-42
Statements of Cash Flows for the years
ended December 31, 1996 and 1995........................ F-43
Notes to Financial Statements................................ F-45
</TABLE>
F-36
<PAGE> 42
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cherry Communications Incorporated
We have audited the accompanying balance sheet of Cherry Communications
Incorporated as of December 31, 1996 and the related statements of operations,
stockholder's equity (deficit) and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cherry Communications
Incorporated as of December 31, 1996, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
F-37
<PAGE> 43
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 2 and 9 to the
financial statements, the Company incurred substantial losses in 1995 and 1996
and has disputed significant net accounts payable balances due its primary
vendor. Although the dispute has been settled, as discussed in Note 10, and
1996 balances payable have been reduced, significant balances converted to
notes payable remain. The Company's ability to obtain an equity infusion or
replacement financing for these notes is limited by the terms and collateral
arrangements of the settlement. The terms of the settlement agreement will
continue the Company's dependence on this vendor as one of the Company's
primary long distance carriers. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. Continuation of the Company is
dependent upon the Company's ability to return to profitability and to achieve
sufficient cash flow from operations, additional debt or equity. The
accompanying statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
GRANT THORNTON LLP
Chicago, Illinois
July 11, 1997, except for Notes 2 and 10,
as to which the date is July 24, 1997
F-38
<PAGE> 44
CHERRY COMMUNICATIONS INCORPORATED
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Current assets
Cash and cash equivalents....................................................... $ 4,524
Accounts receivable
Trade, net of allowance for doubtful accounts
of $41,346.................................................................. 42,275
Other......................................................................... 218
--------
42,493
Prepaid expenses and other...................................................... 944
--------
Total current assets...................................................... 47,961
Property and equipment, net........................................................ 38,814
Other assets
Due from affiliates............................................................. 1,018
Deposits and other assets, net.................................................. 3,760
-------
Total other assets........................................................ 4,778
-------
Total assets.............................................................. $91,553
=======
</TABLE>
F-39
<PAGE> 45
CHERRY COMMUNICATIONS INCORPORATED
BALANCE SHEET - CONTINUED
DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<S> <C>
Current liabilities
Current portion of long-term debt...................................................... $ 12,230
Current portion of capitalized lease obligations....................................... 5,083
Accounts payable....................................................................... 197,709
Accrued excise and other taxes......................................................... 3,967
Accrued expenses....................................................................... 2,842
Accrued litigation costs............................................................... 892
Other liabilities...................................................................... 500
---------
Total current liabilities........................................................ 223,223
Long-term obligations
Capitalized lease obligations, less current portion.................................... 18,272
Long-term debt, less current portion................................................... 1,634
---------
Total liabilities................................................................ 243,129
Commitments and contingencies............................................................. -
Stockholder's equity (deficit)
Common stock, no par value, authorized 10,000
shares, issued and outstanding 1,000 shares.......................................... 1
Additional paid-in capital............................................................. 61,467
Accumulated deficit.................................................................... (213,044)
---------
Total stockholder's equity (deficit)............................................. (151,576)
---------
Total liabilities and stockholder's equity (deficit)............................. $ 91,553
=========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-40
<PAGE> 46
CHERRY COMMUNICATIONS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1995 1996
------------- ------------
<S> <C> <C>
Operating revenues
Carrier long distance............................................................ $ 40,837 $ 313,322
Commercial long distance......................................................... 24,215 19,739
Residential long distance........................................................ 12,940 7,857
Other income..................................................................... 2,868 9,710
--------- ---------
Total operating revenues..................................................... 80,860 350,628
Operating expenses
Cost of services and products.................................................... 80,396 391,615
Selling, general and administrative expenses..................................... 19,525 30,358
Provision for doubtful accounts.................................................. 6,032 32,004
--------- ---------
Total operating expenses..................................................... 105,953 453,977
--------- ---------
Operating loss............................................................... (25,093) (103,349)
Other income (expense)
Interest and finance charges..................................................... (2,142) (15,299)
Gain on sale of customer base.................................................... 5,486 1,339
Loss on disposition of property and equipment.................................... - (394)
Loss on disposition of investment securities..................................... - (643)
Other income..................................................................... 68 43
--------- ---------
3,412 (14,954)
Loss before income tax expense............................................... (21,681) (118,303)
Income tax expense.................................................................. 5 10
--------- ---------
NET LOSS................................................................... $ (21,686) $(118,313)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 47
CHERRY COMMUNICATIONS INCORPORATED
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE TWO YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
---------------------------- paid-in Accumulated
Shares Amount capital deficit
------------- ----------- --------------- ------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995................................. 1,000 $ 1 $35,672 $ (73,045)
Stockholder's contributions of notes payable
and accrued interest payable of $500.................. - - 25,795 -
Unrealized gain on investment securities................. - - - -
Net loss................................................. - - - (21,686)
------- ------ ------- ---------
Balance, December 31, 1995............................... 1,000 1 61,467 (94,731)
Change in unrealized gain on investment
securities............................................ - - - -
Net loss................................................. - - - (118,313)
------- ------ ------- ---------
Balance, December 31, 1996............................... 1,000 $ 1 $61,467 $(213,044)
======= ====== ======= =========
<CAPTION>
----------------------------------------
Unrealized
gain on Total
investment stockholder's
securities equity (deficit)
--------------- -------------------
<S> <C> <C>
Balance, January 1, 1995................................. $ - $ (37,372)
Stockholder's contributions of notes payable
and accrued interest payable of $500.................. - 25,795
Unrealized gain on investment securities................. 476 476
Net loss................................................. - (21,686)
------- ---------
Balance, December 31, 1995............................... 476 (32,787)
Change in unrealized gain on investment
securities............................................ (476) (476)
Net loss................................................. - (118,313)
------- ---------
Balance, December 31, 1996............................... $ - $(151,576)
======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 48
CHERRY COMMUNICATIONS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $ (21,686) $ (118,313)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposition of investment securities................................. - 643
Provision for doubtful accounts.............................................. 6,032 32,004
Depreciation and amortization................................................ 1,069 4,655
Loss on disposition of property and equipment................................ - 394
Gain on sale of customer base................................................ (5,486) (1,339)
Increase in receivables...................................................... (31,055) (49,636)
Increase in prepaid expenses and other....................................... (234) (710)
Increase in accounts payable................................................. 52,086 149,527
Increase in accrued excise and other taxes................................... 1,913 1,269
Increase in accrued expenses................................................. 963 1,636
Decrease in accrued litigation costs......................................... (5,846) (2,816)
Increase in other liabilities................................................ 346 154
--------- ----------
Total adjustments.......................................................... 19,788 135,781
--------- ----------
Net cash (used in) provided by operating activities........................ (1,898) 17,468
Cash flows from investing activities:
Proceeds from sale of customer base.............................................. 2,486 1,339
Proceeds from sales of investment securities.................................... 423 -
Purchases of property and equipment.............................................. (3,268) (7,454)
Net repayments from (advances to) affiliates..................................... 379 (982)
Deposits and other assets........................................................ (1,192) (835)
--------- ----------
Net cash used in investing activities...................................... (1,172) (7,932)
Cash flows from financing activities:
Proceeds from notes payable...................................................... 1,378 313
Payments on notes payable........................................................ (698) (1,174)
Payments on capitalized lease obligations........................................ (1,608) (7,010)
Increase in notes payable to stockholder......................................... 5,336 --
--------- ----------
Net cash provided by (used in) financing activities........................ 4,408 (7,871)
--------- ----------
Net increase in cash and cash equivalents........................................... 1,338 1,665
Cash and cash equivalents, beginning of year........................................ 1,521 2,859
--------- ----------
Cash and cash equivalents, end of year.............................................. $ 2,859 $ 4,524
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 49
CHERRY COMMUNICATIONS INCORPORATED
STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest and finance charges..................................................... $ 856 $ 2,193
Income taxes paid................................................................ 4 12
Supplemental schedule of noncash investing and financing activities:
Assets received in settlement of accounts receivable........................... $ 3,000 $ 1,880
Investment securities assigned to vendors...................................... - 2,357
Accounts payable converted into notes payable.................................. 9,002 -
Capitalized lease obligations incurred......................................... 6,195 24,803
Contribution of notes payable and accrued interest to equity................... 25,795 -
Unrealized gain on investment securities....................................... 476 (476)
Decrease in contingency reserve through issuance of notes payable.............. - (4,258)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 50
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Cherry Communications Incorporated ("Cherry" or the "Company") commenced
operations in 1991 as a successor through merger of five businesses operating
in the payment processing and credit authorization industry, including leasing
of bank card processing machinery. During 1992, the Company discontinued the
operations of the five businesses and began the new business of a
non-switch-based reseller of long distance services to residential and
commercial customers throughout the United States. In late 1994, the Company
acquired its first long distance switch. As of December 31, 1996, the Company
is a switch-based carrier operating nine long distance switch centers
throughout the United States and overseas, and has arrangements with foreign
carriers for processing of international calls. The Company provides its long
distance network services to resellers, agents and end users consisting of
business and residential customers. At December 31, 1996, the Company primarily
uses one long distance carrier, WorldCom, Inc., as its major long distance
carrier. Although there are a number of long distance carriers, a change in
carriers could disrupt the Company's ability to service its customers, which
could result in a possible loss of operating revenues.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity
of three months or less to be cash equivalents. Cash equivalents consist of
money market fund investments and short-term certificates of deposit. Exclusive
of cash in banks, cash equivalents at December 31, 1996 approximate fair value.
At December 31, 1996, the Company's certificates of deposits approximated
$2,176,000. The certificates of deposit are collateral for the Company's line
of credit agreement (note 4).
INVESTMENTS
Short-term investments are comprised of equity securities. Investment
securities are classified as available-for-sale and are stated at fair value as
determined by quoted prices on exchanges. During the year ending December 31,
1996, all of the Company's investment securities were transferred to the
Company's primary vendor in partial settlement of outstanding line charges. The
fair value of these securities at the date of transfer approximated $2,357,000.
The Company recognized a loss of $643,000 from the transfer. During the year
ending December 31, 1995, proceeds from the sale of investment securities was
$423,000 with no realized gain or loss recognized.
F-45
<PAGE> 51
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
generally computed using the straight-line method over the estimated useful
lives of the related assets.
INCOME TAXES
Income taxes on net taxable earnings are payable personally by the stockholder,
pursuant to an election under Subchapter S of the Internal Revenue Code, which
states the Corporation is not taxed as a corporation. Accordingly, no provision
has been made for Federal income taxes.
REVENUE RECOGNITION
Revenues are recorded upon placing of calls or rendering of other related
services.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of trade receivables. Concentration of credit
risk with respect to these receivables is generally diversified because the
Company's customer base includes many entities spread across a large geographic
area. The Company routinely addresses the financial strength of its customers
and, as a consequence, believes that its receivable credit risk exposure is
limited.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-46
<PAGE> 52
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has sustained significant losses
in 1995 and 1996, and has a deficit in stockholder's equity of approximately
$151.6 million at December 31, 1996. As discussed in Note 9 - Litigation, the
Company has various disputes with carriers for out-bound and in-bound line
charges which affect timing and amounts of collections and payments. The most
significant of these disputes is with WorldCom, Inc. ("WorldCom"), historically
the Company's primary carrier. As discussed in Note 10 - Subsequent Events, the
dispute with WorldCom has been settled as of July 24, 1997, resulting in, among
other matters, a settlement of outstanding net liabilities of $202,415,000 at
July 15, 1997 ($175,633,000 at December 31, 1996) for $165,000,000 in notes.
The first new note of $50,000,000 is due on December 31, 1997. The second new
note of $115,000,000 is due in quarterly installments commencing October 23,
1998 through June 23, 2000, with interest payable quarterly at 10% per annum.
Other terms of the settlement require the Company to continue to pledge all
assets as collateral for the notes, except for equipment under capitalized
lease obligations; the Company will issue shares representing 19.9% ownership
to WorldCom; and the sole shareholder must pledge 51% of total outstanding
shares as collateral. WorldCom will subordinate its collateral position up to
$100,000,000 for new borrowings by the Company if 75% of the proceeds from a
single new borrowing of up to $70.0 million or 50% of the proceeds from a
single new borrowing over $70.0 million are used to pay WorldCom.
These developments continue to have a material adverse effect and limit the
Company's ability to meet its obligations as they come due and to obtain
financing or an equity infusion. The Company's actions to address its current
liquidity constraints and its financial performance include negotiations with
potential lenders or equity participants. However, there can be no assurances
that the Company's actions will improve its financial performance or liquidity
position or that it can avoid default on the December 31, 1997 payment of the
$50,000,000 note obligation.
F-47
<PAGE> 53
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation consist of the
following at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Life
---------------
<S> <C> <C>
Equipment under capitalized lease obligations:
Telecommunications equipment.................................................. $31,052 5-10 years
Other......................................................................... 2,150 7 years
-------
33,202
Furniture, fixtures and equipment.................................................. 11,164 4-5 years
Leasehold improvements............................................................. 1,202 Life of lease
-------
Total property and equipment.............................................. 45,568
Less accumulated depreciation and amortization..................................... 6,754
-------
Net property and equipment................................................ $38,814
=======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995 and
1996 was $1,019,000 and $3,958,000, respectively.
F-48
<PAGE> 54
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NOTE 4 - LONG-TERM DEBT
(in thousands)
<S> <C>
WorldCom installment note (Note 1) due December, 1995, bearing interest at 12%.
Due to the disputed balances with WorldCom, the Company has not paid
principal or interest on this note (1)....................................... $ 679
WorldCom installment note (Note 2) due January, 1996, bearing interest at 16%.
Due to the disputed balances with WorldCom, the Company has not paid
principal or interest on this note (1)....................................... 8,323
WorldCom installment note (Note 3) due December, 1995, bearing interest at 10%.
Due to the disputed balances with WorldCom, the Company has not paid
principal or interest on this note (1)....................................... 1,378
Illinois Capital Group installment note due September, 1997, bearing interest
at 10% with monthly principal and interest payments of $60,500............... 519
Esplanade at Locust Point installment note due June, 1999, with monthly
payments of $100,000, including interest imputed at 12.5%.................... 2,565
First National Bank of Wheaton $400,000 (as of December 31, 1996) line of
credit bearing interest at the prime rate (8.5% as of December 31, 1996).
The line of credit is due upon demand and is collateralized by certificates
of deposits and general business assets...................................... 400
-------
Total long-term obligations.................................................... 13,864
Less current portion of long-term debt......................................... 12,230
-------
Long-term portion of long-term debt............................................ $ 1,634
=======
</TABLE>
(1) See Note 10 - Subsequent Events.
In January 1996, the Company and Esplanade at Locust Point ("Esplanade")
entered into an agreement as a settlement on an office property lease. As part
of the $5,000,000 settlement, the Company agreed to pay Esplanade $1,000,000 on
February 9, 1996 and then make 40 monthly payments of $100,000 beginning March
1996. Interest on the note was imputed at a rate of 12.5% as no interest rate
was explicitly stated in the agreement.
F-49
<PAGE> 55
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 4 - LONG-TERM DEBT - CONTINUED
In March, 1996, the Company entered into an agreement with Illinois Capital
Group ("ICG") as a settlement on equipment leases sold to ICG. Under the terms
of the agreement, the Company is to make 17 equal monthly payments of $60,500,
including interest stated at 10% commencing April 15, 1996, with the final
payment of approximately $56,900 in principal and interest due on September 15,
1997. In the event the Company or the shareholder interferes with existing
leases under the security agreement, an additional $250,000 penalty provision
is due ICG.
Principal amounts due under all of these debt arrangements at December 31, 1996
mature as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................... $12,230
1998........................................................... 1,055
1999........................................................... 579
-------
$13,864
=======
</TABLE>
- -------------------------------------------------------------------------------
NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments classified as current
assets or liabilities, including cash and cash equivalents, accounts
receivable, and accounts payable and accrued expenses approximate carrying
value, principally because of the short maturity of these items.
The carrying amounts of the long-term debt payable approximates fair value due
to the interest rates on these agreements approximating Cherry's incremental
borrowing rates.
The fair values of capitalized lease obligations approximate carrying value
based on their effective interest rates compared to current market rates.
F-50
<PAGE> 56
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 6 - CAPITALIZED LEASE OBLIGATIONS
The Company leases telecommunications and other equipment through various
equipment lease financing facilities. Such leases have been accounted for as
capitalized lease obligations in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases."
Future minimum lease payments on these capitalized lease obligations (in
thousands) are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
1997...................................................................... $ 7,869
1998...................................................................... 7,431
1999...................................................................... 7,155
2000...................................................................... 6,174
2001...................................................................... 1,782
Thereafter................................................................ --
-------
Net minimum lease payments................................................ 30,411
Less amount representing interest......................................... 7,056
-------
Present value of minimum lease payments................................... 23,355
Less current portion of capitalized lease obligations..................... 5,083
-------
Long-term portion of capitalized lease obligations........................ $18,272
=======
</TABLE>
The net carrying value of assets under capital leases was $30,083,000 at
December 31, 1996, and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
- -------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company's offices, along with various equipment and roof access rights, are
leased under operating leases expiring in 1997 through 2006. Certain leases
contain escalation clauses based upon increases in the consumer price index.
F-51
<PAGE> 57
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Future minimum lease payment on noncancellable operating leases (in thousands)
are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
1997.............................................................. $1,744
1998.............................................................. 1,328
1999.............................................................. 935
2000.............................................................. 767
2001.............................................................. 636
Thereafter........................................................ 2,170
------
$7,580
======
</TABLE>
Rent expense for the years ended December 31, 1995 and 1996, was $931,000 and
$1,932,000, respectively.
USAGE AND DEDICATED CIRCUIT AGREEMENTS
The Company has entered into agreements with various long distance providers
which require minimum usage. The Company has also entered into agreements with
various long distance carriers for dedicated circuits. These agreements
guarantee the provider a base monthly charge regardless of the actual volume of
usage or use of dedicated circuits by the Company or its customers.
- -------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company and Cherry Communications Ltd. - U.K. ("Cherry-U.K.") are related
parties by common ownership. At December 31, 1996, Cherry-U.K. is in the
development stage. Cherry-U.K. will provide London-based switching services for
the Company. At December 31, 1996, Cherry-U.K. was indebted to the Company for
approximately $1,018,000.
Effective April 1, 1997, the Company entered into a ten-year lease agreement
for an office building with shareholder related trusts. Until occupancy on or
about January 1, 1998, the Company is required to pay 50% of the monthly lease
amount or approximately $11,000 per month. Lease payment terms, as determined
by independent appraisers, over the ten-year period range from $265,000 to
$345,000 annually. At December 31, 1996, the Company had recorded an initial
deposit of $100,000 for the lease. Tenant finish and other improvements to the
office facility are expected to approximate $4,000,000.
F-52
<PAGE> 58
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 9 - LITIGATION
The Company is subject to a number of lawsuits, investigations and claims (some
of which involve substantial amounts) arising out of the conduct of its
business, including those relating to commercial transactions and regulatory
matters. One such lawsuit was brought by the Company against Digital
Communications of America, WorldCom Network Services Inc. and WorldCom Inc.
(collectively referred to as "WorldCom"), asserting various claims including
substantial billing disputes. WorldCom asserted various counterclaims.
Subsequent to December 31, 1996, the parties reached a settlement. See Note 10
Subsequent Events.
The Company is also party to an action with AT&T in which AT&T filed suit
against the Company. The Company purchased long distance and international
service from AT&T from January, 1996 through February, 1997. The Company
disputed the accuracy of certain charges and AT&T terminated all services. AT&T
seeks $17.2 million for alleged unpaid services. The Company has counterclaimed
against AT&T, alleging offset claims for the full amount of AT&T's claims,
resulting from alleged inaccurate billing by AT&T. The Company also alleges
false and deceptive advertising claims, unfair competition and deceptive
business practices claims against AT&T. The litigation is at an early stage.
Parties have not yet engaged in discovery. The Company has recorded all
disputed invoices.
In addition, the Company is also party to an action with a U.K.-based carrier
in which the carrier filed suit in the U.K. against the Company. The Company
purchased international service from this carrier from February, 1996 through
April, 1997. The carrier seeks approximately $5.0 million for alleged unpaid
services and finance charges. The litigation is at an early stage. The Company
has recorded all of the carrier's invoices.
The Company is also involved in other litigation concerning significant
collection matters, some of which have resulted in counterclaims. Based on
advice of counsel, the Company believes such matters will be resolved within
the limits of its collection reserves.
Coast to Coast Plus, Inc., a former carrier customer, filed suit in November,
1996 alleging that it suffered $10 million in damages from the Company's
"wrongful" termination of its long-distance telecommunication services and
overbillings for services the Company did not provide. The Company filed an
answer denying liability and filed a counterclaim and a third party claim
against the principals of Coast to Coast which asserted four claims: two RICO
claims, a fraud claim, and a breach of contract, including $250,000 owed for
long-distance services. Deposition and discovery is underway. Based on advice
of counsel, the Company believes this litigation will not have a material
effect on its financial position.
The Company is also involved in other miscellaneous claims, inquiries and
litigation arising in the ordinary course of business. The Company believes
that these matters, taken individually or in the aggregate, would not have a
material adverse impact on the Company's financial position or results of
operations.
F-53
<PAGE> 59
CHERRY COMMUNICATIONS INCORPORATED
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
NOTE 10 - SUBSEQUENT EVENTS
Effective April 1, 1997, the Company entered into a new lease with a related
party for new office facilities. See Note 8 - Related Party Transactions.
On July 2, 1997, the Company entered into a letter of intent with EqualNet
Holding Corp. ("EqualNet") for a proposed business transaction expected to be a
merger of the Company into EqualNet, with the Company's stockholder retaining
91% of the combined entity. The transaction is expected to be treated as a
reverse purchase acquisition and is subject to due diligence, shareholder
approval and certain other preconditions.
Effective July 24, 1997, the Company settled its litigation and claims against
WorldCom. The settlement provides for, among other matters, the following:
1. All claims of both parties as of July 15, 1997 (estimated by the Company to
be approximately $202.4 million net accounts, notes and interest payable)
to be converted to two notes payable in the individual amounts of $50.0
million and $115.0 million. The first note of $50.0 million is non-interest
bearing and due December 31, 1997. The second note of $115.0 million is due
in quarterly installments commencing October 23, 1998 through July 23,
2000. Interest is payable at 10% per annum and is due on March 31, 1998,
June 30, 1998, July 23, 1998 and quarterly thereafter.
2. WorldCom is granted continued security interests in all of the assets of
the Company, except for the limited security interest granted to the
Company's bank up to $2.0 million.
3. The sole shareholder executes a pledge and security agreement granting a
first-priority interest in 51% of the outstanding shares of the Company
subject to anti-dilution provisions.
4. On August 1, 1997, the Company is required to issue common shares
equivalent to 19.9% of the then-outstanding shares of the Company to
WorldCom, also subject to anti-dilution provisions.
5. Similar pledge (51%) agreement requirement applies to the shareholder's
interest in Cherry-U.K.
6. WorldCom will subordinate its security interests up to $100.0 million for
new borrowings if certain proceeds of such borrowings are remitted to
WorldCom (75% for a single borrowing up to $70.0 million or 50% for a
single borrowing over $70 million).
7. If the Company repays both notes by December 30, 1997, it or its nominee
may repurchase the transferred shares totaling 19.9% for $10.
The Company has reflected the settlement reduction of net payables of
approximately $37.4 million as a reduction of disputed costs and finance
charges of $11.4 million and $26.0 million for the year ended December 31, 1996
and the six months ended June 30, 1997, respectively.
F-54
<PAGE> 60
CHERRY COMMUNICATIONS UK LIMITED
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DIRECTORS' REPORT F-56
AUDITORS' REPORT F-58
PROFIT AND LOSS ACCOUNT F-59
BALANCE SHEET F-60
NOTES TO THE ACCOUNTS F-61
The following pages do not form part of the statutory accounts:
MANAGEMENT PROFIT AND LOSS ACCOUNT F-64
</TABLE>
F-55
<PAGE> 61
CHERRY COMMUNICATIONS UK LIMITED
DIRECTORS' REPORT
FOR THE YEAR ENDED 31ST MARCH 1997
The directors present their report together with the audited accounts for the
year ended 31st March 1997.
PRINCIPAL ACTIVITIES
The company's principal activity continued to be that of a switch based long
distance carrier which provides long distance network services to carriers,
resellers, agents and end users consisting of business and residential
customers.
During the year ended 31 March 1997, Cherry UK's primary business activity was
to provide services to Cherry Communications Incorporated, the nature of which
focused on the provision of:
* Marketing and sales services for the benefit of Cherry Inc.
* Network services to allow the use of Cherry UK switching equipment for
the termination of international telecommunications messages originated
by Cherry Inc. customers.
* Carrier relationships and co-ordination of telecommunication circuit
facilities in Europe.
* General administrative support ancillary to the above services.
Business activity prior to this period was also focused on the same activities
as above. However, the company also engaged in direct marketing and sales
efforts to business and residential clients for the resale of long distance
telecommunications services. This activity was suspended in the current period
in order to allocate resources to installing and upgrading switching equipment
and expanding the telecommunications network. Future planned activities include
the resumption of direct sales efforts for Cherry UK clients but with the focus
on the carrier (wholesale) market segment.
RESULTS
The results for the year are set out in the profit and loss account on page 4.
DIRECTORS
The directors and their beneficial interests in the share capital of the company
as set out below have held office during the whole of the period from 1 April
1996 to the date of this report unless otherwise stated.
<TABLE>
<CAPTION>
ORDINARY SHARES OF (POUND)1
31ST 1st
MARCH April
1997 1996
<S> <C> <C>
Mr James Robert Elliott - resigned 4 December 1997 50,000 50,000
Mr Stuart John Hinkley - resigned 2 February 1998 -- --
Mr William Tod Chmar - appointed 7 October 1997 -- --
Mr Victor Eugene Goetz - appointed 7 October 1997 -- --
Mr John Davis Phillips - appointed 7 October 1997 -- --
</TABLE>
F-56
<PAGE> 62
CHERRY COMMUNICATIONS UK LIMITED
DIRECTORS' REPORT
FOR THE YEAR ENDED 31ST MARCH 1997
DIRECTORS' RESPONSIBILITIES
Company law requires the directors to prepare accounts for each financial year
which give a true and fair view of the state of the company's affairs and of the
profit or loss for that year. In preparing these accounts the directors are
required to:
Select suitable accounting policies and then apply them consistently;
Make judgements and estimates that are reasonable and prudent;
Prepare the accounts on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose, with reasonable accuracy at any time, the financial position of the
company and enable them to ensure that the accounts comply with the Companies
Act 1985. They are also responsible for safeguarding the assets of the company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
AUDITORS
A resolution to reappoint Munslow Messias Chartered Certified Accountants as
auditors will be put to the members at the Annual General Meeting.
The report of the Directors' has been prepared in accordance with the special
provisions of Part VII of the Companies Act 1985 and was approved by the board
on 29th May 1998 and signed on its behalf by:
Mr C Hoyle, Secretary
F-57
<PAGE> 63
AUDITORS' REPORT TO THE
SHAREHOLDERS OF CHERRY COMMUNICATIONS UK LIMITED
We have audited the accounts on pages 4 to 8 which have been prepared under the
historical cost convention and the accounting policies set out on page 6.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 1 the company's directors are responsible for the
preparation of the accounts. It is our responsibility to form an independent
opinion, based on our audit, on those accounts and report our opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the accounts. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the accounts, and of whether the accounting
policies are appropriate to the company's circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the accounts are free from
material misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of the information in the accounts.
OPINION
In our opinion the accounts give a true and fair view of the state of the
company's affairs as at 31st March 1997 and of its profit for the year then
ended and have been properly prepared in accordance with the Companies Act 1985.
/s/ MUNSLOW MESSIAS
MUNSLOW MESSIAS
CHARTERED CERTIFIED ACCOUNTANTS
AND REGISTERED AUDITORS
1st Floor
143-149 Gt Portland Street
London
WIN 5FB
1st June 1998
F-58
<PAGE> 64
CHERRY COMMUNICATIONS UK LIMITED
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31ST MARCH 1997
<TABLE>
<CAPTION>
NOTES 1997 1996
(POUND) (pound)
<S> <C> <C> <C>
TURNOVER 2 1,500,000 1,040,760
Cost of Sales -- 753,400
---------- ----------
GROSS PROFIT 1,500,000 287,360
Administrative Expenses 1,428,561 1,243,414
---------- ----------
OPERATING PROFIT/LOSS 3 71,439 (956,054)
Interest Receivable 1,533 1,133
---------- ----------
PROFIT/LOSS FOR THE FINANCIAL YEAR 72,972 (954,921)
RETAINED LOSS BROUGHT FORWARD (1,193,061) (238,140)
---------- ----------
RETAINED LOSS CARRIED FORWARD (1,120,089) (1,193,061)
========== ==========
</TABLE>
All amounts relate to continuing activities.
There were no recognised gains or losses for 1997 or 1996 other than those
included in the profit and loss account.
The notes on pages 6 to 8 form part of these accounts.
F-59
<PAGE> 65
CHERRY COMMUNICATIONS UK LIMITED
BALANCE SHEET
AS AT 31ST MARCH 1997
<TABLE>
<CAPTION>
NOTES 1997 1996
(POUND) (POUND) (pound) (pound)
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Tangible assets 5 1,046,905 431,632
CURRENT ASSETS
Debtors 6 243,272 516,820
Cash at bank and in hand 255,667 85,434
-------- ---------
498,939 602,254
CREDITORS: AMOUNTS FALLING DUE WITHIN
ONE YEAR 7 816,318 1,305,934
-------- ---------
NET CURRENT LIABILITIES (317,379) (703,680)
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 729,526 (272,048)
CREDITORS: AMOUNTS FALLING DUE AFTER
MORE THAN ONE YEAR 8 1,799,615 871,013
---------- ----------
(1,070,089) (1,143,061)
========== ==========
CAPITAL AND RESERVES
Share Capital - Equity 9 50,000 50,000
Profit and loss account (1,120,089) (1,193,061)
---------- ----------
SHAREHOLDERS' FUNDS 10 (1,070,089) (1,143,061)
========== ==========
</TABLE>
The accounts have been prepared in accordance with the special provisions of
Part VII of the Companies Act 1985 relating to small companies.
These accounts were approved by the board on 29th May 1998 and signed on its
behalf by:
Mr Victor Eugene Goetz
Director
The notes on pages 6 to 8 form part of these accounts.
F-60
<PAGE> 66
CHERRY COMMUNICATIONS UK LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEAR ENDED 31ST MARCH 1997
1 ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Accounts have been prepared under the historical cost convention.
The company has taken advantage of the exemptions in Financial
Reporting Standard No. 1 from the requirement to produce a cash flow
statement on the grounds that it is a small company.
TURNOVER
Turnover is the total amount receivable by the company for services
provided excluding value added tax.
DEPRECIATION
Depreciation is calculated to write down the cost or valuation less
estimated residual value of all tangible fixed assets by the reducing
balance method over their expected useful lives. The rates and periods
generally applicable are:
<TABLE>
<CAPTION>
Leasehold properties - over the unexpired
term of lease
<S> <C>
Plant and equipment 20%
Furniture and equipment 20%
Computer equipment 33%
</TABLE>
GOING CONCERN
The accounts have been prepared on the going concern basis on the
assumption that its operations will continue to be financed by Cherry
Communications, Inc. d.b.a Resurgens Communications Group.
2 TURNOVER
The turnover was derived from the company's principal activity which
was carried out wholly in the UK.
3 OPERATING PROFIT
<TABLE>
<CAPTION>
THE OPERATING PROFIT IS ARRIVED AT AFTER CHARGING OR CREDITING: 1997 1996
(POUND) (pound)
<S> <C> <C>
Depreciation of owned assets 269,893 85,381
Auditors' remuneration 12,000 11,152
======= ======
4 DIRECTORS 1997 1996
(POUND) (pound)
Directors' remuneration 51,800 94,847
======= ======
</TABLE>
F-61
<PAGE> 67
CHERRY COMMUNICATIONS UK LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEAR ENDED 31ST MARCH 1997
<TABLE>
<CAPTION>
4 DIRECTORS 1997 1996
<S> <C> <C>
(POUND) (pound)
Directors' remuneration 51,800 94,847
========= =========
</TABLE>
5 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
SHORT
LEASEHOLD FURNITURE
LAND AND PLANT AND AND OFFICE COMPUTER
BUILDINGS EQUIPMENT EQUIPMENT EQUIPMENT TOTAL
--------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
COST (POUND) (POUND) (POUND) (POUND) (POUND)
At 1st April 1996 -- 556,300 17,992 26,180 600,472
Additions 160,901 665,259 31,099 27,907 885,166
------- --------- ------- --------- ---------
AT 31ST MARCH 1997 160,901 1,221,559 49,091 54,087 1,485,638
======= ========= ======= ========= =========
DEPRECIATION
At 1st April 1996 -- 159,843 5,187 3,810 168,840
Charge for the year 32,180 212,343 8,780 16,590 269,893
------- --------- ------- --------- ---------
AT 31ST MARCH 1997 32,180 372,186 13,967 20,400 438,733
======= ========= ======= ========= =========
NET BOOK VALUE
AT 31ST MARCH 1997 128,721 849,373 35,124 33,687 1,046,905
======= ========= ======= ========= =========
At 31st March 1996 -- 396,457 12,805 22,370 431,632
======= ========= ======= ========= =========
</TABLE>
<TABLE>
<CAPTION>
6 DEBTORS 1997 1996
<S> <C> <C> <C>
(POUND) (pound)
Trade debtors -- 136,198
Other debtors 243,272 380,622
--------- ---------
243,272 516,820
========= =========
<CAPTION>
7 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 1997 1996
(POUND) (pound)
<S> <C> <C>
Bank overdrafts 100,088 84,655
Trade creditors 634,135 1,117,640
Other creditors 82,095 103,639
--------- ---------
816,318 1,305,934
========= =========
</TABLE>
'Other creditors' include (pound) 18,048 (1996 - (pound)96,505) in respect of
taxation and social security.
F-62
<PAGE> 68
CHERRY COMMUNICATIONS UK LIMITED
NOTES TO THE ACCOUNTS
FOR THE YEAR ENDED 31ST MARCH 1997
<TABLE>
<CAPTION>
8 CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR 1997 1996
(POUND) (pound)
<S> <C> <C>
Other creditors 1,799,615 871,013
---------- ----------
1,799,615 871,013
========== ==========
</TABLE>
Other creditors represent amount due to Cherry Communications Inc., a
company incorporated in the USA and which was placed under Chapter 11
of the United States Bankruptcy Code in October 1997. Cherry
Communications Inc. is being acquired by Resurgens Communications Group
and Cherry Communications UK Limited will become a subsidiary of
Resurgens Communications Group.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
9 SHARE CAPITAL
(POUND) (pound)
AUTHORISED
EQUITY SHARES
50,000 Ordinary shares of (pound)1.00 each 50,000 50,000
---------- ----------
50,000 50,000
========== ==========
ALLOTTED
EQUITY SHARES
50,000 Allotted, called up and fully paid ordinary shares of (pound)1.00 each 50,000 50,000
========== ==========
<CAPTION>
1997 1996
<S> <C> <C> <C>
10 RECONCILIATION OF SHAREHOLDERS' FUNDS
(POUND) (pound)
Profit/Loss for the financial year 72,972 (954,921)
---------- ----------
Increase/Decrease in the shareholders' funds 72,972 (954,921)
Opening shareholders' funds (1,143,061) (188,140)
---------- ----------
Closing shareholders' funds (1,070,089) (1,143,061)
========== ==========
</TABLE>
F-63
<PAGE> 69
CHERRY COMMUNICATIONS UK LIMITED
MANAGEMENT PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31ST MARCH 1997
<TABLE>
<CAPTION>
1997 1996
(POUND) (POUND) (pound) (pound)
<S> <C> <C> <C> <C>
TURNOVER 1,500,000 1,040,760
Cost of Sales -- 753,400
--------- ---------
GROSS PROFIT 1,500,000 287,360
INTEREST RECEIVABLE
Bank deposit interest 1,533 1,133
------- -------
1,533 1,133
--------- ---------
1,501,533 288,493
LESS EXPENSES
Directors' remuneration 51,800 94,847
Directors' employers national insurance 5,284 3,710
Salaries and employers national insurance 383,962 154,252
Rent and rates 248,855 81,911
Light and heat 379 1,323
Telephone 15,952 21,768
Printing, postage and stationery 40,610 13,792
Advertising 29,843 18,799
Insurances 7,903 2,954
Legal and professional fees 168,481 53,060
Audit and accountancy 12,000 11,152
Repairs and renewals 598 1,708
Motor and travel 62,247 47,730
Bad and doubtful debts -- 531,263
Bank charges and interest 13,943 9,272
Leasing of motor vehicles -- 16,219
Consultancy fees 6,000 --
Foreign exchange differences (1,889) 1,950
Commissions payable 10,468 81,402
Computer expenses 2,962 --
Staff recruitment costs 43,085 --
Accountancy 30,000 --
Entertaining 21,669 1,942
Sundry expenses 4,516 8,979
Depreciation 269,893 85,381
------- -------
1,428,561 1,243,414
--------- ---------
NET PROFIT/LOSS FOR THE YEAR 72,972 (954,921)
========= =========
</TABLE>
F-64
<PAGE> 70
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Financial Statements of Holdco
give effect to the consummation of the Resurgens Transaction and to the several
transactions that World Access has completed or are currently contemplated. The
Unaudited Pro Forma Combined Statements of Operations give effect to: (1) the
ATI acquisition as if it had occurred on January 1, 1997; (2) the NACT Stock
Purchase as if it had occurred on January 1, 1997; (3) the NACT Transaction as
if it had occurred on January 1, 1997; (4) the Resurgens Transaction as if it
had occurred on January 1, 1997; and (5) the Telco Merger as if it had occurred
on March 1, 1997. The Unaudited Pro Forma Combined Balance Sheet gives effect
to: (1) the NACT Transaction and Resurgens Transaction as if they had been
completed on March 31, 1998 and (2) the Telco Merger as if it had been completed
on May 31, 1998.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that the management of Holdco believes are
reasonable. Each of the acquisition transactions above has been accounted for
using the purchase method of accounting. The adjustments recorded in the
Unaudited Pro Forma Combined Financial Statements represent the preliminary
determination of these adjustments based upon available information. There can
be no assurance that the actual adjustments will not differ significantly from
the pro forma adjustments reflected in the Unaudited Pro Forma Combined
Financial Statements.
In connection with the consummation of the pending acquisition transaction,
Holdco expects to record charges representing the estimated portion of the
purchase price allocated to in-process research and development of $21.9 million
and $65.0 million for the NACT Transaction and Telco Merger, respectively. In
addition, in the three month period ended March 31, 1998, Holdco recorded
charges representing the estimated portion of the purchase price allocated to
in-process research and development of $44.6 million and $5.4 million for the
NACT Stock Purchase and ATI acquisition, respectively. Since these charges are
directly related to the acquisitions and will not recur, the Unaudited Pro Forma
Combined Statements of Operations have been prepared excluding these one-time
non-recurring charges.
The Unaudited Pro Forma Combined Financial Statements are not necessarily
indicative of the financial position or the future results of operations or
results that might have been achieved if the foregoing acquisition transactions
had been consummated as of the indicated dates. The Unaudited Pro Forma Combined
Financial Statements should be read in conjunction with the historical
consolidated financial statements of Holdco, ATI, NACT, Resurgens and Telco, and
the related notes thereto.
PF-1
<PAGE> 71
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDCO,
NACT MINORITY HOLDCO NACT
INTEREST & NACT RESURGENS & RESURGENS
HOLDCO ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED
-------- ------------- ------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 63,278 $ -- $ 63,278 $ 2,487 $ (7,000)(C) $ 58,765
Marketable securities............... 3,500 -- 3,500 -- -- 3,500
Accounts receivable................. 39,683 -- 39,683 1,210 -- 40,893
Notes receivable.................... 6,908 -- 6,908 -- -- 6,908
Inventories......................... 28,340 -- 28,340 -- -- 28,340
Other current assets................ 7,154 -- 7,154 2,475 -- 9,629
-------- -------- -------- -------- -------- --------
Total Current Assets.......... 148,863 -- 148,863 6,172 (7,000) 148,035
Property and equipment............... 13,941 -- 13,941 53,784 9,000(C) 76,725
Goodwill............................. 71,152 10,809(A) 81,961 -- 60,410(C) 142,371
Other assets......................... 12,165 -- 12,165 296 18,300(C) 30,761
-------- -------- -------- -------- -------- --------
Total Assets.................. $246,121 $ 10,809 $256,930 $ 60,252 $ 80,710 $397,892
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt..................... $ 1,884 $ -- $ 1,884 $ 3,569 $ -- $ 5,453
Accounts payable.................... 17,592 -- 17,592 11,117 -- 28,709
Accrued payroll and benefits........ 2,338 -- 2,338 -- -- 2,338
Other accrued liabilities........... 6,395 -- 6,395 2,436 2,000(C) 10,831
-------- -------- -------- -------- -------- --------
Total Current Liabilities..... 28,209 -- 28,209 17,122 2,000 47,331
Long-term debt....................... 115,528 -- 115,528 -- -- 115,528
Noncurrent liabilities............... 1,686 -- 1,686 30,110 -- 31,796
Minority interests................... 11,594 (11,594)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities............. 157,017 (11,594) 145,423 47,232 2,000 194,655
Stockholders' Equity
Common stock........................ 217 18(A) 235 85 (85)(D) 271
36(C)
Capital in excess of par value...... 130,289 44,285(A) 174,574 61,467 (61,467)(D) 266,268
91,694(C)
Accumulated deficit................. (41,402) (21,900)(B) (63,302) (48,532) 48,532(D) (63,302)
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity.... 89,104 22,403 111,507 13,020 78,710 203,237
-------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders' Equity......... $246,121 $ 10,809 $256,930 $ 60,252 $ 80,710 $397,892
======== ======== ======== ======== ======== ========
<CAPTION>
HOLDCO,
NACT, RESURGENS
TELCO & TELCO
TELCO ADJUSTMENTS COMBINED
-------- ----------- ---------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 13,999 $ -- $ 72,764
Marketable securities............... 1,599 -- 5,099
Accounts receivable................. 20,353 -- 61,246
Notes receivable.................... -- -- 6,908
Inventories......................... 22,234 (4,500)(E) 46,074
Other current assets................ 1,002 -- 10,631
-------- -------- ---------
Total Current Assets.......... 59,187 (4,500) 202,722
Property and equipment............... 8,956 (2,800)(E) 82,881
Goodwill............................. 7,680 62,077(E) 212,128
Other assets......................... -- 16,000(E) 46,761
-------- -------- ---------
Total Assets.................. $ 75,823 $ 70,777 $ 544,492
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt..................... $ -- $ -- $ 5,453
Accounts payable.................... 6,818 -- 35,527
Accrued payroll and benefits........ -- -- 2,338
Other accrued liabilities........... 12,816 6,650(E) 30,297
-------- -------- ---------
Total Current Liabilities..... 19,634 6,650 73,615
Long-term debt....................... -- -- 115,528
Noncurrent liabilities............... 1,056 -- 32,852
Minority interests................... -- -- --
-------- -------- ---------
Total Liabilities............. 20,690 6,650 221,995
Stockholders' Equity
Common stock........................ 110 (110)(F) 338
67(E)
Capital in excess of par value...... 78,474 (78,474)(F) 450,461
184,193(E)
Accumulated deficit................. (23,451) 23,451(F) (128,302)
(65,000)(G)
-------- -------- ---------
Total Stockholders' Equity.... 55,133 64,127 322,497
-------- -------- ---------
Total Liabilities and
Stockholders' Equity......... $ 75,823 $ 70,777 $ 544,492
======== ======== =========
</TABLE>
PF-2
<PAGE> 72
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT HOLDCO,
MINORITY HOLDCO NACT &
INTEREST & NACT RESURGENS RESURGENS
HOLDCO ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED
-------- ----------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and
equivalents....... $ 63,278 $ -- $ 63,278 $ 2,487 $ (7,000)(C) $ 58,765
Marketable
securities........ 3,500 -- 3,500 -- -- 3,500
Accounts
receivable........ 39,683 -- 39,683 1,210 -- 40,893
Notes receivable..... 6,908 -- 6,908 -- -- 6,908
Inventories.......... 28,340 -- 28,340 -- -- 28,340
Other current
assets............ 7,154 -- 7,154 2,475 -- 9,629
-------- -------- -------- -------- -------- --------
Total Current
Assets..... 148,863 -- 148,863 6,172 (7,000) 148,035
Property and
equipment............ 13,941 -- 13,941 53,784 9,000(C) 76,725
Goodwill............... 71,152 10,809(A) 81,961 -- 60,410(C) 142,371
Other assets........... 12,165 -- 12,165 296 18,300(C) 30,761
-------- -------- -------- -------- -------- --------
Total
Assets..... $246,121 $ 10,809 $256,930 $ 60,252 $ 80,710 $397,892
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt...... $ 1,884 $ -- $ 1,884 $ 3,569 $ -- $ 5,453
Accounts payable..... 17,592 -- 17,592 11,117 -- 28,709
Accrued payroll and
benefits.......... 2,338 -- 2,338 -- -- 2,338
Other accrued
liabilities....... 6,395 -- 6,395 2,436 2,000(C) 10,831
-------- -------- -------- -------- -------- --------
Total Current
Liabilities... 28,209 -- 28,209 17,122 2,000 47,331
Long-term debt......... 115,528 -- 115,528 -- -- 115,528
Noncurrent
liabilities.......... 1,686 -- 1,686 30,110 31,796
Minority interests..... 11,594 (11,594)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities.. 157,017 (11,594) 145,423 47,232 2,000 194,655
Stockholders' Equity
Common stock......... 217 18(A) 235 85 (85)(D) 271
36(C)
Capital in excess of
par value......... 130,289 44,285(A) 174,574 61,467 (61,467)(D) 266,268
91,694(C)
Accumulated
deficit........... (41,402) (21,900)(B) (63,302) (48,532) 48,532(D) (63,302)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity..... 89,104 22,403 111,507 13,020 78,710 203,237
-------- -------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity..... $246,121 $ 10,809 $256,930 $ 60,252 $ 80,710 $397,892
======== ======== ======== ======== ======== ========
</TABLE>
PF-3
<PAGE> 73
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT HOLDCO,
MINORITY HOLDCO NACT &
INTEREST & NACT TELCO TELCO
HOLDCO ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
------------ ----------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and
equivalents........ $ 63,278 $ -- $ 63,278 $ 13,999 $ -- $ 77,277
Marketable
securities......... 3,500 -- 3,500 1,599 -- 5,099
Accounts
receivable......... 39,683 -- 39,683 20,353 -- 60,036
Notes receivable..... 6,908 -- 6,908 -- -- 6,908
Inventories.......... 28,340 -- 28,340 22,234 (4,500)(E) 46,074
Other current
assets............. 7,154 -- 7,154 1,002 -- 8,156
-------- -------- -------- -------- -------- --------
Total Current
Assets...... 148,863 -- 148,863 59,187 (4,500) 203,550
Property and
equipment............ 13,941 -- 13,941 8,956 (2,800)(E) 20,097
Goodwill............... 71,152 10,809(A) 81,961 7,680 62,077(E) 151,718
Other assets........... 12,165 -- 12,165 -- 16,000(E) 28,165
-------- -------- -------- -------- -------- --------
Total
Assets...... $246,121 $ 10,809 $256,930 $ 75,823 $ 70,777 $403,530
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt...... $ 1,884 $ -- $ 1,884 $ -- $ -- $ 1,884
Accounts payable..... 17,592 -- 17,592 6,818 -- 24,410
Accrued payroll and
benefits........... 2,338 -- 2,338 -- -- 2,338
Other accrued
liabilities........ 6,395 -- 6,395 12,816 6,650(E) 25,861
-------- -------- -------- -------- -------- --------
Total Current
Liabilities... 28,209 -- 28,209 19,634 6,650 54,493
Long-term debt......... 115,528 -- 115,528 -- -- 115,528
Noncurrent
liabilities.......... 1,686 -- 1,686 1,056 -- 2,742
Minority interests..... 11,594 (11,594)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities.. 157,017 (11,594) 145,423 20,690 6,650 172,763
Stockholders' Equity
Common stock......... 217 18(A) 235 110 (110)(F) 302
67(E)
Capital in excess of
par value.......... 130,289 44,285(A) 174,574 78,474 (78,474)(F) 358,767
184,193(E)
Accumulated
deficit............ (41,402) (21,900)(B) (63,302) (23,451) 23,451(F) (128,302)
(65,000)(G)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity...... 89,104 22,403 111,507 55,133 64,127 230,767
-------- -------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity...... $246,121 $ 10,809 $256,930 $ 75,823 $ 70,777 $403,530
======== ======== ======== ======== ======== ========
</TABLE>
PF-4
<PAGE> 74
HOLDCO
------
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT HOLDCO
MINORITY &
INTEREST NACT
HOLDCO ADJUSTMENTS COMBINED
------------ ------------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents............................... $ 63,278 $ -- $ 63,278
Marketable securities.............................. 3,500 -- 3,500
Accounts receivable................................ 39,683 -- 39,683
Notes receivable................................... 6,908 -- 6,908
Inventories........................................ 28,340 -- 28,340
Other current assets............................... 7,154 -- 7,154
-------- -------- --------
Total Current Assets....................... 148,863 -- 148,863
Property and equipment............................... 13,941 -- 13,941
Goodwill............................................. 71,152 10,809(A) 81,961
Other assets......................................... 12,165 -- 12,165
-------- -------- --------
Total Assets............................... $246,121 $ 10,809 $256,930
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.................................... $ 1,884 $ -- $ 1,884
Accounts payable................................... 17,592 -- 17,592
Accrued payroll and benefits....................... 2,338 -- 2,338
Other accrued liabilities.......................... 6,395 -- 6,395
-------- -------- --------
Total Current Liabilities.................. 28,209 -- 28,209
Long-term debt....................................... 115,528 -- 115,528
Noncurrent liabilities............................... 1,686 -- 1,686
Minority interests................................... 11,594 (11,594)(A) --
-------- -------- --------
Total Liabilities.......................... 157,017 (11,594) 145,423
Stockholders' Equity
Common stock....................................... 217 18(A) 235
Capital in excess of par value..................... 130,289 44,285(A) 174,574
Accumulated deficit................................ (41,402) (21,900)(B) (63,302)
-------- -------- --------
Total Stockholders' Equity................. 89,104 22,403 111,507
-------- -------- --------
Total Liabilities and Stockholders'
Equity................................... $246,121 $ 10,809 $256,930
======== ======== ========
</TABLE>
PF-5
<PAGE> 75
HOLDCO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDCO
TELCO & TELCO
HOLDCO TELCO ADJUSTMENTS COMBINED
------------ -------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents....................... $ 63,278 $ 13,999 $ -- $ 77,277
Marketable securities...................... 3,500 1,599 -- 5,099
Accounts receivable........................ 39,683 20,353 -- 60,036
Notes receivable........................... 6,908 -- -- 6,908
Inventories................................ 28,340 22,234 (4,500)(E) 46,074
Other current assets....................... 7,154 1,002 -- 8,156
-------- -------- -------- ---------
Total Current Assets............... 148,863 59,187 (4,500) 203,550
Property and equipment....................... 13,941 8,956 (2,800)(E) 20,097
Goodwill..................................... 71,152 7,680 62,077(E) 140,909
Other assets................................. 12,165 -- 16,000(E) 28,165
-------- -------- -------- ---------
Total Assets....................... $246,121 $ 75,823 $ 70,777 $ 392,721
======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............................ $ 1,884 $ -- $ -- $ 1,884
Accounts payable........................... 17,592 6,818 -- 24,410
Accrued payroll and benefits............... 2,338 -- -- 2,338
Other accrued liabilities.................. 6,395 12,816 6,650(E) 25,861
-------- -------- -------- ---------
Total Current Liabilities.......... 28,209 19,634 6,650 54,493
Long-term debt............................... 115,528 -- -- 115,528
Noncurrent liabilities....................... 1,686 1,056 -- 2,742
Minority interests........................... 11,594 -- -- 11,594
-------- -------- -------- ---------
Total Liabilities.................. 157,017 20,690 6,650 184,357
Stockholders' Equity
Common stock............................... 217 110 (110)(F) 284
67(E)
Capital in excess of par value............. 130,289 78,474 (78,474)(F) 314,482
184,193(E)
Accumulated deficit........................ (41,402) (23,451) 23,451(F) (106,402)
(65,000)(G)
-------- -------- -------- ---------
Total Stockholders' Equity......... 89,104 55,133 64,127 208,364
-------- -------- -------- ---------
Total Liabilities and Stockholders'
Equity........................... $246,121 $ 75,823 $ 70,777 $ 392,721
======== ======== ======== =========
</TABLE>
PF-6
<PAGE> 76
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
NACT ATI & NACT NACT
HOLDCO & MAJORITY MAJORITY MINORITY
ATI ATI INTEREST INTEREST INTEREST
HOLDCO ATI ADJUSTMENTS COMBINED NACT ADJUSTMENTS COMBINED ADJUSTMENTS
------------ ----- ----------- -------- ------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products....... $ 28,229 $ 826 $ -- $ 29,055 $ 1,175 $ -- $30,230
Service revenues........ 7,502 -- -- 7,502 1,160 -- 8,662 $ --
-------- ----- ------- -------- ------- -------- ------- -----
Total Sales............ 35,731 826 -- 36,557 2,335 -- 38,892 --
Cost of products sold... 16,772 631 -- 17,403 755 -- 18,158 --
Cost of services........ 7,428 -- -- 7,428 1,220 -- 8,648 --
-------- ----- ------- -------- ------- -------- ------- -----
Total Cost of Sales.... 24,200 631 -- 24,831 1,975 -- 26,806 --
Gross Profit........... 11,531 195 -- 11,726 360 -- 12,086 --
Engineering and
development............ 788 241 -- 1,029 504 -- 1,533 --
Selling, general and
administrative......... 3,256 349 -- 3,605 1,369 -- 4,974 --
Amortization of
goodwill............... 864 -- 40(A) 904 39 370(E) 1,313 140(I)
-- -- -- -- --
In-process research and
development............ 50,000 -- (5,400)(B) 44,600 -- (44,600)(F) -- --
Special charges......... 3,240 -- -- 3,240 -- -- 3,240 --
-------- ----- ------- -------- ------- -------- ------- -----
Operating Income
(Loss)............... (46,617) (395) 5,360 (41,652) (1,552) 44,230 1,026 (140)
Interest and other
income................. 1,269 -- -- 1,269 -- -- 1,269 --
Interest and other
expense................ (1,515) (18) -- (1,533) -- -- (1,533) --
-------- ----- ------- -------- ------- -------- ------- -----
Income (Loss) Before
Income Taxes and
Minority Interests... (46,863) (413) 5,360 (41,916) (1,552) 44,230 762 (140)
Income taxes............ 1,255 -- (140)(C) 1,115 -- -- 1,115 --
-------- ----- ------- -------- ------- -------- ------- -----
Income (Loss) Before
Minority Interests... (48,118) (413) 5,500 (43,031) (1,552) 44,230 (353) (140)
Minority interests in
earnings of
subsidiary............. 683 -- -- 683 -- (282)(G) 401 (401)(J)
-------- ----- ------- -------- ------- -------- ------- -----
Net Income (Loss)...... $(48,801) $(413) $ 5,500 $(43,714) $(1,552) $ 44,512 $ (754) $ 261
======== ===== ======= ======== ======= ======== ======= =====
Net Income (Loss) Per
Common Share
Basic.................. $ (2.52)
========
Diluted................ $ (2.52)
========
Weighted Average Shares
Outstanding
Basic.................. 19,343
========
Diluted................ 19,343
========
<CAPTION>
HOLDCO,
HOLDCO, HOLDCO, ATI, ATI, NACT,
ATI & NACT & RESURGENS
NACT RESURGENS RESURGENS TELCO & TELCO
COMBINED RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- --------- ----------- ------------ ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products....... $30,230 $ -- $ -- $ 30,230 $28,545 $ -- $ 58,775
Service revenues........ 8,662 368 -- 9,030 -- -- 9,030
------- -------- ------- -------- ------- ----- --------
Total Sales............ 38,892 368 -- 39,260 28,545 -- 67,805
Cost of products sold... 18,158 -- -- 18,158 17,426 (60)(P) 35,524
Cost of services........ 8,648 9,084 310(L) 18,042 -- 18,042
------- -------- ------- -------- ------- ----- --------
Total Cost of Sales.... 26,806 9,084 310 36,200 17,426 (60) 53,566
Gross Profit........... 12,086 (8,716) (310) 3,060 11,119 60 14,239
Engineering and
development............ 1,533 -- -- 1,533 3,981 -- 5,514
Selling, general and
administrative......... 4,974 4,160 -- 9,134 5,854 -- 14,988
Amortization of
goodwill............... 1,453 -- 680(M) 2,133 222 (80)(Q) 3,050
-- -- -- 775(R)
In-process research and
development............ -- -- -- -- -- -- --
Special charges......... 3,240 -- -- 3,240 -- -- 3,240
------- -------- ------- -------- ------- ----- --------
Operating Income
(Loss)............... 886 (12,876) (990) (12,980) 1,062 (635) (12,553)
Interest and other
income................. 1,269 -- -- 1,269 153 -- 1,422
Interest and other
expense................ (1,533) (1,565) -- (3,098) -- -- (3,098)
------- -------- ------- -------- ------- ----- --------
Income (Loss) Before
Income Taxes and
Minority Interests... 622 (14,441) (990) (14,809) 1,215 (635) (14,229)
Income taxes............ 1,115 -- (1,115)(N) -- 50 (50)(S) --
------- -------- ------- -------- ------- ----- --------
Income (Loss) Before
Minority Interests... (493) (14,441) 125 (14,809) 1,165 (585) (14,229)
Minority interests in
earnings of
subsidiary............. -- -- -- -- -- -- --
------- -------- ------- -------- ------- ----- --------
Net Income (Loss)...... $ (493) $(14,441) $ 125 $(14,809) $ 1,165 $(585) $(14,229)
======= ======== ======= ======== ======= ===== ========
Net Income (Loss) Per
Common Share
Basic.................. $ (0.45)(T)
========
Diluted................ $ (0.45)(T)
========
Weighted Average Shares
Outstanding
Basic.................. 31,822(T)
========
Diluted................ 31,822(T)
========
</TABLE>
PF-7
<PAGE> 77
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI & NACT NACT
MAJORITY MINORITY HOLDCO, ATI HOLDCO, ATI,
INTEREST INTEREST & NACT RESURGENS NACT & RESURGENS
COMBINED ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED
------------- ----------- ------------ --------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products.................. $30,230 $ -- $30,230 $ -- $ -- $ 30,230
Service revenues................... 8,662 -- 8,662 368 -- 9,030
------- ----- ------- -------- ------- --------
Total Sales...................... 38,892 -- 38,892 368 -- 39,260
Cost of products sold.............. 18,158 -- 18,158 -- -- 18,158
Cost of services................... 8,648 -- 8,648 9,084 310(L) 18,042
------- ----- ------- -------- ------- --------
Total Cost of Sales.............. 26,806 -- 26,806 9,084 310 36,200
Gross Profit..................... 12,086 -- 12,086 (8,716) (310) 3,060
Engineering and development........ 1,533 -- 1,533 -- -- 1,533
Selling, general and
administrative................... 4,974 -- 4,974 4,160 -- 9,134
Amortization of goodwill........... 1,313 140(I) 1,453 -- 680(M) 2,133
Special charges.................... 3,240 -- 3,240 -- -- 3,240
------- ----- ------- -------- ------- --------
Operating Income (Loss).......... 1,026 (140) 886 (12,876) (990) (12,980)
Interest and other income.......... 1,269 -- 1,269 -- -- 1,269
Interest and other expense......... (1,533) -- (1,533) (1,565) -- (3,098)
------- ----- ------- -------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests......... 762 (140) 622 (14,441) (990) (14,809)
Income taxes....................... 1,115 -- 1,115 -- (1,115)(N) --
------- ----- ------- -------- ------- --------
Income (Loss) Before Minority
Interests...................... (353) (140) (493) (14,441) 125 (14,809)
Minority interests in earnings of
subsidiary....................... 401 (401)(J) -- -- -- --
------- ----- ------- -------- ------- --------
Net Income (Loss)................ $ (754) $ 261 $ (493) $(14,441) $ 125 $(14,809)
======= ===== ======= ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................ $ (0.57)(O)
========
Diluted.......................... $ (0.57)(O)
========
Weighted Average Shares Outstanding
Basic............................ 25,822(O)
========
Diluted.......................... 25,822(O)
========
</TABLE>
PF-8
<PAGE> 78
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI &
NACT NACT
MAJORITY MINORITY HOLDCO, ATI HOLDCO, ATI,
INTEREST INTEREST & NACT TELCO NACT & TELCO
COMBINED ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
------------ ------------- ------------ ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products................... $30,230 $ -- $30,230 $28,545 $ -- $58,775
Service revenues.................... 8,662 -- 8,662 -- -- 8,662
------- ----- ------- ------- ----- -------
Total Sales....................... 38,892 -- 38,892 28,545 -- 67,437
Cost of products sold............... 18,158 -- 18,158 17,426 (60)(P) 35,524
Cost of services.................... 8,648 -- 8,648 -- 8,648
------- ----- ------- ------- ----- -------
Total Cost of Sales............... 26,806 -- 26,806 17,426 (60) 44,172
Gross Profit...................... 12,086 -- 12,086 11,119 60 23,265
Engineering and development......... 1,533 -- 1,533 3,981 -- 5,514
Selling, general and
administrative.................... 4,974 -- 4,974 5,854 -- 10,828
Amortization of goodwill............ 1,313 140(I) 1,453 222 (80)(Q) 2,370
775(R)
Special charges..................... 3,240 -- 3,240 -- -- 3,240
------- ----- ------- ------- ----- -------
Operating Income (Loss)........... 1,026 (140) 886 1,062 (635) 1,313
Interest and other income........... 1,269 -- 1,269 153 -- 1,422
Interest and other expense.......... (1,533) -- (1,533) -- -- (1,533)
------- ----- ------- ------- ----- -------
Income (Loss) Before Income Taxes
and Minority Interests.......... 762 (140) 622 1,215 (635) 1,202
Income taxes........................ 1,115 -- 1,115 50 (50) 1,115
------- ----- ------- ------- ----- -------
Income (Loss) Before Minority
Interests....................... (353) (140) (493) 1,165 (585) 87
Minority interests in earnings of
subsidiary........................ 401 (401)(J) -- -- -- --
------- ----- ------- ------- ----- -------
Net Income (Loss)................. $ (754) $ 261 $ (493) $ 1,165 $(585) $ 87
======= ===== ======= ======= ===== =======
Net Income (Loss) Per Common Share
Basic............................. $ 0.00(T)
=======
Diluted........................... $ 0.00(T)
=======
Weighted Average Shares Outstanding
Basic............................. 28,072(T)
=======
Diluted........................... 28,072(T)
=======
</TABLE>
PF-9
<PAGE> 79
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI & NACT NACT
MAJORITY MINORITY HOLDCO, ATI &
INTEREST INTEREST NACT
COMBINED ADJUSTMENTS COMBINED
------------- ------------- --------------
<S> <C> <C> <C>
Sales of products................................. $30,230 $ -- $30,230
Service revenues.................................. 8,662 -- 8,662
------- ----- -------
Total Sales..................................... 38,892 -- 38,892
Cost of products sold............................. 18,158 -- 18,158
Cost of services.................................. 8,648 -- 8,648
------- ----- -------
Total Cost of Sales............................. 26,806 -- 26,806
Gross Profit.................................... 12,086 -- 12,086
Engineering and development....................... 1,533 -- 1,533
Selling, general and administrative............... 4,974 -- 4,974
Amortization of goodwill.......................... 1,313 140(I) 1,453
Special charges................................... 3,240 -- 3,240
------- ----- -------
Operating Income (Loss)......................... 1,026 (140) 886
Interest and other income......................... 1,269 -- 1,269
Interest and other expense........................ (1,533) -- (1,533)
------- ----- -------
Income (Loss) Before Income Taxes and Minority
Interests.................................... 762 (140) 622
Income taxes...................................... 1,115 -- 1,115
------- ----- -------
Income (Loss) Before Minority Interests......... (353) (140) (493)
Minority interests in earnings of subsidiary...... 401 (401)(J) --
------- ----- -------
Net Income (Loss)............................... $ (754) $ 261 $ (493)
======= ===== =======
Net Income (Loss) Per Common Share
Basic........................................... $ (0.02)(K)
=======
Diluted......................................... $ (0.02)(K)
=======
Weighted Average Shares Outstanding
Basic........................................... 22,072(K)
=======
Diluted......................................... 22,072(K)
=======
</TABLE>
PF-10
<PAGE> 80
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI & HOLDCO, ATI,
NACT MAJORITY NACT
INTEREST TELCO & TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
------------- ------- ----------- --------------
<S> <C> <C> <C> <C>
Sales of products........................... $30,230 $28,545 $ -- $58,775
Service revenues............................ 8,662 -- -- 8,662
------- ------- ----- -------
Total Sales............................... 38,892 28,545 -- 67,437
Cost of products sold....................... 18,158 17,426 (60)(P) 35,524
Cost of services............................ 8,648 -- 8,648
------- ------- ----- -------
Total Cost of Sales....................... 26,806 17,426 (60) 44,172
Gross Profit.............................. 12,086 11,119 60 23,265
Engineering and development................. 1,533 3,981 -- 5,514
Selling, general and administrative......... 4,974 5,854 -- 10,828
Amortization of goodwill.................... 1,313 222 (80)(Q) 2,230
775(R)
Special charges............................. 3,240 -- -- 3,240
------- ------- ----- -------
Operating Income (Loss)................... 1,026 1,062 (635) 1,453
Interest and other income................... 1,269 153 -- 1,422
Interest and other expense.................. (1,533) -- -- (1,533)
------- ------- ----- -------
Income (Loss) Before Income Taxes and
Minority Interests..................... 762 1,215 (635) 1,342
Income taxes................................ 1,115 50 (50) 1,115
------- ------- ----- -------
Income (Loss) Before Minority Interests... (353) 1,165 (585) 227
Minority interests in earnings of
subsidiary................................ 401 -- -- 401
------- ------- ----- -------
Net Income (Loss)......................... $ (754) $ 1,165 $(585) $ (174)
======= ======= ===== =======
Net Income (Loss) Per Common Share
Basic..................................... $ (0.01)(T)
Diluted................................... $ (0.01)(T)
=======
Weighted Average Shares Outstanding
Basic..................................... 26,248(T)
Diluted................................... 26,248(T)
=======
</TABLE>
PF-11
<PAGE> 81
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
NACT ATI & NACT NACT
HOLDCO & NACT MAJORITY MAJORITY MINORITY
ATI ATI MAJORITY INTEREST INTEREST INTEREST
HOLDCO ATI ADJUSTMENTS COMBINED INTEREST ADJUSTMENTS COMBINED ADJUSTMENTS
------- -------- ----------- -------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products.... $71,392 $ 13,687 $ (150)(A) $ 84,929 $24,502 $ -- $109,431 $ --
Service revenues..... 21,593 -- -- 21,593 5,493 -- 27,086 --
------- -------- ------- -------- ------- ------- -------- ------
Total Sales......... 92,985 13,687 (150) 106,522 29,995 -- 136,517 --
Cost of products
sold................ 43,827 13,586 (70)(A) 57,343 7,569 -- 64,912 --
Cost of services..... 17,018 -- -- 17,018 5,756 -- 22,774 --
------- -------- ------- -------- ------- ------- -------- ------
Total Cost of
Sales............. 60,845 13,586 (70) 74,361 13,325 -- 87,686 --
Gross Profit........ 32,140 101 (80) 32,161 16,670 -- 48,831 --
Engineering and
development......... 1,862 4,283 -- 6,145 2,761 -- 8,906 --
Selling, general and
administrative...... 9,000 6,265 -- 15,265 6,913 -- 22,178 --
Purchased research
and development..... -- -- -- -- -- -- -- --
Amortization of
goodwill............ 1,756 -- 200(B) 1,956 573 2,300(E) 4,829 540(H)
------- -------- ------- -------- ------- ------- -------- ------
Operating Income
(Loss)............ 19,522 (10,447) (280) 8,795 6,423 (2,300) 12,918 (540)
Interest and other
income.............. 2,503 64 -- 2,567 734 -- 3,301 --
Interest and other
expense............. (1,355) -- -- (1,355) (19) -- (1,374) --
------- -------- ------- -------- ------- ------- -------- ------
Income (Loss) Before
Income Taxes and
Minority
Interests......... 20,670 (10,383) (280) 10,007 7,138 (2,300) 14,845 (540)
Income taxes......... 7,536 -- (3,800)(C) 3,736 2,757 -- 6,493 --
------- -------- ------- -------- ------- ------- -------- ------
Income (Loss) Before
Minority
Interests......... 13,134 (10,383) 3,520 6,271 4,381 (2,300) 8,352 (540)
Minority Interests in
Earnings of
Subsidiary.......... -- -- -- -- -- (1,433)(F) (1,433) 1,433(I)
------- -------- ------- -------- ------- ------- -------- ------
Net Income (Loss)... $13,134 $(10,383) $ 3,520 $ 6,271 $ 4,381 $(3,733) $ 6,919 $ 893
======= ======== ======= ======== ======= ======= ======== ======
Net Income (Loss) Per
Common Share
Basic............... $ 0.76
=======
Diluted............. $ 0.70
=======
Weighted Average
Shares Outstanding
Basic............... 17,242
=======
Diluted............. 18,708
=======
<CAPTION>
HOLDCO,
HOLDCO, HOLDCO, ATI, ATI, NACT,
ATI & NACT & RESURGENS
NACT RESURGENS RESURGENS TELCO & TELCO
COMBINED RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- --------- ----------- ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products.... $109,431 $ -- $ -- $ 109,431 $111,725 $ -- $ 221,156
Service revenues..... 27,086 165,489 -- 192,575 -- -- 192,575
-------- --------- ------- --------- -------- -------- ---------
Total Sales......... 136,517 165,489 -- 302,006 111,725 -- 413,731
Cost of products
sold................ 64,912 -- -- 64,912 72,406 (240)(P) 137,078
Cost of services..... 22,774 246,494 1,230(K) 270,498 -- -- 270,498
-------- --------- ------- --------- -------- -------- ---------
Total Cost of
Sales............. 87,686 246,494 1,230 335,410 72,406 (240) 407,576
Gross Profit........ 48,831 (81,005) (1,230) (33,404) 39,319 240 6,155
Engineering and
development......... 8,906 -- -- 8,906 14,898 -- 23,804
Selling, general and
administrative...... 22,178 74,448 -- 96,626 26,877 -- 123,503
Purchased research
and development..... -- -- -- -- 5,135 (5,135)(Q) --
Amortization of
goodwill............ 5,369 -- 2,710(L) 8,079 687 (330)(R) 11,536
3,100(S)
-------- --------- ------- --------- -------- -------- ---------
Operating Income
(Loss)............ 12,378 (155,453) (3,940) (147,015) (8,278) 2,605 (152,688)
Interest and other
income.............. 3,301 642 -- 3,943 679 -- 4,622
Interest and other
expense............. (1,374) (16,909) 4,970(M) (13,313) -- -- (13,313)
-------- --------- ------- --------- -------- -------- ---------
Income (Loss) Before
Income Taxes and
Minority
Interests......... 14,305 (171,720) 1,030 (156,385) (7,599) 2,605 (161,379)
Income taxes......... 6,493 -- (6,493)(N) -- 50 (50)(T) --
-------- --------- ------- --------- -------- -------- ---------
Income (Loss) Before
Minority
Interests......... 7,812 (171,720) 7,523 (156,385) (7,649) 2,655 (161,379)
Minority Interests in
Earnings of
Subsidiary.......... -- -- -- -- -- -- --
-------- --------- ------- --------- -------- -------- ---------
Net Income (Loss)... $ 7,812 $(171,720) $ 7,523 $(156,385) $ (7,649) $ 2,655 $(161,379)
======== ========= ======= ========= ======== ======== =========
Net Income (Loss) Per
Common Share
Basic............... $ (5.26)(U)
=========
Diluted............. $ (5.26)(U)
=========
Weighted Average
Shares Outstanding
Basic............... 30,671(U)
=========
Diluted............. 30,671(U)
=========
</TABLE>
PF-12
<PAGE> 82
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI & NACT NACT HOLDCO, HOLDCO, ATI,
MAJORITY MINORITY ATI & NACT &
INTEREST INTEREST NACT RESURGENS RESURGENS
COMBINED ADJUSTMENTS COMBINED RESURGENS ADJUSTMENTS COMBINED
------------- ----------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products...................... $109,431 $ -- $109,431 $ -- $ -- $ 109,431
Service revenues....................... 27,086 -- 27,086 165,489 -- 192,575
-------- ------ -------- --------- ------- ---------
Total Sales.......................... 136,517 -- 136,517 165,489 -- 302,006
Cost of products sold.................. 64,912 -- 64,912 -- -- 64,912
Cost of services....................... 22,774 -- 22,774 246,494 1,230(K) 270,498
-------- ------ -------- --------- ------- ---------
Total Cost of Sales.................. 87,686 -- 87,686 246,494 1,230 335,410
Gross Profit......................... 48,831 -- 48,831 (81,005) (1,230) (33,404)
Engineering and development............ 8,906 -- 8,906 -- -- 8,906
Selling, general and administrative.... 22,178 -- 22,178 74,448 -- 96,626
Amortization of goodwill............... 4,829 540(H) 5,369 -- 2,710(L) 8,079
-------- ------ -------- --------- ------- ---------
Operating Income (Loss).............. 12,918 (540) 12,378 (155,453) (3,940) (147,015)
Interest and other income.............. 3,301 -- 3,301 642 -- 3,943
Interest and other expense............. (1,374) -- (1,374) (16,909) 4,970(M) (13,313)
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Income Taxes and
Minority Interests................. 14,845 (540) 14,305 (171,720) 1,030 (156,385)
Income taxes........................... 6,493 -- 6,493 -- (6,493)(N) --
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Minority
Interests.......................... 8,352 (540) 7,812 (171,720) 7,523 (156,385)
Minority Interests in Earnings of
Subsidiary........................... (1,433) 1,433(I) -- -- -- --
-------- ------ -------- --------- ------- ---------
Net Income (Loss).................... $ 6,919 $ 893 $ 7,812 $(171,720) $ 7,523 $(156,385)
======== ====== ======== ========= ======= =========
Net Income (Loss) Per Common Share
Basic................................ $ (6.34)(O)
=========
Diluted.............................. $ (6.34)(O)
=========
Weighted Average Shares Outstanding
Basic................................ 24,671(O)
=========
Diluted.............................. 24,671(O)
=========
</TABLE>
PF-13
<PAGE> 83
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI & NACT NACT HOLDCO, ATI,
MAJORITY MINORITY HOLDCO, ATI & NACT
INTEREST INTEREST NACT TELCO & TELCO
COMBINED ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
---------- ----------- --------------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products................... $109,431 $ -- $109,431 $111,725 $ -- $221,156
Service revenues.................... 27,086 -- 27,086 -- -- 27,086
-------- ------ -------- -------- ------- --------
Total Sales....................... 136,517 -- 136,517 111,725 -- 248,242
Cost of products sold............... 64,912 -- 64,912 72,406 (240)(P) 137,078
Cost of services.................... 22,774 -- 22,774 -- 22,774
-------- ------ -------- -------- ------- --------
Total Cost of Sales............... 87,686 -- 87,686 72,406 (240) 159,852
Gross Profit...................... 48,831 -- 48,831 39,319 240 88,390
Engineering and development......... 8,906 -- 8,906 14,898 -- 23,804
Selling, general and
administrative.................... 22,178 -- 22,178 26,877 -- 49,055
Purchased research and
development....................... -- -- -- 5,135 (5,135)(Q) --
Amortization of goodwill............ 4,829 540(H) 5,369 687 (330)(R) 8,826
3,100(S)
-------- ------ -------- -------- ------- --------
Operating Income (Loss)........... 12,918 (540) 12,378 (8,278) 2,605 6,705
Interest and other income........... 3,301 -- 3,301 679 -- 3,980
Interest and other expense.......... (1,374) -- (1,374) -- -- (1,374)
-------- ------ -------- -------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests.......... 14,845 (540) 14,305 (7,599) 2,605 9,311
Income taxes........................ 6,493 -- 6,493 50 (50)(T) 6,493
-------- ------ -------- -------- ------- --------
Income (Loss) Before Minority
Interests....................... 8,352 (540) 7,812 (7,649) 2,655 2,818
Minority Interests in Earnings of
Subsidiary........................ (1,433) 1,433(I) -- -- -- --
-------- ------ -------- -------- ------- --------
Net Income (Loss)................. $ 6,919 $ 893 $ 7,812 $ (7,649) $ 2,655 $ 2,818
======== ====== ======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................. $ 0.10(U)
========
Diluted........................... $ 0.10(U)
========
Weighted Average Shares Outstanding
Basic............................. 26,921(U)
========
Diluted........................... 28,386(U)
========
</TABLE>
PF-14
<PAGE> 84
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI & NACT NACT HOLDCO,
MAJORITY MINORITY ATI &
INTEREST INTEREST NACT
COMBINED ADJUSTMENTS COMBINED
---------- ----------- ---------------
<S> <C> <C> <C>
Sales of products..................................... $109,431 $ -- $109,431
Service revenues...................................... 27,086 -- 27,086
-------- ----- --------
Total Sales......................................... 136,517 -- 136,517
Cost of products sold................................. 64,912 -- 64,912
Cost of services...................................... 22,774 -- 22,774
-------- ----- --------
Total Cost of Sales................................. 87,686 -- 87,686
Gross Profit........................................ 48,831 -- 48,831
Engineering and development........................... 8,906 -- 8,906
Selling, general and administrative................... 22,178 -- 22,178
Amortization of goodwill.............................. 4,829 540(H) 5,369
-------- ----- --------
Operating Income (Loss)............................. 12,918 (540) 12,378
Interest and other income............................. 3,301 -- 3,301
Interest and other expense............................ (1,374) -- (1,374)
-------- ----- --------
Income (Loss) Before Income Taxes and Minority
Interests........................................ 14,845 (540) 14,305
Income taxes.......................................... 6,493 -- 6,493
-------- ----- --------
Income (Loss) Before Minority Interests............. 8,352 (540) 7,812
Minority Interests in Earnings of Subsidiary.......... (1,433) 1,433(I) --
-------- ----- --------
Net Income (Loss)................................... $ 6,919 $ 893 $ 7,812
======== ===== ========
Net Income (Loss) Per Common Share
Basic............................................... $ 0.37(J)
========
Diluted............................................. $ 0.35(J)
========
Weighted Average Shares Outstanding
Basic............................................... 20,921(J)
========
Diluted............................................. 22,387(J)
========
</TABLE>
PF-15
<PAGE> 85
HOLDCO
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HOLDCO,
ATI & NACT
MAJORITY HOLDCO, ATI,
INTEREST TELCO NACT & TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
------------- -------- ----------- ---------------
<S> <C> <C> <C> <C>
Sales of products.................. $109,431 $111,725 $ -- $221,156
Service revenues................... 27,086 -- -- 27,086
-------- -------- ------- --------
Total Sales...................... 136,517 111,725 -- 248,242
Cost of products sold.............. 64,912 72,406 (240)(P) 137,078
Cost of services................... 22,774 -- 22,774
-------- -------- ------- --------
Total Cost of Sales.............. 87,686 72,406 (240) 159,852
Gross Profit..................... 48,831 39,319 240 88,390
Engineering and development........ 8,906 14,898 -- 23,804
Selling, general and
administrative................... 22,178 26,877 -- 49,055
In-process research and
development...................... -- 5,135 (5,135)(Q) --
Amortization of goodwill........... 4,829 687 (330)(R) 8,286
3,100(S)
-------- -------- ------- --------
Operating Income (Loss).......... 12,918 (8,278) 2,605 7,245
Interest and other income.......... 3,301 679 -- 3,980
Interest and other expense......... (1,374) -- -- (1,374)
-------- -------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests........ 14,845 (7,599) 2,605 9,851
Income taxes....................... 6,493 50 (50)(T) 6,493
-------- -------- ------- --------
Income (Loss) Before Minority
Interests..................... 8,352 (7,649) 2,655 3,358
Minority Interests in Earnings of
Subsidiary....................... (1,433) -- -- (1,433)
-------- -------- ------- --------
Net Income (Loss)................ $ 6,919 $ (7,649) $ 2,655 $ 1,925
======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................ $ 0.08(U)
========
Diluted.......................... $ 0.07(U)
========
Weighted Average Shares Outstanding
Basic............................ 25,097(U)
========
Diluted.......................... 26,563(U)
========
</TABLE>
PF-16
<PAGE> 86
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
GENERAL HISTORICAL INFORMATION:
The ATI acquisition consummated on January 29, 1998 and the NACT Stock
Purchase consummated on February 27, 1998 have been accounted for under the
purchase method of accounting. The historical consolidated financial statements
of World Access include the results of the operations of ATI and NACT from
February 1, 1998 and March 1, 1998, respectively. The purchase price of ATI and
the majority interest in NACT was allocated to the fair values of the net assets
acquired and to in-process research and development projects. During the first
quarter of 1998, $5.4 million and $44.6 million of purchased in-process research
and development technologies related to the ATI acquisition and the NACT Stock
Purchase, respectively, was expensed in accordance with the applicable
accounting rules. The amount of the in-process research and development
write-off consists of the value of ATI's and NACT's products in the development
stage that are not considered to have reached technological feasibility.
The Income Approach was utilized to value the acquired research and
development technologies in the NACT Transaction. The Income Approach values
technologies by projecting the potential cash flows related to those
technologies and discounting the cash flows to their present values using a
discount rate reflective of the risk of achieving the cash flows. The projected
cash flows include estimates of the remaining costs to complete the in-process
technologies.
NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained. Failure to attain technological
feasibility, especially given the high degree of customization required for
complete integration into the NACT solution, would have rendered partially
designed hardware and software useless for other applications. Incomplete design
of hardware and software coding would create a non-connective, inoperable
product that would have no alternative use.
NACT's business plan called for a shift in market focus to larger
customers, both domestic and international; therefore, NACT had numerous
projects in development at the time of the acquisition. Additionally, the
pending completion of a major release of NACT's billing system required
significant development efforts to ensure continued integration with NACT's
product suite.
NACT had nine principal projects in the development pipeline at the time of
acquisition. Most major projects had several ongoing sub-projects (e.g., a
hardware design project and a software design project). These projects included
significant redevelopment of some existing products and the creation of new
products. The research and development projects were at various stages of
development. Most new or redeveloped products were scheduled for release in
1998, while several others were scheduled for release in 1999. None of the
in-process projects considered in the write-off had attained technological
feasibility.
For all in-process technologies, management estimated remaining costs to
complete. These estimates were $3.3 million for 1998, and $1 million for 1999.
The expected sources of funding were scheduled research and development expenses
from the operating budget of NACT provided by the operating assets and
liabilities of NACT.
The Income Approach was also used to value the acquired research and
development technologies in the ATI acquisition.
ATI develops and manufactures a series of high-performance digital
microwave/millimeter radio equipment. Their products reach across all frequency
bands and data rates and offer numerous features. The nature of the in-process
research and development was such that technological feasibility had not been
attained. Failure to attain technological feasibility would have rendered
partially designed equipment useless for other applications. ATI's products are
designed for specific frequency bandwidths and, as such, are highly
PF-17
<PAGE> 87
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
customized to those bandwidths and the needs of customers wishing to operate in
them. Products only partially completed for certain bandwidths cannot be used in
other bandwidths.
At the time of acquisition, ATI's primary product lines were FSK+, Compact,
and QAM. ATI's management determined the following percentages of each product
line were in-process technologies:
<TABLE>
<S> <C>
FSK+: 15.0% of units in development
Compact: 95.0% of units in development
QAM: 100.0% of units in development
</TABLE>
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility.
For all in-process products, management estimated remaining costs to
complete to be $3.1 million for 1998, $7.2 million for 1999, $7.6 million for
2000, $5.1 million for 2001, and $1.1 million for 2002. The expected sources of
funding were scheduled R&D expenses from the operating budget of ATI provided by
the operating assets and liabilities of ATI.
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A., Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT alleging that
telephone systems manufactured and sold by NACT incorporating prepaid debit card
features infringe upon Aerotel's patent which was issued in November 1987. See
Footnote 2 to the World Access Form 10-Q for the Three Months Ended March 31,
1998 for further description of this litigation.
As part of the negotiations relating to the acquisition of NACT, World
Access and GST Telecommunications, Inc. (the seller) agreed to share evenly any
Aerotel judgment against NACT. Subsequent to the acquisition, World Access has
been actively engaged in settlement negotiations. Based upon such negotiations
as of the filing date of its March 31, 1998 Form 10-Q, World Access believed
that $2.5 million was a reasonable estimate of its portion of the ultimate
settlement of this matter, including legal fees and established a legal
contingency accrual in the purchase accounting of NACT. This estimate was based
on advise of counsel and an assessment of preliminary settlement discussions
with counsel for Aerotel. On July 9, 1998, World Access and GST entered into a
Memorandum of Understanding to settle the Aerotel litigation for $5,150,000, of
which $2,625,000 is the responsibility of World Access. Including legal fees,
World Access now estimates its Aerotel settlement costs will be approximately
$3.2 million. The additional $700,000 accrual has not been reflected in the Pro
Forma Combined Financial Statements. At the time final materials are filed with
the Commission, World Access expects to be in a position to more accurately
define its Aerotel exposure and will update its financial statements and related
disclosures accordingly.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET:
NACT MINORITY INTEREST ADJUSTMENTS:
(A) The acquisition of the minority interest of NACT will be accounted for
under the purchase method of accounting. In addition, in accordance with
generally accepted accounting principles, the portion of the purchase price
allocable to the in-process research and development projects of NACT will be
expensed at the consummation of the NACT Transaction. The amount of the one-time
non-recurring charge is expected to approximate $21.9 million. Since this charge
is directly related to the acquisition and will not recur, the Unaudited Pro
Forma Statements of Operations have been prepared excluding this charge. World
Access has not determined the final allocation of the purchase price, and
accordingly, the amount ultimately determined may differ significantly from the
amounts shown below.
PF-18
<PAGE> 88
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The unallocated excess of purchase price over the net assets acquired is
determined as follows (in thousands):
Purchase price of approximately 32.7% minority interest in NACT:
<TABLE>
<S> <C>
Stock issued in exchange for NACT shares.................. $ 44,303
---------
Allocation:
Minority interest in subsidiaries......................... (11,594)
Adjust assets and liabilities:
In-process research and development costs(i)........... (21,900)
---------
(33,494)
---------
Unallocated excess purchase price over net assets
acquired.................................................. $ 10,809
=========
</TABLE>
(i) The in-process research and development write-off of $21.9 million is
based on the valuation performed in connection with the NACT Stock Purchase. The
valuation report assigned a value of $66.5 million to the in-process research
and development projects as of the date of the NACT Stock Purchase, of which
67.3% or $44.6 million was expensed at the consummation of the NACT Stock
Purchase. Management estimates that an additional $21.9 million of in-process
research and development projects will be written-off in conjunction with the
consummation of the NACT Transaction. World Access will obtain an updated
valuation of the in-process research and development projects as of the closing
of the NACT Transaction for use in determining the final purchase accounting for
the NACT Transaction.
(B) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
RESURGENS PRO FORMA ADJUSTMENTS:
(C) The Resurgens Transaction will be accounted for under the purchase
method of accounting. World Access has not determined the final allocation of
the purchase price, and accordingly, the amount ultimately determined may differ
significantly from the amounts shown below.
PF-19
<PAGE> 89
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price:
Cash paid for claims(i)................................... $ 3,000
Purchase of switching equipment by World Access for use by
Resurgens prior to closing of the merger............... 4,000
Restricted stock issued to creditors(ii).................. 76,000
Restricted stock issued to Renaissance Partners(ii)....... 15,730
-------
Total stock....................................... 91,730
Fees and expenses related to the Resurgens Transaction.... 2,000
--------
Total purchase price.............................. 100,730
--------
Allocation:
Historical stockholders' equity, net of creditor
liabilities forgiven(iii).............................. (13,020)
Adjust assets and liabilities:
Adjust licenses to estimated fair market value(iv)..... (3,000)
Adjust network switching equipment to estimated fair
market value(iv)..................................... (5,000)
Record switching equipment purchased by World Access... (4,000)
Establish deferred tax asset(v)........................ (15,300)
--------
(40,320)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 60,410
========
</TABLE>
(i) Represents an estimate of $1.0 million to be paid to the creditors of
Resurgens under a cash settlement plan proposed by World Access and
approximately $2.0 million to be paid to governmental creditors.
(ii) The value assigned to the restricted shares issued to the creditors
and Renaissance Partners is based on the seven day average closing price of
World Access common stock, including the announcement date and the three days
prior and three days subsequent to the announcement date, less a 30% discount
attributable to the restrictive nature of the shares. World Access consulted
with an independent financial advisor knowledgeable of the transaction in
determining the appropriate discount. Specific factors supporting the discount
are (1) the length of the restriction [1 year], (2) the number of shares subject
to restriction [3.7 million shares], and (3) the volatility of World Access
common stock [the closing price on the announcement date was $37.06 and the
closing price on June 15, 1998 was $25.38, a 31.5% reduction].
(iii) The combined historical stockholders deficit of Cherry Communications
Incorporated and Cherry Communications U.K. Limited of $339,211,000 has been
adjusted to reflect a $352,231,000 reduction of liabilities in relation to the
proposed bankruptcy reorganization plan.
(iv) Estimates of fair market value of the licenses and the switching
equipment acquired have been made by management. These estimates are subject to
adjustment pending final valuations to be obtained from independent appraisers.
(v) At the time the Resurgens Transaction is consummated, Resurgens is
expected to have in excess of $125 million in net operating loss carryforwards
available to offset future federal taxable income. Based on its current
assessment of the forecasted operating results of Resurgens and other pertinent
factors, management expects at least 35% of these future tax benefits will be
realized. Accordingly, a deferred tax asset of $44 million, net of a 65%
valuation allowance of approximately $29 million, has been reflected in the Pro
Forma Combined Balance Sheet. The amount of the valuation allowance is subject
to future analysis and may be revised prior to the closing of the Resurgens
Transaction.
PF-20
<PAGE> 90
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma loss of the combined entity is not indicative of the results
of operations that are expected to be achieved by the combined entity in the
future. The nature of Resurgens current operations are concentrated solely on
the international carriers' carrier business and an upgraded, efficient
operating network is now in place. Resurgens has a new, experienced management
team in place and has entered into several new contracts to increase its revenue
base, including a significant service contract with WorldCom Network Services,
Inc., a wholly owned subsidiary of WorldCom, Inc. Prior to the acquisition of
Resurgens, it is expected that Resurgens will be essentially debt free due to
its Chapter 11 bankruptcy proceedings. In addition, there are several closing
conditions that must be satisfied before the Resurgens Transaction is
consummated, including the achievement by Resurgens of monthly revenues of $25
million and related gross profit margin of greater than 5% for the calendar
month immediately preceding the closing date.
(D) Eliminate existing stockholders' equity.
TELCO PRO FORMA ADJUSTMENTS:
(E) The Telco Merger will be accounted for under the purchase method of
accounting. In addition, in accordance with generally accepted accounting
principles, the portion of the purchase price allocable to the in-process
research and development projects of Telco will be expensed at the consummation
of the acquisition. The amount of the one-time non-recurring charge is expected
to approximate $65 million. Since this charge is directly related to the
acquisition and will not recur, the Unaudited Pro Forma Statements of Operations
have been prepared excluding this charge. World Access has not determined the
final allocation of the purchase price, and accordingly, the amount ultimately
determined may differ significantly from the amounts shown below.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Purchase price:
Stock issued in exchange for Telco shares................. $175,560
Fair market value of World Access options issued in
exchange for Telco options............................. 8,700
--------
Total stock and options........................... $ 184,260
Fees and expenses related to the merger................... 3,750
---------
Total purchase price.............................. 188,010
---------
Allocation:
Historical stockholders' equity........................... (55,133)
Adjust assets and liabilities:
Write-down of inventories related to outsourcing,
recent procurement agreements and those that are
non-strategic as a result of the merger to net
realizable value..................................... 4,500
Write-down to fair market value of certain redundant
equipment resulting from the merger.................. 1,500
Write-off of leaseholds associated with Telco's current
Norwood facility which is expected to be relocated... 1,300
Accrue involuntary employee termination benefits....... 1,500
Accrue lease termination provision related to Telco's
current Norwood facility............................. 1,400
Establish deferred tax asset(i)........................ (16,000)
In-process research and development costs(ii).......... (65,000)
---------
(125,933)
---------
Unallocated excess purchase price over net assets
acquired.................................................. $ 62,077
=========
</TABLE>
PF-21
<PAGE> 91
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(i) The net deferred tax asset of $16 million is comprised primarily of
gross temporary differences arising from the differences between book and tax
basis of certain assets and liabilities and for tax credits available to Telco.
It is the opinion of management that these tax assets are likely to be utilized
by Telco.
(ii) The amount of in-process research and development costs has been
estimated by management based on factors considered such as the number of
projects in process, the potential alternative future uses of those projects and
estimated future projected revenues from those projects. The valuation of the
in-process research and development projects will be performed by an independent
valuation firm. The independent valuation of the in-process research and
development projects will be utilized in the final purchase price allocation.
(F) Eliminate existing stockholders' equity.
(G) Represents retained earnings adjustment for the one-time non-recurring
charge related to the write-off of in-process research and development expenses
acquired.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1998:
ATI PRO FORMA ADJUSTMENTS:
(A) Amortization of unallocated excess purchase price over net assets
acquired over 15 years relating to the one month period ended January 31, 1998
not included in the Holdco historical statement of operations.
(B) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the ATI merger.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
(D) Not used.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS:
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years relating to the two month period ended February 28, 1998
not included in the World Access historical statement of operations.
(F) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the purchase of the majority
interest in NACT.
(G) Record the 32.7% minority interest in net income of NACT.
(H) Not used
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS:
(I) Amortization of unallocated excess purchase price over net assets
acquired related to the purchase of the remaining minority interest in NACT over
20 years.
(J) Reverse the minority interests in earnings of NACT.
(K) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of World Access common stock issued in the
merger calculated in accordance with SFAS 128.
PF-22
<PAGE> 92
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RESURGENS PRO FORMA ADJUSTMENTS:
(L) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market values of the license agreements.
(M) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(N) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(O) Represents basic and diluted earnings per share, including
approximately 3.7 million shares of World Access common stock issued to
Resurgens's creditors and Renaissance Partners calculated in accordance with
SFAS 128.
TELCO PRO FORMA ADJUSTMENTS:
(P) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(Q) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(R) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(S) Adjust tax provision for the benefit of the loss incurred by the
combined entities.
(T) Represents basic and diluted earnings per share, including
approximately 6.0 million shares of World Access common stock issued in the
merger and common stock equivalents related to stock options issued in exchange
for Telco options calculated in accordance with SFAS 128.
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997:
ATI PRO FORMA ADJUSTMENTS:
(A) Eliminate inter-company sales and related cost of sales.
(B) Amortization of unallocated excess purchase price over net assets
acquired over 15 years.
(C) Adjust tax provision for the benefit of the loss incurred by ATI and
pro forma adjustments.
(D) Not used.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS:
(E) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(F) Record the 32.7% minority interest in net income of NACT.
(G) Not used
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS:
(H) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(I) Reverse the minority interests in earnings of NACT.
PF-23
<PAGE> 93
HOLDCO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(J) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of World Access common stock issued in the
merger calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS:
(K) Record an adjustment to depreciation expense for the adjustment to fair
market value of switching equipment and the adjustment to amortization expense
for the adjustment to fair market value of the license agreements.
(L) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(M) Eliminate the one-time non-recurring charges of $3.0 million related to
the loss on disposition of property, $1.3 million related to the settlement of
certain lawsuits unrelated to the bankruptcy and $670,000 in reorganization
costs.
(N) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(O) Represents basic and diluted earnings per share, including
approximately 3.7 million shares of World Access common stock issued to
Resurgens's creditors and Renaissance Partners calculated in accordance with
SFAS 128.
TELCO PRO FORMA ADJUSTMENTS:
(P) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(Q) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the purchase of Jupiter
Technology, Inc.
(R) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(S) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(T) Adjust tax provision for the benefit of the loss incurred by Telco and
the pro forma adjustments.
(U) Represents basic and diluted earnings per share, including
approximately 6.0 million shares of World Access common stock issued in the
merger and common stock equivalents related to stock options issued in exchange
for Telco options calculated in accordance with SFAS 128.
PF-24
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated June 5, 1998 with respect to
the combined financial statements of Cherry Communications Incorporated (d/b/a
Resurgens Communications Group) and Cherry Communications UK Limited for the
year ended December 31, 1997, in the Form 8-K of World Access, Inc. dated July
24, 1998, and to the incorporation by reference of such report in the
Registration Statements on Form S-8 (Nos. 33-77918, 33-47752, 333-17741 and
333-59347) and Form S-3 (Nos. 333-43497 and 333-51199) of World Access, Inc.
/s/ Ernst & Young LLP
Atlanta, Georgia
July 24, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated July 11, 1997, except for Notes 2 and 10 as to
which the date is July 24, 1997, accompanying the financial statements of
Cherry Communications Incorporated contained in the Form 8-K. We hereby consent
to the incorporation by reference of said report in the Registration Statements
of World Access, Inc. on Forms S-3 (File No. 333-43497 and File No. 333-51199)
and on Forms S-8 (File No. 333-59347, File No. 333-17741, File No. 33-377918,
and File No. 33-47752).
/s/ Grant Thornton LLP
----------------------
GRANT THORNTON LLP
Chicago, Illinois
July 24, 1998
<PAGE> 1
EXHIBIT 23.3
MUNSLOW MESSIAS
[LETTERHEAD]
World Access, Inc.
c/o Resurgens Communications Group
945 East Paces Ferry Road
Suite 2210
Atlanta
GA 30326
U.S.A. Our Ref: JJM/ptc/8/C141
Dear Sirs,
Consent of Chartered and Certified Accountants and Registered Auditors
We consent to the inclusion of our report dated June 1, 1998 with respect to the
financial statements of Cherry Communications UK Limited, which report appears
in the Form 8-K of World Access, Inc. dated July 24th 1998. We also consent to
incorporation by reference in the registration statements on Form S-8 (Nos.
33-77918, 33-47752, 333,17741 and 333-59347) and Form S-3 (Nos. 333-43497 and
333-51199) of World Access, Inc. to the above referenced report which appears
in the aforementioned Form 8-K.
/s/ Munslow Messias
Munslow Messias
July 23rd 1998
