<PAGE> 1
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
(AMENDING ITEM 7)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 9, 1998
WORLD ACCESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
945 E. PACES FERRY ROAD, SUITE 2240, ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (404) 231-2025
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<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Included in this report are
the following financial statements:
(i) The unaudited consolidated financial statements of Telco Systems,
Inc ("Telco") for the three months and nine months in each of the periods
ended May 31, 1998 and 1997; and
(ii) The audited consolidated financial statements of Telco for the
year ended August 31, 1997, which have been audited by the independent
accounting firm of Ernst & Young LLP, 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 that are currently
contemplated. The Unaudited Pro Forma Combined Statements of Operations give
effect to: (1) the acquisition of Advanced TechCom, Inc. ("ATI"), which was
consummated on January 29, 1998; (2) the acquisition of a 67.3% majority
interest in NACT Telecommunications, Inc. ("NACT") (the "NACT Stock Purchase"),
which was consummated on February 27, 1998; (3) the acquisition of the remainder
of NACT (the "NACT Merger"); (4) the acquisition of Cherry Communications
Incorporated (d/b/a Resurgens Communications Group) and Cherry Communications
U.K. Limited (collectively the "Resurgens Transaction"); and (5) the Merger as
if each of these acquisitions had occurred on January 1, 1997. The Unaudited Pro
Forma Combined Balance Sheet gives effect to: the NACT Merger, the Resurgens
Transaction and the Merger as if they had been completed on June 30, 1998.
As Telco's fiscal year end, August 31, differs from World Access' fiscal
year-end by more than 93 days, Telco's results of operations for the period from
November 25, 1996 through November 30, 1997 were used in preparing the Unaudited
Pro Forma Combined Statement of Operations for the year ended December 31, 1997.
Telco's results of operations for the six months from December 1, 1997 through
May 31, 1998 were used in preparing the Unaudited Pro Forma Combined Statement
of Operations for the six months ended June 30, 1998. Telco's unaudited June 30,
1998 balance sheet was utilized in preparing the Unaudited Pro Forma Combined
Balance Sheet as of June 30, 1998.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that the management of World Access 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
transactions, New World Access expects to record charges representing the
estimated portion of the purchase price allocated to in-process research and
development of $21.9 million and $73.9 million for the NACT Merger and the
Merger, respectively. In addition, in the three month period ended March 31,
1998, World Access 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 World Access, ATI, NACT, and Telco, the
historical combined financial statements of Resurgens 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
1
<PAGE> 3
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, Controller and
Secretary
Dated as of September 25, 1998
2
<PAGE> 4
INDEX TO CONSOLIDATED TELCO SYSTEMS, INC. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Statements of Operations for the Years Ended
August 31, 1997, 1996 and 1995............................ F-3
Consolidated Balance Sheets as of August 31, 1997 and August
25, 1996.................................................. F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended August 31, 1997, 1996 and 1995................ F-5
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1997, 1996 and 1995............................ F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets as of May 31, 1998 (unaudited)
and August 31, 1997....................................... F-16
Consolidated Statements of Operations for the Three Months
and Nine Months Ended May 31, 1998 and May 25, 1997
(unaudited)............................................... F-17
Consolidated Statements of Cash Flows for the Nine Months
Ended May 31, 1998 and May 25, 1997 (unaudited)........... F-18
Notes to Consolidated Financial Statements (unaudited)...... F-19
INDEX TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
NEW WORLD ACCESS
Unaudited Pro Forma Combined Balance Sheets as of June 30,
1998...................................................... F-21 to F-25
Unaudited Pro Forma Combined Statements of Operations for
the Six Months Ended June 30, 1998........................ F-26 to F-30
Unaudited Pro Forma Combined Statements of Operations for
the Year Ended December 31, 1997.......................... F-31 to F-35
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-36
</TABLE>
F-1
<PAGE> 5
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Telco Systems, Inc.
We have audited the accompanying consolidated balance sheets of Telco
Systems, Inc. as of August 31, 1997 and August 25, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 31, 1997. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Telco Systems, Inc. at August 31, 1997, and August 25, 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended August 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
October 15, 1997
F-2
<PAGE> 6
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE YEARS ENDED AUGUST 31,
--------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net sales................................................... $117,843 $ 93,954 $89,070
Costs and expenses
Cost of products sold....................................... 74,985 57,285 48,559
Research and development.................................... 15,355 17,991 18,207
Sales, marketing and administration......................... 29,652 30,408 22,945
Restructuring costs (credit)................................ -- 4,209 (420)
Gain on investment.......................................... (1,070) -- --
Amortization of intangible assets........................... 669 752 783
Interest income............................................. (670) (1,146) (1,632)
-------- -------- -------
118,921 109,499 88,442
-------- -------- -------
Net (loss) income........................................... $ (1,078) $(15,545) $ 628
======== ======== =======
Average shares and equivalents.............................. 10,701 10,357 10,345
Net (loss) income per share................................. $ (.10) $ (1.50) $ .06
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 7
TELCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 25,
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 5,406 $ 8,461
Marketable securities..................................... 7,302 6,581
Accounts receivable, less allowance for doubtful accounts
of $895 in 1997 ($676 in 1996)......................... 19,663 18,025
Refundable income taxes................................... -- 702
Inventories, net.......................................... 28,370 23,495
Other current assets...................................... 985 810
--------- ---------
Total current assets.............................. 61,726 58,074
Plant and equipment, at cost................................ 46,401 45,941
Less accumulated depreciation............................. 36,712 33,411
--------- ---------
Net plant and equipment........................... 9,689 12,530
Intangible and other assets, less accumulated amortization
of $11,651 in 1997 ($10,935 in 1996)...................... 7,184 8,900
--------- ---------
Total assets...................................... $ 78,599 $ 79,504
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,292 $ 9,758
Payroll and related liabilities........................... 3,492 3,649
Other accrued liabilities................................. 10,528 8,750
--------- ---------
Total current liabilities......................... 21,312 22,157
Restructuring and other long-term liabilities............... 1,531 3,350
Shareholders' equity:
Series A Participating Cumulative Preferred Stock, 200
shares -- authorized; no shares outstanding............ --
Preferred stock, $.01 par value, 5,000 shares authorized;
no shares outstanding.................................. -- --
Common stock, $.01 par value, 24,000 shares authorized;
shares outstanding: 10,805 at August 31, 1997; (10,520
at August 25, 1996).................................... 108 105
Capital in excess of par value............................ 76,602 74,267
Accumulated deficit....................................... (20,886) (19,808)
Unearned compensation -- restricted stock................. (68) (567)
--------- ---------
Total shareholders' equity........................ 55,756 53,997
--------- ---------
Total liabilities and shareholders' equity........ $ 78,599 $ 79,504
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 8
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED AUGUST 31, 1997
----------------------------------------------------------------
COMMON STOCK
--------------- PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------ ------ ------- ------------ ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, August 28, 1994............. 9,649 $ 96 $66,343 $ (4,891) $61,548
------ ---- ------- -------- -------
Net income for year.................. 628 628
Issuance of common stock:
Employee stock purchase plan....... 56 1 504 505
Exercise of stock options.......... 526 5 4,719 4,724
------ ---- ------- -------- -------
Balance, August 27, 1995............. 10,231 102 71,566 (4,263) 67,405
------ ---- ------- -------- -------
Net (loss) for year.................. (15,545) (15,545)
Issuance of common stock:
Employee stock purchase plan....... 56 514 514
Exercise of stock options.......... 174 2 1,533 1,535
Restricted stock, net.............. 59 1 654 $(655)
Amortization of unearned
compensation....................... 88 88
------ ---- ------- ----- -------- -------
Balance, August 25, 1996............. 10,520 105 74,267 (567) (19,808) 53,997
Net (loss) for year.................. (1,078) (1,078)
Issuance (cancellations) of common
stock:
Employee stock purchase plan....... 43 448 448
Exercise of stock options.......... 284 3 2,360 2,363
Restricted stock, net.............. (42) (473) 473 --
Amortization of unearned
compensation....................... 26 26
------ ---- ------- ----- -------- -------
Balance, August 31, 1997............. 10,805 $108 $76,602 $ (68) $(20,886) $55,756
====== ==== ======= ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 9
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE YEARS ENDED AUGUST 31,
------------------------------
1997 1996 1995
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash Flows from Operating Activities
Net (loss) income......................................... $(1,078) $ (15,545) $ 628
Depreciation and amortization............................. 5,094 5,324 4,982
Restructuring costs (credit).............................. -- 4,209 (420)
Amortization of unearned compensation..................... 26 88 --
Change in assets and liabilities
Accounts receivable, net.................................. (1,638) (7,978) 5,017
Refundable income taxes................................... 702 549 (1,251)
Inventories, net.......................................... (4,875) (6,074) (3,229)
Other current assets...................................... (175) 1,775 320
Other assets.............................................. 1,000 25 (924)
Accounts payable and other current liabilities............ (1,512) 9,585 (4,401)
Restructuring liabilities................................. (2,192) (1,845) (469)
Long-term liabilities..................................... 536 113 (330)
------- --------- --------
Net cash (used in) provided by operating activities......... (4,112) (9,774) (77)
Cash Flows from Investing Activities
Additions to plant and equipment, net..................... (3,634) (6,336) (2,257)
Proceeds from sale -- lease back.......................... 2,601 -- --
Purchase of marketable securities......................... (11,674) (24,350) (29,665)
Maturities of marketable securities....................... 10,953 28,664 29,716
------- --------- --------
Net cash (used in) investing activities................... (1,754) (2,022) (2,206)
Cash Flows from Financing Activities
Proceeds and related tax benefits from sale of common
shares under employee stock plans...................... 2,811 2,049 5,229
------- --------- --------
Net cash provided by financing activities................. 2,811 2,049 5,229
------- --------- --------
(Decrease) increase in cash and equivalents................. (3,055) (9,747) 2,946
Cash and equivalents at beginning of year................... 8,461 18,208 15,262
------- --------- --------
Cash and equivalents at end of year......................... $ 5,406 $ 8,461 $ 18,208
======= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year Income taxes...................... $ -- $ 89 $ 1,235
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 10
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements consolidate the accounts of Telco Systems, Inc.,
and its subsidiaries (the Company). Intercompany accounts and transactions have
been eliminated. The Company's fiscal year ends on the last Sunday in August
which included 53 weeks in fiscal 1997 and 52 weeks in both fiscal 1996 and
fiscal 1995. Certain amounts reported in prior years have been reclassified to
be consistent with the current year's presentation.
The Company has 50% limited partnership interests in two real estate
partnerships which are accounted for by the equity method of accounting. The
aggregate net investment in these partnerships on the accompanying balance
sheets is not material (See Note 7).
New Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 128 (SFAS 128), "Earnings Per Share"
which will require adoption in the Company's second quarter of fiscal 1998. This
statement specifies the computation, presentation and disclosure requirements of
earnings per share. The Company believes that adoption of this statement will
have no material impact on its consolidated financial statements and related
disclosures.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" (SFAS 130). SFAS 130 establishes standards for reporting comprehensive
income and its components in a full set of general purpose financial statements.
SFAS 130 requires that items to be recorded in comprehensive income, which
include unrealized gains/losses on marketable securities classified as
available-for-sale and cumulative translation adjustments, be displayed with the
same prominence as other financial statement items. The Company is in the
process of determining the effect of adoption of this statement on its
consolidated financial statements and related disclosures. SFAS 130 is required
to be adopted in the Company's financial statements for the year ending August
29, 1999.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is required to be adopted in the Company's financial
statements for the year ending August 29, 1999. The adoption of SFAS 131 will
have no impact on the Company's financial results or financial condition, but
may result in certain disclosures of segment information.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
In general, the Company recognizes revenue from product sales at the time
of shipment. In certain contractual situations, revenue is recognized when the
product is accepted by the customer.
F-7
<PAGE> 11
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Product Warranty
Expected future product warranty liability is provided for when the product
is sold.
Cash Equivalents and Marketable Securities
The Company classifies all of its marketable securities as
available-for-sale securities. These securities are stated at their fair value.
There are currently no unrealized holding gains and losses. The Company
considers all highly liquid investments with maturity of 91 days or less to be
cash equivalents. Those instruments with maturities greater than 91 are
classified as marketable securities. Cash equivalents and marketable securities
are carried at market, and consist of U.S. Government securities, bank
certificates of deposit and corporate issues. All securities mature within
twelve months.
Inventories
Inventories are stated at the lower of cost or market. The cost of products
sold is based on standard costs, which approximate actual costs as determined by
the first-in, first-out method.
Inventories at fiscal year end were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw material................................................ $12,803 $12,112
Work-in-process............................................. 5,605 5,560
Finished goods.............................................. 9,962 5,823
------- -------
$28,370 $23,495
======= =======
</TABLE>
Plant and Equipment
Additions to plant and equipment are recorded at cost. Depreciation is
determined by using the straight-line method over the estimated useful lives of
the assets -- three to eight years. Leasehold improvements are amortized on a
straight-line basis over the shorter of their estimated useful life or the lease
term.
Plant and equipment, at cost, at fiscal year end were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $33,313 $31,214
Furniture and leasehold improvements........................ 13,088 14,727
------- -------
$46,401 $45,941
======= =======
</TABLE>
Intangible and Other Assets
Intangible assets arising in connection with business acquisitions were
$7,122,000 and $7,791,000 at August 31, 1997 and August 25, 1996, respectively.
They are amortized over lives ranging from seven to twenty-five years using the
straight-line method, with an average remaining life of 10.7 years. The carrying
value of goodwill is reviewed periodically based on the undiscounted cash flows
of the entities acquired over the remaining amortization period. Should this
review indicate that goodwill will not be recoverable, the carrying value will
be reduced by the estimated shortfall of undiscounted cash flows.
F-8
<PAGE> 12
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, and accounts receivable. The Company's temporary cash investments,
which are principally limited to U.S. Government securities and bank
certificates of deposit, are subject to minimal risk. The Company routinely
assesses the financial strength of its customers and, as a consequence, believes
that its trade accounts receivable credit risk exposure is limited.
Earnings (loss) Per Share
Earnings (loss) per share is based on the weighted average number of common
shares outstanding and common stock equivalents, if dilutive. Fully diluted
earnings per share did not differ significantly from primary earnings per share
in any year. Net loss per share in fiscal years 1997 and 1996 did not consider
common stock equivalents as the effect would be antidilutive.
NOTE 2 DESCRIPTION OF BUSINESS
The Company is engaged in a single business segment constituting the
development, manufacturing, and marketing of broadband transmission products,
network access products, and bandwidth optimization products for the
telecommunications industry. Regional Bell Operating Companies (RBOC),
independent telephone companies, and interexchange carriers are the primary
users of the Company's products. Sales to the RBOCs accounted for 39% of sales
in fiscal 1997, 37% of sales in fiscal 1996, and 29% of sales in fiscal 1995.
RBOC sales include sales to one RBOC of 33% in fiscal 1997, 31% in fiscal 1996,
and 17% in fiscal 1995. In fiscal 1997, two additional customers each
represented 11% and 10% of sales. In fiscal 1996, two additional customers each
represented 13% and 11% of sales. In fiscal 1995, one additional customer
represented 18% of sales.
NOTE 3 INCOME TAXES
The components of the provision (benefit) for income taxes were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
1997 1996 1995
----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current................................................... $ $(1,105) $(821)
Deferred.................................................. 1,105 821
----- ------- -----
$ -- $ -- $ --
===== ======= =====
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
using the statutory rate as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
1997 1996 1995
----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rate...................... $(366) $(5,285) $ 214
Loss producing no current tax benefit....................... 123 5,024
Amortization of goodwill.................................... 243 247 267
Previously unbenefited deferred items....................... (566)
Other....................................................... 14 85
----- ------- -----
Income tax provision........................................ $ -- $ -- $ --
===== ======= =====
</TABLE>
F-9
<PAGE> 13
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities at fiscal year end
are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS
Restructuring costs......................................... $ 1,863 $ 2,942
Inventory and other reserves................................ 8,049 4,384
Net operating loss carryforward............................. 2,058 3,173
Tax credit carryforward..................................... 4,019 3,543
Other....................................................... 97 187
-------- --------
16,086 14,229
Valuation reserve........................................... (15,009) (13,063)
-------- --------
Total deferred tax assets......................... 1,077 1,166
-------- --------
DEFERRED TAX LIABILITIES
Accelerated tax deduction................................... 1,261 1,188
Amortization................................................ 267 287
Depreciation................................................ (373) (250)
Other....................................................... (78) (59)
-------- --------
Total deferred tax liabilities.................... 1,077 1,166
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
</TABLE>
SFAS 109, "Accounting for Income Taxes", requires that a valuation reserve
be established if it is "more likely than not" that realization of the tax
benefits will not occur. The valuation reserve increased by $1,946,000 in fiscal
1997. This change is due primarily to an increase in the current year of
inventory and other reserves. These items have been fully reserved.
At August 31, 1997, the Company had net operating loss carryforwards to
reduce future taxable income of $5,000,000. To the extent not utilized, the U.S.
Federal net operating loss will expire in 2011. The Company also had unused
research and development and investment tax credit carryforwards of $4,000,000
at August 31, 1997, which expire from fiscal years 1999 through 2012.
NOTE 4 ACCRUED LIABILITIES
Accrued liabilities at fiscal year end were as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Restructuring costs......................................... $ 2,485 $2,322
Warranty and rework......................................... 2,027 1,173
All other accrued liabilities............................... 6,016 5,255
------- ------
$10,528 $8,750
======= ======
</TABLE>
NOTE 5 LINE OF CREDIT
The Company maintains a $20.0 million secured line of credit with Fleet
Bank which is available until May 30, 1998. At August 31, 1997, $165,000 was
reserved to support various guarantees in effect at that date. Additionally, the
Company maintains a $3.5 million line of credit with Fleet Bank which is
specifically designated for the acquisition of capital equipment. This line of
credit is available until December 31, 1997.
There were no borrowings against these credit lines at August 31, 1997.
F-10
<PAGE> 14
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 LONG-TERM LIABILITIES
At August 31, 1997 and August 25, 1996, restructuring and other long-term
liabilities include $.3 million and $2.6 million, respectively, of restructuring
costs discussed in Note 8.
NOTE 7 LEASE COMMITMENTS
The Company leases a 216,000 square-foot manufacturing, research and
administration facility in Norwood, Massachusetts, from a limited partnership in
which the Company has a 50% interest. Neither the Company nor the other partners
have made or anticipate making any substantial capital contributions or advances
to the partnership. Under the partnership agreement, the Company, in addition to
its 50% interest, is entitled to a priority payment (which would proportionately
increase with an increase in the property value) out of the proceeds of any sale
or future refinancing of the property. The gross rent payable is $1.5 million
annually through January 31, 1999. For the remainder of the lease term ending
January 31, 2004, gross rent payable is $1.7 million annually.
In June 1997, the Company entered into a sale-leaseback arrangement for
certain computer and other electronic equipment which provided cash of
approximately $2.6 million. The operating leases contained in the arrangement
cover periods from two to four years. All of equipment included in the
transaction was purchased by the Company within the last eighteen months.
The Company leases other facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2005. The
Company is required to pay property taxes, insurance and normal maintenance
costs. Certain of the lease agreements provide for five-year renewal options,
and future lease payments could increase based on the Consumer Price Index.
Minimum annual lease commitments under non-cancelable operating leases for
facilities and equipment as of August 31, 1997 are set forth in the following
table. Amounts relating to excess facilities included herein have been accrued
as discussed in Note 8:
<TABLE>
<CAPTION>
GROSS LEASE SUB-LEASE NET LEASE
FISCAL YEAR PAYMENTS INCOME PAYMENTS
- ----------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1998.................................................... $ 3,570 $ 710 $ 2,860
1999.................................................... 3,584 647 2,937
2000.................................................... 3,256 509 2,747
2001.................................................... 3,179 412 2,767
2002.................................................... 2,887 69 2,818
Beyond.................................................. 6,498 -- 6,498
------- ------ -------
$22,974 $2,347 $20,627
======= ====== =======
</TABLE>
Rent expense under operating leases was $3.1 million in fiscal 1997, $2.9
million in fiscal 1996, and $2.4 million in fiscal 1995.
F-11
<PAGE> 15
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 RESTRUCTURING COSTS
During fiscal 1996, the Company's management approved a plan to restructure
its operations and recognized the following charges:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Excess Facilities........................................... $2,225
Write-down of assets to net realizable value................ 1,589
Employee severance costs.................................... 1,034
Restructuring credit relating to 1993 excess facilities
costs..................................................... (639)
------
$4,209
======
</TABLE>
The plan included the consolidation and move of manufacturing operations
from the Company's Fremont, California facility to its facility located in
Norwood, Massachusetts. During fiscal 1997, the plan was accomplished within
original cost estimates. At August 31, 1997, the remaining reserve balance of
$1,657,000 was specifically designated for excess facility costs at the Fremont,
California location.
At August 31, 1997, the remaining fiscal 1993 restructuring reserve for
excess facility costs for the Norwood, Massachusetts location was $1,098,000
NOTE 9 STOCK PLANS
Under the Company's 1980 Stock Option Plan, the 1988 Non-Qualified Stock
Option Plan, and the 1990 Stock Option Plan (the Plans), officers, directors,
and key employees have been granted options to purchase shares of the Company's
common stock at a price equal to the market value at the date of grant. Options
normally become exercisable ratably over a 48 month period, commencing six
months from the date of grant, and expire after ten years. At August 31, 1997,
1,479,786 shares of common stock were reserved for issuance under the Plans.
On May 20, 1997, the Board of Directors approved an amendment to the
Company's 1990 Stock Option Plan and reduced the exercise price of certain stock
options granted to employees between May 15, 1996 and May 13, 1997 at exercise
prices ranging from $11.50 to $20.875 per share. The exercise price was adjusted
to be equal to the current market price on that day. Stock options granted to
the Company's Board of Directors and to employees in conjunction with a general
option grant on March 5, 1997 were excluded from this action. Approximately
388,581 shares were reduced to the new exercise price of $9.625.
On February 15, 1996, 92,000 restricted shares of the Company's common
stock were granted and issued to certain key employees. Shares were awarded in
the name of each of the participants who have all the rights of other
stockholders, subject to certain restrictions and forfeiture provisions. At
August 31, 1997, 7,500 shares carried restrictions. Restrictions on the shares
expire ratably on the anniversary date of the award over the next three years.
F-12
<PAGE> 16
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity in the stock option plans for fiscal 1996, 1995,
and 1994 is presented as follows:
<TABLE>
<CAPTION>
AVAILABLE OPTIONS OPTION PRICE
STOCK OPTION PLANS FOR OPTIONS OUTSTANDING PER SHARE
- ------------------ ----------- ----------- ---------------
<S> <C> <C> <C>
Balance at August 28, 1994.................... 166,936 1,248,850 $ 2.13 - $15.88
-------- --------- ---------------
Grants...................................... (395,456) 395,456 $ 9.88 - $16.75
Authorized under 1990 plan.................. 250,000
Exercised................................... (525,568) $ 2.13 - $15.50
Canceled.................................... 159,439 (159,439) $ 3.38 - $16.25
Expired..................................... (1,167)
-------- --------- ---------------
Balance at August 27, 1995.................... 179,752 959,299 $ 2.25 - $16.75
-------- --------- ---------------
Authorized under 1990 Plan.................. 350,000
Grants...................................... (572,305) 572,305 $ 9.63 - $16.38
Exercised................................... (173,895) $ 3.00 - $16.25
Canceled.................................... 182,887 (182,887) $ 3.38 - $16.38
-------- --------- ---------------
Balance at August 25, 1996.................... 140,334 1,174,822 $ 2.13 - $16.75
-------- --------- ---------------
Authorized under 1990 Plan.................... 450,000
Grants...................................... (902,831) 902,831 $13.09 - $20.88
Exercised................................... (284,370) $ 2.13 - $16.38
Canceled.................................... 677,297 (677,297) $ 3.00 - $20.88
Expired..................................... (1,000) $3.00
-------- --------- ---------------
Balance at August 31, 1997.................... 363,800 1,115,986 $ 2.25 - $19.00
-------- --------- ---------------
</TABLE>
At August 31, 1997, August 25, 1996, and August 27, 1995, there were
464,589 shares, 464,767 shares, and 413,495 shares exercisable, respectively.
Under the Company's 1983 Employee Stock Purchase Plan, eligible employees
may purchase shares of common stock through payroll deductions (up to a maximum
of 10% of their salary) at a price equal to 85% of the lower of the stock's fair
market value at the beginning or at the end of each six month offering period.
There were 38,947 shares issuable under the Plan for fiscal 1997 of which 22,112
were outstanding at August 31, 1997. For fiscal 1996 and 1995, 56,010 shares and
56,005 shares, respectively, were issued under the Plan. At August 31, 1997,
59,383 shares of common stock were reserved for issuance under the Plan.
In October 1995, the Financial Accounting Standards Board issues Statement
of Financial Accounting Standard 123 (SFAS 123), "Accounting for Stock-Based
Compensation". SFAS 123 requires that companies either recognize compensation
expense for grants of stock, stock options and other equity instruments based on
fair value, or provide pro forma disclosure of net income and earnings per share
in the notes to the financial statements. The Company adopted the
disclosure-only provisions of SFAS 123 in fiscal 1997 and has applied APB
Opinion No. 25 and related interpretations in accounting for its plans.
F-13
<PAGE> 17
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
STOCK OPTIONS EMPLOYEE STOCK
AND AWARDS PURCHASE PLANS
--------------------- -------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average fair value of shares................ $ 8.36 $ 10.54 $ 6.00 $ 4.16
Shares Granted....................................... 902,831 631,305 38,947 56,010
Assumptions:
Risk-free interest rate............................ 5.9% 6.0% 5.0% 5.0%
Expected volatility................................ 146.2% 144.4% 88.0% 87.2%
Expected life of grants............................ 5.5 years 5.5 years .5 years .5 years
Dividend yield..................................... None None None None
</TABLE>
OUTSTANDING AND EXERCISABLE BY PRICE RANGE
AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
SHARES OUTSTANDING
------------------------------------ SHARES EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 8/31/97 LIFE PRICE AT 8/31/97 PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
STOCK OPTION PLAN
$ 2.25-$ 8.63............................. 125,309 5.02 $ 7.67 116,770 $ 7.61
$ 9.31-$ 9.88............................. 502,296 9.18 9.60 96,507 9.66
$10.00-$11.38............................. 279,025 8.19 10.83 129,091 10.91
$11.75-$19.00............................. 209,356 7.14 14.57 122,221 14.15
--------- ---- ------ ------- ------
$ 2.25-$19.00............................. 1,115,986 8.08 $10.62 464,589 $10.67
========= ==== ====== ======= ======
STOCK PURCHASE PLAN
$11.05.................................... $ 22,112 -- $11.05 $22,112 $11.05
========= ==== ====== ======= ======
</TABLE>
Had compensation costs for the Company's stock option plans and employee
stock purchase plans been determined on the fair market value at the grant dates
for such awards, the Company's net loss and net loss per share would approximate
the pro forma amounts below:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Net loss:
As reported............................................... $(1,078) $(15,545)
Pro forma................................................. (4,380) (16,787)
Net loss per share:
As reported............................................... $ (.10) $ (1.50)
Pro forma................................................. (.41) (1.62)
</TABLE>
The effects of applying SFAS 123 for the purpose of providing pro forma
disclosures may not be indicative of the effects on reported net income and net
income per share for future years, as the pro forma disclosures include the
effects of only those awards granted after August 27, 1995.
F-14
<PAGE> 18
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution savings plan under the
provisions of Internal Revenue Code Section 401(k). Under the terms of the Plan,
the Company contributes up to 3% of base pay to a fund which is held by a
trustee. All employees are eligible to participate in the Plan and are entitled,
upon termination or retirement, to receive their vested portion of the savings
fund assets. The unvested portion remains in the Plan and is used to reduce
future Plan expense. Total Plan expense was $468,000 in fiscal 1997, $547,000 in
fiscal 1996, and $525,000 in fiscal 1995.
NOTE 11 STOCKHOLDER RIGHTS PLAN
On February 19, 1997, the Board of Directors of Telco Systems, Inc. adopted
a Stockholder Rights Plan (the "Plan") and distributed one Right for each
outstanding share of the Company's Common Stock, par value $.01 per share. The
Rights were issued to holders of record of Common Stock outstanding on February
19, 1997. Each share of Common Stock issued after February 19, 1997 will also
include one Right subject to certain limitations. Each Right when it becomes
exercisable will initially entitle the registered holder to purchase from the
Company one one-hundredth (1/100th) of a share of Series A Participating
Cumulative Preferred Stock, par value $.01 per share ("Series A Preferred
Stock"), of the Company at a price of $50.00 (the "Exercise Price").
Currently, the Rights are attached to the Company's common stock. These
Rights are not now exercisable and cannot be transferred separately. The Rights
become exercisable and separately transferable when the Board learns that any
person or group (other than Kopp Investment Advisors, Inc. and its affiliates or
associates (collectively "KIA")), has acquired 15% or more of the Company's
outstanding common stock or on such date as may be designated by the Board
following the announcement of a tender or exchange offer for outstanding shares
of common stock which could result in the offeror becoming the beneficial owner
of 15% or more of the Company's outstanding common stock. Under such
circumstances, holders of the Rights will be entitled to purchase, for the
Exercise Price, that number of hundredths of a share of Series A Preferred Stock
equivalent to the number of shares of the Company's common stock (or under
certain circumstances other equity securities) having a market value of two
times the Exercise Price. 15% holders (other than KIA), however, are not
entitled to exercise their Rights under such circumstances. As a result, their
voting and equity interests in the Company would be substantially diluted should
the rights ever be exercised.
The Rights expire in February 2007, but may be redeemed earlier by the
Company in accordance with the provisions of the Rights Plan at a price of $.01
per Right.
F-15
<PAGE> 19
TELCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 13,999 $ 5,406
Marketable securities..................................... 1,599 7,302
Accounts receivable, net.................................. 20,353 19,663
Inventories, net.......................................... 22,234 28,370
Other current assets...................................... 1,002 985
-------- --------
Total current assets.............................. 59,187 61,726
Plant and equipment, at cost................................ 48,644 46,401
Less accumulated depreciation............................. 39,688 36,712
-------- --------
Net plant and equipment........................... 8,956 9,689
Intangible and other assets, net............................ 7,680 7,184
-------- --------
Total assets...................................... $ 75,823 $ 78,599
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,818 $ 7,292
Payroll and related liabilities........................... 2,975 3,492
Other accrued liabilities................................. 9,841 10,528
-------- --------
Total current liabilities......................... 19,634 21,312
Restructuring and other long-term liabilities............... 1,056 1,531
Shareholders' equity:
Series A participating cumulative preferred stock, 200
shares authorized; no shares outstanding............... -- --
Preferred stock, $.01 par value, 5,000 shares authorized;
no shares outstanding.................................. -- --
Common stock, $.01 par value, 24,000 shares authorized;
shares outstanding:
11,037 at May 31, 1998
10,805 at August 31, 1997.............................. 110 108
Capital in excess of par value............................ 78,827 76,602
Unearned compensation -- restricted stock................. (42) (68)
Accumulated deficit....................................... (23,762) (20,886)
-------- --------
Total shareholders' equity........................ 55,133 55,756
-------- --------
Total liabilities and shareholders' equity........ $ 75,823 $ 78,599
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 20
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -----------------
MAY 31, MAY 25, MAY 31, MAY 25,
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net sales................................................. $28,545 $27,411 $81,557 $86,541
Costs and expenses:
Cost of products sold..................................... 17,426 19,118 49,984 54,255
Research and development.................................. 3,981 3,598 11,262 11,336
Sales, marketing and administration....................... 5,854 8,705 17,884 23,510
Purchased research and development........................ -- -- 5,135 --
(Gain) on sale of investment.............................. -- -- -- (1,070)
Amortization of intangible assets......................... 222 168 573 501
Interest (income)......................................... (153) (161) (505) (504)
------- ------- ------- -------
Total costs and expenses........................ 27,330 31,428 84,333 88,028
------- ------- ------- -------
(Loss) income before income taxes......................... 1,215 (4,017) (2,776) (1,487)
Provision for income taxes 50 -- 100 --
------- ------- ------- -------
Net (loss) income............................... $ 1,165 $(4,017) $(2,876) $(1,487)
======= ======= ======= =======
Shares used in computing net income (loss) per share:
Basic................................................... 11,031 10,764 10,942 10,690
Diluted................................................. 11,094 10,764 10,942 10,690
Earnings (loss) per share:
Basic................................................... $ 0.11 $ (0.37) $ (0.26) $ (0.14)
Diluted................................................. $ 0.11 $ (0.37) $ (0.26) $ (0.14)
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 21
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
MAY 31, MAY 25,
1998 1997
------- -------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net (loss)................................................ $(2,876) $(1,487)
Depreciation and amortization............................. 3,644 4,043
Write-off of purchased research and development........... 5,135 --
Amortization of unearned compensation..................... 16 40
Change in assets and liabilities:
Accounts receivable.................................... (690) 500
Inventories, net....................................... 6,136 (2,651)
Other current assets................................... (17) (152)
Intangible and other assets............................ -- 1,000
Accounts payable and other current liabilities......... (1,656) (1,994)
Restructuring liabilities.............................. (1,007) (1,712)
Long-term liabilities.................................. (388) 358
------- -------
Net cash provided by (used in) operating activities....... 8,297 (2,055)
------- -------
Cash flows from investing activities:
Additions to plant and equipment, net..................... (2,308) (2,718)
Purchase of assets of Jupiter Technology, Inc............. (4,336) --
Purchase of short-term investments........................ (3,049) (5,110)
Maturities of short-term investments...................... 8,752 10,713
------- -------
Net cash (used in) provided by investing activities....... (941) 2,885
------- -------
Cash flows from financing activities:
Proceeds from sale of common shares under employee stock
plans.................................................. 1,237 2,500
------- -------
Net cash provided by financing activities................... 1,237 2,500
------- -------
Increase (decrease) in cash and equivalents................. 8,593 3,330
Cash and equivalents at beginning of period................. 5,406 8,461
------- -------
Cash and equivalents at end of period....................... $13,999 $11,791
======= =======
Supplemental schedule of non-cash investing and financing
activities:
Shares issued for assets of Jupiter Technology............ $ 1,000 $ --
======= =======
Liabilities assumed relating to Jupiter Technology........ $ 898 $ --
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 22
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR QUARTER ENDED MAY 31, 1998
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial statements of Telco Systems, Inc. (the
"Company") included in this report reflect all adjustments (consisting of only
normally recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial position at May 31, 1998
and the consolidated statements of operations and cash flows for the nine months
ended May 31, 1998 and May 25, 1997. The unaudited results of operations for the
interim periods reported are not necessarily indicative of results to be
expected for the year.
Certain notes and other information have been condensed or omitted from
these interim financial statements. The statements, therefore, should be read in
conjunction with the consolidated financial statements and related notes
included in the Telco Systems, Inc. Annual Report on Form 10-K for the year
ended August 31, 1997.
NOTE 2 -- INVENTORIES
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1997
------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 8,679 $12,803
Work-in-process............................................. 3,759 5,605
Finished goods.............................................. 9,796 9,962
------- -------
$22,234 $28,370
======= =======
</TABLE>
NOTE 3 -- SHARES OUTSTANDING
Changes in shares outstanding:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
MAY 31, MAY 25,
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Outstanding at beginning of period.......................... 10,805 10,520
Shares issued for Jupiter acquisition..................... 102 --
Options exercised, net.................................... 81 250
Restricted stock option................................... 6 --
Employee stock purchase plan.............................. 43 43
------- -------
Outstanding at end of period................................ 11,037 10,813
======= =======
</TABLE>
NOTE 4 -- ACQUISITION
On January 26, 1998, the Company acquired substantially all of the assets
of Jupiter Technology, Inc., a privately held company engaged in the development
of ATM and frame relay access equipment. The transaction was accounted for using
the purchase method at a cost of $6.2 million, including issuance of 101,636
shares of common stock. The purchase price included $5.1 million which
represented the value of in-process technology that had not yet reached
technological feasibility and had no alternative use. This amount was expensed
during the third quarter of fiscal 1998. In addition, the purchase price
included $1.1 million of goodwill, which will be amortized over five years.
F-19
<PAGE> 23
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- (LOSS) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share", which the Company adopted in the second quarter
of fiscal 1998. The Company has restated all prior period per share amounts to
comply with the requirements of FAS 128. Under the new requirements, primary and
fully diluted earnings per share were replaced by basic and diluted earnings per
share. Basic earnings per common share is calculated by dividing net income or
loss by the weighted average number of common shares outstanding during the
periods. Diluted earnings per share is calculated by dividing net income or loss
by the sum of the weighted average number of common shares outstanding plus all
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued. Potentially dilutive common shares were
excluded from the diluted calculation for those periods in which the Company
reported a net loss. The following table reconciles the number of shares
utilized in the earnings per share calculations for the periods ended May 31,
1998 and May 25, 1997.
SHARES USED IN COMPUTING EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
MAY 31, MAY 25, MAY 31, MAY 25,
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding
(basic)......................................... 11,031 10,764 10,942 10,690
Effect of dilutive securities -- stock options.... 63 0 0 0
Weighted average common shares outstanding
(diluted)....................................... 11,094 10,764 10,942 10,690
</TABLE>
NOTE 6 -- SUBSEQUENT EVENT
On June 4, 1998, the Company entered into a definitive agreement to merge
with World Access, Inc. The transaction will be subject to stockholder and
regulatory approval and is expected to be accounted for as a purchase. The
merger agreement provides that all shares of the Company's common stock will be
converted into shares of World Access common stock having a value of $17.00 per
share, based on the average daily closing price of World Access common stock as
reported on the Nasdaq National Market System for a predefined period prior to
the effective time of the merger (the "Closing Price"). If the Closing Price is
more than $36.00, then each share of the Company's common stock will be
converted into 0.4722 shares of World Access common stock. If the Closing Price
is less than $29.00, then each share of the Company's common stock will be
converted into 0.5862 shares of World Access common stock.
F-20
<PAGE> 24
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS NEW
AND NACT WORLD ACCESS
NACT MINORITY COMBINED AND
WORLD INTEREST ("NEW WORLD RESURGENS RESURGENS
ACCESS ADJUSTMENTS ACCESS") RESURGENS ADJUSTMENTS COMBINED
-------- ------------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 57,653 $ -- $ 57,653 $ 1,637 $ (7,000)(C) $ 52,290
Marketable securities.................... 3,500 -- 3,500 -- -- 3,500
Accounts receivable...................... 41,819 -- 41,819 3,354 -- 45,173
Inventories.............................. 34,473 -- 34,473 -- -- 34,473
Other current assets..................... 15,429 -- 15,429 4,476 -- 19,905
-------- -------- -------- -------- -------- --------
Total Current Assets............... 152,874 -- 152,874 9,467 (7,000) 155,341
Property and equipment.................... 17,203 -- 17,203 52,126 9,000(C) 78,329
Goodwill.................................. 74,378 9,617(A) 83,995 -- 71,251(C) 155,246
Acquired technology....................... 4,400(A) 4,400 -- -- 4,400
Other assets.............................. 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total Assets....................... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.......................... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950
Accounts payable......................... 23,087 -- 23,087 19,731 -- 42,818
Other accrued liabilities................ 12,913 -- 12,913 7,243 2,000(C) 22,156
-------- -------- -------- -------- -------- --------
Total Current Liabilities.......... 40,408 -- 40,408 30,516 2,000 72,924
Long-term debt............................ 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities.................... 1,564 1,700(A) 3,264 29,050 -- 32,314
Minority interests........................ 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities.................. 169,944 (10,743) 159,201 59,566 2,000 220,767
Stockholders' Equity
Common stock............................. 219 20(A) 239 85 (85)(D) 275
36(C)
Capital in excess of par value........... 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620
91,694(C)
Accumulated deficit...................... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity......... 98,574 24,760 123,334 2,179 89,551 215,064
-------- -------- -------- -------- -------- --------
Total Liabilities and Stockholders'
Equity............................ $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
<CAPTION>
NEW
WORLD ACCESS,
RESURGENS
TELCO AND TELCO
TELCO ADJUSTMENTS COMBINED
-------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 11,601 $ -- $ 63,891
Marketable securities.................... 2,200 -- 5,700
Accounts receivable...................... 16,974 -- 62,147
Inventories.............................. 23,209 (4,500)(E) 53,182
Other current assets..................... 954 -- 20,859
-------- -------- ---------
Total Current Assets............... 54,938 (4,500) 205,779
Property and equipment.................... 8,383 (2,800)(E) 83,912
Goodwill.................................. 7,617 30,125(E) 192,988
Acquired technology....................... -- 56,400(E) 60,800
Other assets.............................. -- 23,400(E) 65,915
-------- -------- ---------
Total Assets....................... $ 70,938 $102,625 $ 609,394
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt.......................... $ -- $ -- $ 7,950
Accounts payable......................... 4,357 -- 47,175
Other accrued liabilities................ 12,635 6,650(E) 41,441
-------- -------- ---------
Total Current Liabilities.......... 16,992 6,650 96,566
Long-term debt............................ -- -- 115,529
Noncurrent liabilities.................... 991 24,900(E) 58,205
Minority interests........................ -- -- --
-------- -------- ---------
Total Liabilities.................. 17,983 31,550 270,300
Stockholders' Equity
Common stock............................. 110 (110)(F) 340
65(E)
Capital in excess of par value........... 79,017 (79,017)(F) 469,485
197,865(E)
Accumulated deficit...................... (26,172) 26,172(F) (130,731)
(73,900)(G)
-------- -------- ---------
Total Stockholders' Equity......... 52,955 71,075 339,094
-------- -------- ---------
Total Liabilities and Stockholders'
Equity............................ $ 70,938 $102,625 $ 609,394
======== ======== =========
</TABLE>
F-21
<PAGE> 25
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW WORLD
MINORITY NEW ACCESS AND
WORLD INTEREST WORLD RESURGENS RESURGENS
ACCESS ADJUSTMENTS ACCESS RESURGENS ADJUSTMENTS COMBINED
-------- ----------- -------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and
equivalents........ $ 57,653 $ -- $ 57,653 $ 1,637 $ (7,000)(C) $ 52,290
Marketable
securities......... 3,500 -- 3,500 -- -- 3,500
Accounts receivable... 41,819 -- 41,819 3,354 -- 45,173
Inventories........... 34,473 -- 34,473 -- -- 34,473
Other current
assets............. 15,429 -- 15,429 4,476 -- 19,905
-------- -------- -------- -------- -------- --------
Total Current
Assets...... 152,874 -- 152,874 9,467 (7,000) 155,341
Property and
equipment............. 17,203 -- 17,203 52,126 9,000(C) 78,329
Goodwill................ 74,378 9,617(A) 83,995 -- 71,251(C) 155,246
Acquired technology..... 4,400(A) 4,400 -- -- 4,400
Other assets............ 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total
Assets...... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt....... $ 4,408 $ -- $ 4,408 $ 3,542 $ -- $ 7,950
Accounts payable...... 23,087 -- 23,087 19,731 -- 42,818
Other accrued
liabilities........ 12,913 -- 12,913 7,243 2,000(C) 22,156
-------- -------- -------- -------- -------- --------
Total Current
Liabilities... 40,408 -- 40,408 30,516 2,000 72,924
Long-term debt.......... 115,529 -- 115,529 -- -- 115,529
Noncurrent
liabilities........... 1,564 1,700(A) 3,264 29,050 32,314
Minority interests...... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities... 169,944 (10,743) 159,201 59,566 2,000 220,767
Stockholders' Equity
Common stock.......... 219 20(A) 239 85 (85)(D) 275
36(C)
Capital in excess of
par value.......... 133,286 46,640(A) 179,926 61,467 (61,467)(D) 271,620
91,694(C)
Accumulated deficit... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity...... 98,574 24,760 123,334 2,179 89,551 215,064
-------- -------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity...... $268,518 $ 14,017 $282,535 $ 61,745 $ 91,551 $435,831
======== ======== ======== ======== ======== ========
</TABLE>
F-22
<PAGE> 26
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW WORLD
MINORITY NEW ACCESS AND
WORLD INTEREST WORLD TELCO TELCO
ACCESS ADJUSTMENTS ACCESS TELCO ADJUSTMENTS COMBINED
-------- ----------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents........ $ 57,653 $ -- $ 57,653 $ 11,601 $ -- $ 69,254
Marketable securities....... 3,500 -- 3,500 2,200 -- 5,700
Accounts receivable......... 41,819 -- 41,819 16,974 -- 58,793
Inventories................. 34,473 -- 34,473 23,209 (4,500)(E) 53,182
Other current assets........ 15,429 -- 15,429 954 -- 16,383
-------- -------- -------- -------- -------- --------
Total Current
Assets............. 152,874 -- 152,874 54,938 (4,500) 203,312
Property and equipment........ 17,203 -- 17,203 8,383 (2,800)(E) 22,786
Goodwill...................... 74,378 9,617(A) 83,995 7,617 30,125(E) 121,737
Acquired technology........... 4,400(A) 4,400 -- 56,400(E) 60,800
Other assets.................. 24,063 -- 24,063 -- 23,400(E) 47,463
-------- -------- -------- -------- -------- --------
Total Assets......... $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............. $ 4,408 $ -- $ 4,408 $ -- $ -- $ 4,408
Accounts payable............ 23,087 -- 23,087 4,357 -- 27,444
Other accrued liabilities... 12,913 -- 12,913 12,635 6,650(E) 32,198
-------- -------- -------- -------- -------- --------
Total Current
Liabilities........ 40,408 -- 40,408 16,992 6,650 64,050
Long-term debt................ 115,529 -- 115,529 -- -- 115,529
Noncurrent liabilities........ 1,564 1,700(A) 3,264 991 24,900(E) 29,155
Minority interests............ 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities.... 169,944 (10,743) 159,201 17,983 31,550 208,734
Stockholders' Equity
Common stock................ 219 20(A) 239 110 (110)(F) 304
65(E)
Capital in excess of par
value..................... 133,286 46,640(A) 179,926 79,017 (79,017)(F) 377,791
197,865(E)
Accumulated deficit......... (34,931) (21,900)(B) (56,831) (26,172) 26,172(F) (130,731)
(73,900)(G)
-------- -------- -------- -------- -------- --------
Total Stockholders'
Equity............. 98,574 24,760 123,334 52,955 71,075 247,364
-------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders'
Equity............. $268,518 $ 14,017 $282,535 $ 70,938 $102,625 $456,098
======== ======== ======== ======== ======== ========
</TABLE>
F-23
<PAGE> 27
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT
MINORITY NEW
WORLD INTEREST WORLD
ACCESS ADJUSTMENTS ACCESS
-------- ------------- --------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents................................... $ 57,653 $ -- $ 57,653
Marketable securities.................................. 3,500 -- 3,500
Accounts receivable.................................... 41,819 -- 41,819
Inventories............................................ 34,473 -- 34,473
Other current assets................................... 15,429 -- 15,429
-------- -------- --------
Total Current Assets........................... 152,874 -- 152,874
Property and equipment................................... 17,203 -- 17,203
Goodwill................................................. 74,378 9,617(A) 83,995
Acquired technology...................................... 4,400(A) 4,400
Other assets............................................. 24,063 -- 24,063
-------- -------- --------
Total Assets................................... $268,518 $ 14,017 $282,535
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt........................................ $ 4,408 $ -- $ 4,408
Accounts payable....................................... 23,087 -- 23,087
Other accrued liabilities.............................. 12,913 -- 12,913
-------- -------- --------
Total Current Liabilities...................... 40,408 -- 40,408
Long-term debt........................................... 115,529 -- 115,529
Noncurrent liabilities................................... 1,564 1,700(A) 3,264
Minority interests....................................... 12,443 (12,443)(A) --
-------- -------- --------
Total Liabilities.............................. 169,944 (10,743) 159,201
Stockholders' Equity
Common stock........................................... 219 20(A) 239
Capital in excess of par value......................... 133,286 46,640(A) 179,926
Accumulated deficit.................................... (34,931) (21,900)(B) (56,831)
-------- -------- --------
Total Stockholders' Equity..................... 98,574 24,760 123,334
-------- -------- --------
Total Liabilities and Stockholders' Equity..... $268,518 $ 14,017 $282,535
======== ======== ========
</TABLE>
F-24
<PAGE> 28
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS
WORLD TELCO AND TELCO
ACCESS TELCO ADJUSTMENTS COMBINED
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents.......................... $ 57,653 $11,601 $ -- $ 69,254
Marketable securities......................... 3,500 2,200 -- 5,700
Accounts receivable........................... 41,819 16,974 -- 58,793
Inventories................................... 34,473 23,209 (4,500)(E) 53,182
Other current assets.......................... 15,429 954 -- 16,383
-------- ------- --------- ---------
Total Current Assets.................. 152,874 54,938 (4,500) 203,312
Property and equipment.......................... 17,203 8,383 (2,800)(E) 22,786
Goodwill........................................ 74,378 7,617 30,125(E) 112,120
Acquired technology............................. 56,400(E) 56,400
Other assets.................................... 24,063 -- 23,400(E) 47,463
-------- ------- --------- ---------
Total Assets.......................... $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
Current Liabilities
Short-term debt............................... $ 4,408 $ -- $ -- $ 4,408
Accounts payable.............................. 23,087 4,357 -- 27,444
Other accrued liabilities..................... 12,913 12,635 6,650(E) 32,198
-------- ------- --------- ---------
Total Current Liabilities............. 40,408 16,992 6,650 64,050
Long-term debt.................................. 115,529 -- -- 115,529
Noncurrent liabilities.......................... 1,564 991 24,900(E) 27,455
Minority interests.............................. 12,443 -- -- 12,443
-------- ------- --------- ---------
Total Liabilities..................... 169,944 17,983 31,550 219,477
Stockholders' Equity
Common stock.................................. 219 110 (110)(F) 284
65(E)
Capital in excess of par value................ 133,286 79,017 (79,017)(F) 331,151
197,865(E)
Accumulated deficit........................... (34,931) (26,172) 26,172(F) (108,831)
(73,900)(G)
-------- ------- --------- ---------
Total Stockholders' Equity............ 98,574 52,955 71,075 222,604
-------- ------- --------- ---------
Total Liabilities and Stockholders'
Equity.............................. $268,518 $70,938 $ 102,625 $ 442,081
======== ======= ========= =========
</TABLE>
F-25
<PAGE> 29
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND
WORLD NACT NACT NACT
ACCESS MAJORITY MAJORITY MINORITY
WORLD ATI AND ATI INTEREST INTEREST INTEREST
ACCESS ATI ADJUSTMENTS COMBINED NACT ADJUSTMENTS COMBINED ADJUSTMENTS
-------- ------ ----------- -------- ------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 69,830 $ 826 $ -- $ 70,656 $ 1,175 $ -- $71,831
Service revenues.......... 13,408 -- -- 13,408 1,160 -- 14,568 $ --
-------- ------ ------- -------- ------- -------- ------- -------
Total Sales.............. 83,238 826 -- 84,064 2,335 -- 86,399 --
Cost of products sold..... 39,012 631 -- 39,643 755 190(D) 40,588 90(H)
Cost of services.......... 12,189 -- -- 12,189 1,220 -- 13,409 --
-------- ------ ------- -------- ------- -------- ------- -------
Total Cost of Sales...... 51,201 631 -- 51,832 1,975 190 53,997 90
Gross Profit............. 32,037 195 -- 32,232 360 (190) 32,402 (90)
Engineering and
development.............. 2,582 241 -- 2,823 504 -- 3,327 --
Selling, general and
administrative........... 7,936 349 -- 8,285 1,369 -- 9,654 --
Amortization of
goodwill................. 1,882 -- 16(A) 1,898 39 360(E) 2,297 240(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).. (33,603) (395) 5,384 (28,614) (1,552) 44,050 13,884 (330)
Interest and other
income................... 1,971 -- -- 1,971 -- -- 1,971 --
Interest and other
expense.................. (3,031) (18) -- (3,049) -- -- (3,049) --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Income Taxes and
Minority Interests..... (34,663) (413) 5,384 (29,692) (1,552) 44,050 12,806 (330)
Income taxes.............. 6,135 -- (140)(C) 5,995 (620) -- 5,375 --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Minority Interests..... (40,798) (413) 5,524 (35,687) (932) 44,050 7,431 (330)
Minority interests in
earnings of subsidiary... 1,533 -- -- 1,533 -- (305)(G) 1,228 (1,228)(J)
-------- ------ ------- -------- ------- -------- ------- -------
Net Income (Loss)........ $(42,331) $ (413) $ 5,524 $(37,220) $ (932) $ 44,355 $ 6,203 $ 898
======== ====== ======= ======== ======= ======== ======= =======
Net Income (Loss) Per
Common Share
Basic....................
Diluted..................
Weighted Average Shares
Outstanding
Basic....................
Diluted..................
<CAPTION>
NEW NEW
WORLD WORLD
ACCESS ACCESS,
NEW AND RESURGENS
WORLD RESURGENS RESURGENS TELCO AND TELCO
ACCESS RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- --------- ----------- ------------ ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products......... $ 71,831 $ -- $ -- $ 71,831 $54,552 $ -- $ 126,383
Service revenues.......... 14,568 10,377 -- 24,945 -- -- 24,945
-------- -------- ------- -------- ------- ------- ---------
Total Sales.............. 86,399 10,377 -- 96,776 54,552 -- 151,328
Cost of products sold..... 40,678 -- -- 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services.......... 13,409 27,028 -- 40,437 -- 40,437
-------- -------- ------- -------- ------- ------- ---------
Total Cost of Sales...... 54,087 27,028 -- 81,115 32,969 3,405 117,489
Gross Profit............. 32,312 (16,651) -- 15,661 21,583 (3,405) 33,839
Engineering and
development.............. 3,327 -- -- 3,327 7,809 -- 11,136
Selling, general and
administrative........... 9,654 10,404 620(L) 20,678 11,974 460(R) 33,112
Amortization of
goodwill................. 2,537 -- 1,780(M) 4,317 406 (160)(S) 5,363
-- -- -- 800(T)
In-process research and
development.............. -- -- -- -- 5,135 (5,135)(U) --
Special charges........... 3,240 -- -- 3,240 -- -- 3,240
-------- -------- ------- -------- ------- ------- ---------
Operating Income (Loss).. 13,554 (27,055) (2,400) (15,901) (3,741) 630 (19,012)
Interest and other
income................... 1,971 4 -- 1,975 323 -- 2,298
Interest and other
expense.................. (3,049) (2,224) -- (5,273) -- -- (5,273)
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Income Taxes and
Minority Interests..... 12,476 (29,275) (2,400) (19,199) (3,418) 630 (21,987)
Income taxes.............. 5,375 -- (5,375)(N) -- 100 (100)(V) --
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Minority Interests..... 7,101 (29,275) 2,975 (19,199) (3,518) 730 (21,987)
Minority interests in
earnings of subsidiary... -- -- -- -- -- -- --
-------- -------- ------- -------- ------- ------- ---------
Net Income (Loss)........ $ 7,101 $(29,275) $ 2,975 $(19,199) $(3,518) $ 730 $ (21,987)
======== ======== ======= ======== ======= ======= =========
Net Income (Loss) Per
Common Share
Basic.................... $ (0.67)(X)
=========
Diluted.................. $ (0.67)(X)
=========
Weighted Average Shares
Outstanding
Basic.................... 32,724(X)
=========
Diluted.................. 32,724(X)
=========
</TABLE>
F-26
<PAGE> 30
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT NACT NEW WORLD
MAJORITY MINORITY ACCESS AND
INTEREST INTEREST NEW WORLD RESURGENS RESURGENS
COMBINED ADJUSTMENTS ACCESS RESURGENS ADJUSTMENTS COMBINED
------------- ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products..................... 71,$831.... $ -- $71,831 $ -- $ -- $ 71,831
Service revenues...................... 14,568 -- 14,568 10,377 -- 24,945
------- ------- ------- -------- ------- --------
Total Sales......................... 86,399 -- 86,399 10,377 -- 96,776
Cost of products sold................. 40,588 90(H) 40,678 -- -- 40,678
Cost of services...................... 13,409 -- 13,409 27,028 -- 40,437
------- ------- ------- -------- ------- --------
Total Cost of Sales................. 53,997 90 54,087 27,028 -- 81,115
Gross Profit........................ 32,402 (90) 32,312 (16,651) -- 15,661
Engineering and development........... 3,327 -- 3,327 -- -- 3,327
Selling, general and administrative... 9,654 -- 9,654 10,404 620(L) 20,678
Amortization of goodwill.............. 2,297 240(I) 2,537 -- 1,780(M) 4,317
Special charges....................... 3,240 -- 3,240 -- -- 3,240
------- ------- ------- -------- ------- --------
Operating Income (Loss)............. 13,884 (330) 13,554 (27,055) (2,400) (15,901)
Interest and other income............. 1,971 -- 1,971 4 -- 1,975
Interest and other expense............ (3,049) -- (3,049) (2,224) -- (5,273)
------- ------- ------- -------- ------- --------
Income (Loss) Before Income Taxes
and Minority Interests............ 12,806 (330) 12,476 (29,275) (2,400) (19,199)
Income taxes.......................... 5,375 -- 5,375 -- (5,375)(N) --
------- ------- ------- -------- ------- --------
Income (Loss) Before Minority
Interests......................... 7,431 (330) 7,101 (29,275) 2,975 (19,199)
Minority interests in earnings of
subsidiary.......................... 1,228 (1,228)(J) -- -- -- --
------- ------- ------- -------- ------- --------
Net Income (Loss)................... $ 6,203 $ 898 $ 7,101 $(29,275) $ 2,975 $(19,199)
======= ======= ======= ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................... $ (0.73)(O)
========
Diluted............................. $ (0.73)(O)
========
Weighted Average Shares Outstanding
Basic............................... 26,220(O)
========
Diluted............................. 26,220(O)
========
</TABLE>
F-27
<PAGE> 31
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND
NACT NACT NEW
MAJORITY MINORITY WORLD ACCESS
INTEREST INTEREST NEW TELCO AND TELCO
COMBINED ADJUSTMENTS WORLD ACCESS TELCO ADJUSTMENTS COMBINED
-------- ------------- ------------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of products....................... $71,831 $ -- $71,831 $54,552 $ -- $126,383
Service revenues........................ 14,568 -- 14,568 -- -- 14,568
------ ------- ------- ------- ------- --------
Total Sales........................... 86,399 -- 86,399 54,552 -- 140,951
Cost of products sold................... 40,588 90(H) 40,678 32,969 (120)(P) 77,052
3,525(Q)
Cost of services........................ 13,409 -- 13,409 -- 13,409
------ ------ ------- ------- ------- --------
Total Cost of Sales................... 53,997 90 54,087 32,969 3,405 90,461
Gross Profit.......................... 32,402 (90) 32,312 21,583 (3,405) 50,490
Engineering and development............. 3,327 -- 3,327 7,809 -- 11,136
Selling, general and administrative..... 9,654 -- 9,654 11,974 460(R) 22,088
Amortization of goodwill................ 2,297 240(I) 2,537 406 (160)(S) 3,583
800(T)
In-process research and development..... -- -- -- 5,135 (5,135)(U) --
Special charges......................... 3,240 -- 3,240 -- -- 3,240
------ ------ ------- ------- ------- --------
Operating Income (Loss)............... 13,884 (330) 13,554 (3,741) 630 10,443
Interest and other income............... 1,971 -- 1,971 323 -- 2,294
Interest expense........................ (3,049) -- (3,049) -- -- (3,049)
------ ------ ------- ------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests.................. 12,806 (330) 12,476 (3,418) 630 9,688
Income taxes............................ 5,37 -- 5,375 100 (1,655)(W) 3,820
------ ------ ------- ------- ------- --------
Income (Loss) Before Minority
Interests........................... 7,431 (330) 7,101 (3,518) 2,285 5,868
Minority interests in earnings of
subsidiary............................ 1,228 (1,228)(J) -- -- -- --
------ ------ ------- ------- ------- --------
Net Income (Loss)..................... $6,203 $ 898 $ 7,101 $(3,518) $ 2,285 $ 5,868
====== ====== ======= ======= ======= ========
Net Income Per Common Share
Basic................................. $ 0.20(X)
========
Diluted............................... $ 0.19(X)
========
Weighted Average Shares Outstanding
Basic................................. 28,974(X)
========
Diluted............................... 30,655(X)
========
</TABLE>
F-28
<PAGE> 32
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND
NACT NACT
MAJORITY MINORITY NEW
INTEREST INTEREST WORLD
COMBINED ADJUSTMENTS ACCESS
------------- ----------- -------
<S> <C> <C> <C>
Sales of products......................................... $71,831 $ -- $71,831
Service revenues.......................................... 14,568 -- 14,568
------- ------- -------
Total Sales............................................. 86,399 -- 86,399
Cost of products sold..................................... 40,588 90(H) 40,678
Cost of services.......................................... 13,409 -- 13,409
------- ------- -------
Total Cost of Sales..................................... 53,997 90 54,087
Gross Profit............................................ 32,402 (90) 32,312
Engineering and development............................... 3,327 -- 3,327
Selling, general and administrative....................... 9,654 -- 9,654
Amortization of goodwill.................................. 2,297 240(I) 2,537
Special charges........................................... 3,240 -- 3,240
------- ------- -------
Operating Income........................................ 13,884 (330) 13,554
Interest and other income................................. 1,971 -- 1,971
Interest expense.......................................... (3,049) -- (3,049)
------- ------- -------
Income Before Income Taxes and Minority Interests....... 12,806 (330) 12,476
Income taxes.............................................. 5,375 -- 5,375
------- ------- -------
Income Before Minority Interests........................ 7,431 (330) 7,101
Minority interests in earnings of subsidiary.............. 1,228 (1,228)(J) --
------- ------- -------
Net Income.............................................. $ 6,203 $ 898 $ 7,101
======= ======= =======
Net Income Per Common Share
Basic................................................... $ 0.32(K)
=======
Diluted................................................. $ 0.30(K)
=======
Weighted Average Shares Outstanding
Basic................................................... 22,470(K)
=======
Diluted................................................. 23,969(K)
=======
</TABLE>
F-29
<PAGE> 33
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND WORLD
NACT MAJORITY ACCESS AND
INTEREST TELCO TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
------------- ------- ----------- ----------
<S> <C> <C> <C> <C>
Sales of products............................... $71,831 $54,552 $ -- $126,383
Service revenues................................ 14,568 -- -- 14,568
------- ------- ------- --------
Total Sales................................... 86,399 54,552 -- 140,951
Cost of products sold........................... 40,588 32,969 (120)(P) 76,962
3,525(Q)
Cost of services................................ 13,409 -- 13,409
------- ------- ------- --------
Total Cost of Sales........................... 53,997 32,969 3,405 90,371
Gross Profit.................................. 32,402 21,583 (3,405) 50,580
Engineering and development..................... 3,327 7,809 -- 11,136
Selling, general and administrative............. 9,654 11,974 460(R) 22,088
Amortization of goodwill........................ 2,297 406 (160)(S) 3,343
800(T)
In-process research and development............. -- 5,135 (5,135)(U) --
Special charges................................. 3,240 -- -- 3,240
------- ------- ------- --------
Operating Income.............................. 13,884 (3,741) 630 10,773
Interest and other income....................... 1,971 323 -- 2,294
Interest expense................................ (3,049) -- -- (3,049)
------- ------- ------- --------
Income Before Income Taxes and Minority
Interests.................................. 12,806 (3,418) 630 10,018
Income taxes.................................... 5,375 100 (1,655)(W) 3,820
------- ------- ------- --------
Income Before Minority Interests.............. 7,431 (3,518) 2,285 6,198
Minority interests in earnings of subsidiary.... 1,228 -- -- 1,228
------- ------- ------- --------
Net Income.................................... $ 6,203 $(3,518) $ 2,285 $ 4,970
======= ======= ======= ========
Net Income Per Common Share
Basic......................................... $ 0.18(X)
========
Diluted....................................... $ 0.17(X)
========
Weighted Average Shares Outstanding
Basic......................................... 26,947(X)
========
Diluted....................................... 28,627(X)
========
</TABLE>
F-30
<PAGE> 34
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND
WORLD NACT NACT
ACCESS NACT MAJORITY MAJORITY
WORLD ATI AND ATI MAJORITY INTEREST INTEREST
ACCESS ATI ADJUSTMENTS COMBINED INTEREST ADJUSTMENTS COMBINED
------- -------- ----------- -------- -------- ----------- -------------
<S> <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 7,569 370(D) 65,282
Cost of services................. 17,018 -- -- 17,018 5,756 -- 22,774
------- -------- ------- -------- ------- ------- --------
Total Cost of Sales............. 60,845 13,586 (70) 74,361 13,325 370 88,056
Gross Profit.................... 32,140 101 (80) 32,161 16,670 (370) 48,461
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
Amortization of goodwill......... 1,756 -- 200(B) 1,956 573 2,150(E) 4,679
------- -------- ------- -------- ------- ------- --------
Operating Income (Loss)......... 19,522 (10,447) (280) 8,795 6,423 (2,520) 12,698
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 (2,520) 14,625
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 (2,520) 8,132
Minority Interests in Earnings of
Subsidiary...................... -- -- -- -- -- (1,433)(F) (1,433)
------- -------- ------- -------- ------- ------- --------
Net Income (Loss)............... $13,134 $(10,383) $ 3,520 $ 6,271 $ 4,381 $(3,953) $ 6,699
======= ======== ======= ======== ======= ======= ========
Net Income (Loss) Per Common
Share
Basic...........................
Diluted.........................
Weighted Average Shares
Outstanding
Basic...........................
Diluted.........................
<CAPTION>
NEW
NACT WORLD ACCESS
MINORITY AND
INTEREST NEW RESURGENS RESURGENS TELCO
ADJUSTMENTS WORLD ACCESS RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS
----------- ------------ --------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products................ $ -- $109,431 $ -- $ -- $ 109,431 $113,013 $ --
Service revenues................. -- 27,086 165,489 -- 192,575 -- --
------ -------- --------- ------- --------- -------- --------
Total Sales..................... -- 136,517 165,489 -- 302,006 113,013 --
Cost of products sold............ 180(G) 65,462 -- -- 65,462 72,638 (240)(O)
7,050(P)
Cost of services................. -- 22,774 246,494 1,230(K) 270,498 -- --
------ -------- --------- ------- --------- -------- --------
Total Cost of Sales............. 180 88,236 246,494 1,230 335,960 72,638 6,810
Gross Profit.................... (180) 48,281 (81,005) (1,230) (33,954) 40,375 (6,810)
Engineering and development...... -- 8,906 -- -- 8,906 14,927 --
Selling, general and
administrative.................. -- 22,178 74,448 -- 96,626 28,181 925(Q)
Amortization of goodwill......... 480(H) 5,159 -- 3,560(L) 8,719 669 (669)(R)
1,500(S)
------ -------- --------- ------- --------- -------- --------
Operating Income (Loss)......... (660) 12,038 (155,453) (4,790) (148,205) (3,402) (8,566)
Interest and other income........ -- 3,301 642 -- 3,943 692 --
Interest and other expense....... -- (1,374) (16,909) -- (18,283) -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Income
Taxes and Minority
Interests..................... (660) 13,965 (171,720) (4,790) (162,545) (2,710) (8,566)
Income taxes..................... -- 6,493 -- (6,493)(M) -- -- --
------ -------- --------- ------- --------- -------- --------
Income (Loss) Before Minority
Interests..................... (660) 7,472 (171,720) 1,703 (162,545) (2,710) (8,566)
Minority Interests in Earnings of
Subsidiary...................... 1,433(I) -- -- -- -- -- --
------ -------- --------- ------- --------- -------- --------
Net Income (Loss)............... $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545) $ (2,710) $ (8,566)
====== ======== ========= ======= ========= ======== ========
Net Income (Loss) Per Common
Share
Basic...........................
Diluted.........................
Weighted Average Shares
Outstanding
Basic...........................
Diluted.........................
<CAPTION>
NEW
WORLD ACCESS,
RESURGENS
AND TELCO
COMBINED
--------------
<S> <C>
Sales of products................ $ 222,444
Service revenues................. 192,575
---------
Total Sales..................... 415,019
Cost of products sold............ 144,910
Cost of services................. 270,498
---------
Total Cost of Sales............. 415,408
Gross Profit.................... (389)
Engineering and development...... 23,833
Selling, general and
administrative.................. 125,732
Amortization of goodwill......... 10,219
---------
Operating Income (Loss)......... (160,173)
Interest and other income........ 4,635
Interest and other expense....... (18,283)
---------
Income (Loss) Before Income
Taxes and Minority
Interests..................... (173,821)
Income taxes..................... --
---------
Income (Loss) Before Minority
Interests..................... (173,821)
Minority Interests in Earnings of
Subsidiary...................... --
---------
Net Income (Loss)............... $(173,821)
=========
Net Income (Loss) Per Common
Share
Basic........................... $ (5.54)(U)
=========
Diluted......................... $ (5.54)(U)
=========
Weighted Average Shares
Outstanding
Basic........................... 31,380(U)
=========
Diluted......................... 31,380(U)
=========
</TABLE>
F-31
<PAGE> 35
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND NEW
NACT NACT WORLD ACCESS
MAJORITY MINORITY AND
INTEREST INTEREST NEW RESURGENS RESURGENS
COMBINED ADJUSTMENTS WORLD ACCESS 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.................. 65,282 180(G) 65,462 -- -- 65,462
Cost of services....................... 22,774 -- 22,774 246,494 1,230(K) 270,498
-------- ------ -------- --------- ------- ---------
Total Cost of Sales.................. 88,056 180 88,236 246,494 1,230 335,960
Gross Profit......................... 48,461 (180) 48,281 (81,005) (1,230) (33,954)
Engineering and development............ 8,906 -- 8,906 -- -- 8,906
Selling, general and administrative.... 22,178 -- 22,178 74,448 -- 96,626
Purchased research and development..... -- -- -- -- -- --
Amortization of goodwill............... 4,679 480(H) 5,159 -- 3,560(L) 8,719
-------- ------ -------- --------- ------- ---------
Operating Income (Loss).............. 12,698 (660) 12,038 (155,453) (4,790) (148,205)
Interest and other income.............. 3,301 -- 3,301 642 -- 3,943
Interest and other expense............. (1,374) -- (1,374) (16,909) -- (18,283)
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Income Taxes and
Minority Interests................. 14,625 (660) 13,965 (171,720) (4,790) (162,545)
Income taxes........................... 6,493 -- 6,493 -- (6,493)(M) --
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Minority
Interests.......................... 8,132 (660) 7,472 (171,720) 1,703 (162,545)
Minority Interests in Earnings of
Subsidiary........................... (1,433) 1,433(I) -- -- -- --
-------- ------ -------- --------- ------- ---------
Net Income (Loss).................... $ 6,699 $ 773 $ 7,472 $(171,720) $ 1,703 $(162,545)
========= ====== ======== ========= ======= =========
Net Income (Loss) Per Common Share
Basic................................ $ (6.53)(N)
=========
Diluted.............................. $ (6.53)(N)
=========
Weighted Average Shares Outstanding
Basic................................ 24,875(N)
=========
Diluted.............................. 24,875(N)
=========
</TABLE>
F-32
<PAGE> 36
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD
ACCESS,
ATI AND NACT NACT NEW WORLD
MAJORITY MINORITY NEW ACCESS
INTEREST INTEREST WORLD TELCO AND TELCO
COMBINED ADJUSTMENTS ACCESS TELCO ADJUSTMENTS COMBINED
------------ ----------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of products....................... $109,431 $ -- $109,431 $113,013 $ -- $222,444
Service revenues........................ 27,086 -- 27,086 -- -- 27,086
-------- ------ -------- -------- ------- --------
Total Sales........................... 136,517 -- 136,517 113,013 -- 249,530
Cost of products sold................... 65,282 180(G) 65,462 72,638 (240)(O) 144,910
7,050(P)
Cost of services........................ 22,774 -- 22,774 -- -- 22,774
-------- ------ -------- -------- ------- --------
Total Cost of Sales................... 88,056 180 88,236 72,638 6,810 167,684
Gross Profit.......................... 48,461 (180) 48,281 40,375 (6,810) 81,846
Engineering and development............. 8,906 -- 8,906 14,927 -- 23,833
Selling, general and administrative..... 22,178 -- 22,178 28,181 925(Q) 51,284
Amortization of goodwill................ 4,679 480(H) 5,159 669 (669)(R) 6,659
1,500(S)
-------- ------ -------- -------- ------- --------
Operating Income (Loss)............... 12,698 (660) 12,038 (3,402) (8,566) 70
Interest and other income............... 3,301 -- 3,301 692 -- 3,993
Interest and other expense.............. (1,374) -- (1,374) -- -- (1,374)
-------- ------ -------- -------- ------- --------
Income (Loss) Before Income Taxes and
Minority Interests.................. 14,625 (660) 13,965 (2,710) (8,566) 2,689
Income taxes............................ 6,493 -- 6,493 -- (3,890)(T) 2,603
-------- ------ -------- -------- ------- --------
Income (Loss) Before Minority
Interests........................... 8,132 (660) 7,472 (2,710) (4,676) 86
Minority Interests in Earnings of
Subsidiary............................ (1,433) 1,433(I) -- -- -- --
-------- ------ -------- -------- ------- --------
Net Income (Loss)..................... $ 6,699 $ 773 $ 7,472 $ (2,710) $(4,676) $ 86
======== ====== ======== ======== ======= ========
Net Income Per Common Share
Basic................................. $ 0.00(U)
========
Diluted............................... $ 0.00(U)
========
Weighted Average Shares Outstanding
Basic................................. 27,630(U)
========
Diluted............................... 29,095(U)
========
</TABLE>
F-33
<PAGE> 37
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT NACT
MAJORITY MINORITY
INTEREST INTEREST NEW
COMBINED ADJUSTMENTS WORLD ACCESS
------------- ----------- --------------
<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................................. 65,282 180(G) 65,462
Cost of services...................................... 22,774 -- 22,774
-------- ----- --------
Total Cost of Sales................................. 88,056 180 88,236
Gross Profit........................................ 48,461 (180) 48,281
Engineering and development........................... 8,906 -- 8,906
Selling, general and administrative................... 22,178 -- 22,178
Purchased research and development.................... -- -- --
Amortization of goodwill.............................. 4,679 480(H) 5,159
-------- ----- --------
Operating Income.................................... 12,698 (660) 12,038
Interest and other income............................. 3,301 -- 3,301
Interest and other expense............................ (1,374) -- (1,374)
-------- ----- --------
Income Before Income Taxes and Minority Interests... 14,625 (660) 13,965
Income taxes.......................................... 6,493 -- 6,493
-------- ----- --------
Income Before Minority Interests.................... 8,132 (660) 7,472
Minority Interests in Earnings of Subsidiary.......... (1,433) 1,433(I) --
-------- ----- --------
Net Income.......................................... $ 6,699 $ 773 $ 7,472
======== ===== ========
Net Income Per Common Share
Basic............................................... $ 0.35(J)
========
Diluted............................................. $ 0.33(J)
========
Weighted Average Shares Outstanding
Basic............................................... 21,125(J)
========
Diluted............................................. 22,591(J)
========
</TABLE>
F-34
<PAGE> 38
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
WORLD ACCESS,
ATI AND NACT
MAJORITY WORLD ACCESS
INTEREST TELCO AND TELCO
COMBINED TELCO ADJUSTMENTS COMBINED
-------------- -------- ----------- --------------
<S> <C> <C> <C> <C>
Sales of products................. $109,431 $113,013 $ -- $222,444
Service revenues.................. 27,086 -- -- 27,086
-------- -------- ------- --------
Total Sales..................... 136,517 113,013 -- 249,530
Cost of products sold............. 65,282 72,638 (240)(O) 144,730
7,050(P)
Cost of services.................. 22,774 -- 22,774
-------- -------- ------- --------
Total Cost of Sales............. 88,056 72,638 6,810 167,504
Gross Profit.................... 48,461 40,375 (6,810) 82,026
Engineering and development....... 8,906 14,927 -- 23,833
Selling, general and
administrative.................. 22,178 28,181 925(Q) 51,284
Amortization of goodwill.......... 4,679 669 (669)(R) 6,179
1,500(S)
-------- -------- ------- --------
Operating Income (Loss)......... 12,698 (3,402) (8,566) 730
Interest and other income......... 3,301 692 -- 3,993
Interest and other expense........ (1,374) -- -- (1,374)
-------- -------- ------- --------
Income (Loss) Before Income
Taxes and Minority
Interests.................... 14,625 (2,710) (8,566) 3,349
Income taxes...................... 6,493 -- (3,890)(T) 2,603
-------- -------- ------- --------
Income (Loss) Before Minority
Interests.................... 8,132 (2,710) (4,676) 746
Minority Interests in Earnings of
Subsidiary...................... (1,433) -- -- (1,433)
-------- -------- ------- --------
Net Income (Loss)............... $ 6,699 $ (2,710) $(4,676) $ (687)
======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic........................... $ (0.03)(U)
========
Diluted......................... $ (0.03)(U)
========
Weighted Average Shares
Outstanding
Basic........................... 25,602(U
========
Diluted......................... 25,602(U)
========
</TABLE>
F-35
<PAGE> 39
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
GENERAL HISTORICAL INFORMATION:
ACQUISITIONS OF ATI AND NACT
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 New 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, to in-process research and development projects and to goodwill.
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. See Note 2 to Consolidated Financial Statements in
the World Access June 30 Form 10-Q for further descriptions of these
acquisitions.
AEROTEL LITIGATION
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
Note 8 to Consolidated Financial Statements in the World Access June 30 Form
10-Q for further description of this litigation.
As part of the negotiations relating to the acquisition of NACT, World
Access and GST Telecommunications, Inc. agreed to share evenly any Aerotel
judgment against NACT, including NACT's legal fees. Subsequent to the NACT Stock
Purchase, World Access has been actively engaged in settlement negotiations. On
July 9, 1998, World Access, GST and Aerotel entered into a Memorandum of
Understanding to settle the Aerotel litigation. Including legal fees, World
Access now estimates its Aerotel settlement costs will be approximately $3.3
million. The settlement costs expected to be incurred by World Access have been
accounted for as additional NACT purchase price as of June 30, 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT
Overview. The nature of the efforts required to develop the purchased
in-process technology into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification, and test
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features, and technical
performance requirements.
The value of the purchased in-process technology was determined by
estimating the projected net cash flows related to such products, including
costs to complete the development of the technology and the future revenues to
be earned upon commercialization of the products. These cash flows were
discounted back to their net present value. The resulting projected net cash
flows from such projects were based on management's estimates of revenues and
operating profits related to such projects. These estimates were based on
several assumptions, including those summarized below for each respective
acquisition.
If these projects to develop commercial products based on the acquired
in-process technology are not successfully completed the sales and profitability
of New World Access may be adversely affected in future periods. Additionally,
the value of other intangible assets may become impaired.
NACT. 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
F-36
<PAGE> 40
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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. The purchased in-process technology acquired in the NACT
acquisition was comprised of nine projects related to switching systems. These
projects were scheduled to be released between February 1998 and December 1999.
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. None of
the in-process projects considered in the write-off had attained technological
feasibility.
NACT had thirteen projects (the nine switching projects noted above and the
related sub projects) in development at the time of acquisition. These projects
were at multiple stages along NACT's development timeline. Some projects were
beginning testing in NACT labs; others were at earlier stages of planning and
designing. Eleven projects were scheduled for release between February and
December of 1998. The remaining two projects were scheduled for staggered
release over 1998 and 1999. Revenue projections for the in-process technologies
reflected the anticipated release dates of each project.
Revenue attributable to in-process technology was assumed to increase in
the first five years of the twelve-year projection at annual rates ranging from
52.7% to 7.2%, decreasing over the remaining years at annual rates ranging from
- -2.7% to -61.2% as other products are released in the marketplace. Projected
annual revenue attributable to in-process technology ranged from approximately a
low of $6.3 million to a high of $117.2 million within the term of the
projections. These projections were based on assumed penetration of the existing
customer base, synergies as a result of the NACT acquisition, and movement into
new markets. Projected revenues from in-process technology were assumed to peak
in 2002 and decline from 2003 through 2009 as other new products are expected to
enter the market.
In-process technology's contribution to the operating profit of NACT
(earnings before interest, taxes and depreciation and amortization) was
projected to grow within the projection period at annual rates ranging from a
high of 119.2% to a low of 11.0% during the first five years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately $1.7 million to $34
million within the term of the projections.
The discount rate used to value the existing technology of NACT was 14.0%.
This discount rate was estimated relative to the overall business discount rate
of 15.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of NACT was
15.0%. This discount rate was estimated relative to the overall business
discount rate of 15.0% based on (1) the incomplete status of the products
expected to utilize the in-process technology (i.e., development risk), (2) the
expected market risk of the planned products relative to the existing products,
(3) the emphasis on targeting larger customers for the planned products, (4) the
expected demand for the products from current and prospective NACT customers,
(5) the anticipated increase in NACT's sales force, and (6) the nature of
remaining development tasks relative to previous development efforts.
F-37
<PAGE> 41
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Management estimates that the costs to develop the in-process technology
acquired in the NACT acquisition will be approximately $4.1 million in the
aggregate through the year 1999 ($3,249,000 in 1998 and $829,000 in 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.
ATI. 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 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.
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. The purchased-in-process technology
acquired in the ATI acquisition was comprised of three primary projects related
to high-performance, digital microwave/millimeter radio equipment. Each project
consists of multiple products. These projects were at multiple stages along
ATI's typical development timeline. Some projects were beginning testing in ATI
labs; others were at earlier stages of planning and designing. The majority of
the products were scheduled to be released during 1998 and 1999. Revenue
projections for the in-process technologies reflected the anticipated release
dates of each project.
Revenue attributable to in-process technology was estimated to increase
within the first three years of the seven-year projection at annual rates
ranging from a high of 240.7% to a low of 2.3%, decreasing within the remaining
years at annual rates ranging from -30.9% to -60.9% as other products are
released in the marketplace. Projected annual revenue attributable to in-process
technology ranged from approximately a low of $10.1 million to a high of $71.1
million within the term of the projections. These projections were based on
assumed penetration of the existing customer base, synergies as a result of the
ATI acquisition, and movement into new markets. Projected revenues from
in-process technology were assumed to peak in 2001 and decline from 2003 through
2004 as other new products are expected to enter the market.
In-process technology's contribution to the operating profit of ATI
(earnings before interest, taxes and depreciation and amortization) was
estimated to grow within the projection period at annual rates ranging from a
high of 665.9% to a low of 43.9% during the first four years, decreasing during
the remaining years of the projection period similar to the revenue growth
projections described above. Projected in-process technology's annual
contribution to operating profit ranged from approximately a low of -$900,000 to
a high of $9.1 million within the term of the projections.
The discount rate used to value the existing technology of ATI was 23.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the completed status of the products utilizing existing
technology (i.e., the lack of development risk), and (2) the potential for
obsolescence of current products in the marketplace.
The discount rate used to value the in-process technology of ATI was 26.0%.
This discount rate was estimated relative to the overall business discount rate
of 25.0% based on (1) the incomplete status of the products expected to utilize
the in-process technology (i.e., development risk), (2) the expected market risk
of the planned products relative to the existing products, (3) the emphasis on
different markets than those currently pursued by ATI, and (4) the nature of
remaining development tasks relative to previous development efforts.
Management estimates that the costs to develop the in-process technology
acquired in the ATI acquisition will be approximately $24.3 million in the
aggregate through the year 2002 ($3.3 million, $7.2
F-38
<PAGE> 42
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
million, $7.6 million, $5.1 million, and $1.1 million in 1998, 1999, 2000, 2001,
and 2002, respectively). 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.
Telco. Telco develops and manufactures products focused on providing
integrated access for network services. Telco's products can be separated into
three categories: (1) broadband transmission products, (2) network access
products, and (3) bandwidth optimization products. Telco's products are deployed
at the edge of the service provider's networks to provide organizations with a
flexible, cost-effective means of transmitting voice, data, video and image
traffic over public or private networks.
At the time of acquisition, Telco had eight primary projects in development
relating to next-generation telecommunication and data network hardware. These
projects were at various stages in the development process. Some were about to
enter the testing phase of the initial hardware prototype, while others were
still in the early concept and design specification stages. These eight projects
were scheduled for commercial release at various points in time from December
1998 through late 1999/early 2000.
Telco's in-process research and development projects are being developed to
run on new communications protocols and technologies not employed in its current
products. These include HDSL, SONET, Voice over IP and ATM inverse multiplexing.
Additionally, the products to be commercialized from Telco's in process research
and development are expected to include interface support not in Telco's current
product line, including E1, DS3 and OC3.
None of the in-process projects at Telco considered in the write-off are
expected to achieve technological feasibility before the consummation of World
Access' acquisition of Telco. Furthermore, if the projects are not completed as
planned, the in-process research and development will have no alternative use.
Failure of the in process technologies to achieve technological feasibility may
adversely affect the future profitability of World Access.
Revenue attributable to Telco's aggregate in-process technology was assumed
to increase over the first six years of the projection period at annual rates
ranging from a high of 195% to a low of zero growth, reflecting both the
displacement of Telco's old products by these new products as well as the
expected growth in the overall market in which Telco's products compete.
Thereafter, revenues are projected to decline over the remaining projection
period at annual rates ranging from -14% to -42%, as the acquired in process
technologies become obsolete and are replaced by newer technologies.
Management's projected annual revenues attributable to the aggregate
acquired in-process technologies, which assume that all such technologies
achieve technological feasibility, ranged from a low of approximately $28
million to a high of approximately $276 million. Projected revenues were
projected to peak in 2004 and decline thereafter through 2009 as other new
products enter the market.
The acquired in-process technology's contribution to the operating income
of Telco (and subsequently World Access) was projected to grow over the first
five years of the projection period at annual rates ranging from a high of 142%
to a low of 20% with one intermediate year of marginally declining operating
income. Thereafter, the contribution to operating income was projected to
decline through the projection period. The acquired in-process technology's
contribution to operating income ranged from a loss of approximately $5 million
to a high of approximately $86 million.
The discount rate used to value the existing technology was 20.0%. This
discount rate was selected because of the asset's intangible characteristics,
the risk associated with the economic life expectations of the technology, and
the risk associated with the financial assumptions with respect to the
projections used in the analysis.
The discount rate used to value the in-process technologies was 25.0%. This
discount rate was selected due to several incremental inherent risks. First the
actual useful economic life of such technologies may differ
F-39
<PAGE> 43
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
from the estimates used in the analysis. Second, risks associated with the
financial projections on the specific products that comprise the acquired
in-process research and development. The third factor is the incomplete and
unproven nature of the technologies. Finally, future technological advances that
are currently unknown may negatively impact the economic and functional
viability of the in-process R&D.
Management expects that the cost to complete the development of the
acquired in-process technologies and to commercialize the resulting products
will aggregate approximately $16 million through 2001. Over the projection
period, management expects to spend an additional aggregate $46 million on
sustaining development efforts relating to the acquired in-process technologies.
These sustaining efforts include bug fixing, form-factor changes, and identified
upgrades.
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. New
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 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.................. $ 46,660
--------
Allocation:
Minority interest in subsidiaries......................... (12,443)
Adjust assets and liabilities.............................
In-process research and development costs(i)........... (21,900)
Acquired technology(ii)................................ (4,400)
Deferred tax liability(iii)............................ 1,700
--------
(37,043)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 9,617
========
</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. New 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.
(ii) Represents the purchase price assigned to the acquired technology of
NACT based upon the valuation performed in connection with the NACT Stock
Purchase.
(iii) Establish a deferred tax liability related to the acquired
technology.
F-40
<PAGE> 44
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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. New 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>
<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).............................. (2,179)
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)
--------
(29,479)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 71,251
========
</TABLE>
(i) Represents an estimate of $1.0 million to be paid to the creditors of
Resurgens under a cash settlement plan proposed by New World Access and
approximately $2.0 million to be paid to governmental creditors.
(ii) The value assigned to the 3,750,000 restricted New World Access shares
to be issued to the creditors and Renaissance Partners at the closing date will
be $25.17, the seven trading days average closing price of New World Access
common stock, including the three days prior and the three days subsequent to
May 12, 1998, the date economic terms of the Resurgens Transaction were
announced, less a 30% discount attributable to the restrictive nature of the
shares. New 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,
(2) the number of shares subject to restriction, and (3) the volatility of New
World Access common stock [the closing price on the announcement date was $37.06
and the closing price on August 28, 1998 was $23.13, a 37.6% reduction].
Management of New World Access believes the discount rate to be used in valuing
these restricted shares is appropriate and reasonable.
In addition to the shares noted above, the creditors and Renaissance
Partners will also be issued 7,500,000 restricted New World Access shares at the
closing (the "Escrowed Shares"). These shares will be immediately placed into
escrow and will be valued at par value only, or $75,000. As it becomes probable
that
F-41
<PAGE> 45
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the conditions for release from escrow will be met, the fair market value of the
shares as measured at that time will be recorded as additional goodwill and
stockholders' equity, respectively.
Specifically, the Escrowed Shares will be released in the amounts and on
the dates specified below if the sum of the EBITDA for Resurgens for the
performance periods set forth below equals or exceeds the Target EBITDA for such
performance period as set forth below:
<TABLE>
<CAPTION>
ESCROWED SHARES
TO BE
PERFORMANCE PERIOD RELEASE DATE RELEASED TARGET EBITDA
------------------ ------------ --------------- -------------
<S> <C> <C> <C>
July 1, 1998 to and including
December 31, 1998 (the "First
Performance Period")............ February 15, 1999 1,875,000 $ 7,500,000
January 1, 1999 to and including
December 31, 1999 (the "Second
Performance Period")............ February 15, 2000 2,812,500 $29,000,000
January 1, 2000 to and including
December 31, 2000 (the "Third
Performance Period)............. February 15, 2001 2,812,500 $36,500,000
</TABLE>
Notwithstanding the foregoing, if the Exchange Closing Date is (a) on or
after August 16, 1998 but prior to September 30, 1998, then the First
Performance Period shall commence on September 1, 1998 and shall terminate on
(and including) December 31, 1998 and the Target EBITDA with respect thereto
shall be reduced to $6,700,000, or (b) on or after September 30, 1998, then the
First Performance Period shall commence on the first day of the calendar month
in which the Exchange Closing occurs and shall terminate on (and including) the
last day of the sixth calendar month following the month in which the Exchange
Closing occurs, the release date shall be forty-five (45) days after the end of
such period and the Target EBITDA shall be equal to the sum of (i) $2,100,000
for each calendar month of 1998 included in the First Performance Period and
(ii) $2,400,000 for each calendar month of 1999 included in the First
Performance Period.
If, after the Exchange, the EBITDA of Resurgens is less than the Target
EBITDA required for the release of Escrowed Shares in either of the First or
Second Performance Periods (and with respect to the Second Performance Period is
no less than zero), then, notwithstanding anything described herein, the
Escrowed Shares shall be released if the actual cumulative EBITDA for Resurgens
for such Performance Period and any subsequent Performance Periods equals or
exceeds the cumulative Target EBITDA for such Performance Periods.
Notwithstanding anything to the contrary, (a) if during any calendar
quarter of the Second Performance Period, the closing price per share of the
World Access Common Stock as reported by Nasdaq equals or exceeds $65.00 for any
five consecutive trading days during such calendar quarter, then 25% of all of
the shares of Escrowed Shares shall be released on February 15, 2000, provided
that if no Escrowed Shares are eligible for release during any such calendar
quarter, then such Escrowed Shares shall become eligible for release in a
subsequent calendar quarter of the Second Performance Period if the closing
price per share of the Holdco Common Stock as reported by Nasdaq equals or
exceeds $65.00 for a total number of consecutive trading days during such
subsequent calendar quarter equal to or exceeding the total number of trading
days which such closing price was required to equal or exceed for (i) such
subsequent calendar quarter and (ii) each of the previous calendar quarters
beginning with the calendar quarter for which such Escrowed Shares were not
eligible for release; (b) if the EBITDA of Resurgens for the Second Performance
Period equals or exceeds $52,775,000, then the Escrowed Shares related to the
Third Performance Period shall be released on February 15, 2000; and (c) all of
the Escrowed Shares shall be released upon a Change of Control (as defined in
the Exchange Agreement).
F-42
<PAGE> 46
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(iii) The combined historical accounts of Resurgens include pre-petition
creditor liabilities of $334.5 million, which are classified as "liabilities
subject to compromise," and borrowings under the WorldCom, Inc.
debtor-in-possession financing facility of $22.0 million as of June 30, 1998,
respectively. These liabilities will be satisfied in connection with the Plan of
Reorganization, which has been approved by the creditors committee and is
expected to be confirmed by the bankruptcy court in early September 1998. Upon
the confirmation of the Plan of Reorganization and the closing of the Resurgens
Transaction, the creditors will receive shares of RCG common stock in exchange
for the surrender of all of their claims against RCG. Immediately thereafter,
the creditors' shares of RCG will be cancelled and automatically converted into
the right to receive shares of New World Access Common Stock, a portion of which
will be received directly and a portion of which will be deposited into escrow
pending the satisfaction of certain conditions. All such shares of New World
Access Common Stock are subject to certain contractual restrictions.
The confirmation of the Plan of Reorganization is a condition precedent to
the closing of the Resurgens Transaction. Therefore, the combined historical
stockholders deficit of $354.4 million as of June 30, 1998 has been adjusted to
reflect a $352.6 million reduction for the liabilities subject to compromise and
the WorldCom, Inc. debtor-in-possession financing facility for purposes of the
unaudited pro forma combined balance sheet.
(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.
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 $73.9 million. Since this charge is directly related to the
acquisition and will not recur, the Unaudited Pro Forma Statements of Earnings
have been prepared excluding this charge. New 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.
F-43
<PAGE> 47
NEW WORLD ACCESS
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>
<CAPTION>
<S> <C> <C>
Purchase price:
Stock issued in exchange for Telco shares(i).............. $188,230
Fair market value of World Access options issued in
exchange for Telco options............................. 9,700
--------
Total stock and options........................... $ 197,930
Fees and expenses related to the merger................... 3,750
---------
Total purchase price.............................. 201,680
---------
Allocation:
Historical stockholders' equity........................... (52,955)
Adjust assets and liabilities:
Write-down of inventories related to outsourcing,
recent procurement agreements, excess quantities
related to reduced demand of certain legacy products
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
Trademarks............................................. (7,400)
Establish deferred tax asset(ii)....................... (16,000)
Acquired technology(iii)............................... (56,400)
In-process research and development costs(iv).......... (73,900)
Deferred tax liabilities(v)............................ 24,900
---------
(171,555)
---------
Unallocated excess purchase price over net assets
acquired.................................................. $ 30,125
=========
</TABLE>
(i) Based on the terms of the Telco Merger Agreement and the value of World
Access Common Stock as of August 28, 1998, Telco stockholders are currently
expected to receive approximately 6.5 million freely tradeable shares of New
World Access common stock at the time of the Telco Merger. The value assigned to
these shares will be $29.26 per share, the seven trading days average closing
price of World Access Common Stock which include the three trading days prior
and the three trading days subsequent to June 4, 1998, the date economic terms
of the Telco Merger were announced.
(ii) 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
and New World Access. It is the opinion of management that these tax assets are
likely to be utilized by Telco or New World Access.
(iii) The value of the acquired technology of $56.4 million is based on a
preliminary valuation report prepared by an independent appraiser and represents
the value of Telco's current technology calculated using the income approach.
(iv) The amount of in-process research and development costs of $73.9
million is based on a preliminary valuation report prepared by an independent
appraiser, 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. New World Access will obtain an
updated valuation of the in-process research and development as of the closing
of the Telco Merger for use in determining the final purchase accounting for the
Telco Merger.
F-44
<PAGE> 48
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(v) Establish deferred tax liabilities related to the identifiable
intangible assets.
(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 SIX MONTHS ENDED
JUNE 30, 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 New World Access historical statement of earnings.
(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.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of the acquired technology relating to the majority
interest portion of NACT over 8 years.
(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 New World Access historical statement of earnings.
(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.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(H) Amortization of the acquired technology relating to the minority
interest portion of NACT over 8 years.
(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 New World Access common stock issued in the
merger calculated in accordance with SFAS 128.
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.
F-45
<PAGE> 49
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New 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) Amortization of acquired technology of Telco over 8 years.
(R) Amortization of trademarks of Telco over 8 years.
(S) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the merger.
(T) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(U) Eliminate the one-time non-recurring in-process research and
development charge recorded by Telco in connection with its acquisition of
Jupiter Technology, Inc. which was consummated on January 26, 1998. This
write-off of in-process research and development does not relate to the
transaction between World Access and Telco, but does represent a significant one
time charge that should be eliminated for purposes of presenting pro forma
financial information.
(V) Adjust tax provision for the benefit of the loss incurred by the
combined entities.
(W) To record a reduction in tax expense related to the reduction of the
deferred tax liability established in conjunction with the allocation of
purchase price to acquired technology and trademarks.
(X) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of New 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.
NACT MAJORITY INTEREST PRO FORMA ADJUSTMENTS
(D) Amortization of acquired technology relating to the majority interest
portion of NACT over 8 years.
(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.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(G) Amortization of acquired technology relating to the minority interest
portion of NACT over 8 years.
(H) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(I) Reverse the minority interests in earnings of NACT.
F-46
<PAGE> 50
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(J) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of New 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) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(N) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New World Access common stock issued to
Resurgens's creditors and Renaissance Partners calculated in accordance with
SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(O) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(P) Amortization of acquired technology of Telco over 8 years.
(Q) Amortization of trademarks of Telco over 8 years.
(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 Telco loss and pro forma
adjustments, if applicable.
(U) Represents basic and diluted earnings per share, including
approximately 6.5 million shares of New 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.
F-47
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Current Report (Form 8-K/A, Amendment
No. 1) of World Access, Inc. of our report dated October 15, 1997, with respect
to the consolidated financial statements of Telco Systems, Inc. for the year
ended August 31, 1997, and to the incorporation by reference of such report in
the Registration Statements (Form S-8 Nos. 33-77918, 33-47752, 333-17741 and
333-59347 and Form S-3 No. 333-43497) of World Access, Inc.
Ernst & Young LLP
Boston, Massachusetts
September 23, 1998
