<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q/A
AMENDMENT NO. 1
(AMENDING PART I, ITEMS 1 AND 2 AND PART II, ITEM 6)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE THREE MONTHS ENDED MARCH 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-19998
WORLD ACCESS, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 65-0044209
(State of Incorporation) (I.R.S. Employer Identification No.)
945 E. PACES FERRY ROAD,
SUITE 2240,
ATLANTA, GEORGIA 30326
(Address of principal executive offices) (Zip Code)
(404) 231-2025
(Registrant's telephone number)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO
The number of shares outstanding of the Registrant's common stock, par
value $.01 per share, at May 20, 1998 was 21,915,043.
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents........................................ $ 63,278,252 $118,065,045
Marketable securities....................................... 3,500,000 --
Accounts receivable......................................... 39,683,071 20,263,971
Notes receivable............................................ 6,908,270 2,050,000
Inventories................................................. 28,340,209 22,426,918
Other current assets........................................ 7,153,447 8,873,723
------------ ------------
Total Current Assets.............................. 148,863,249 171,679,657
Property and equipment...................................... 13,940,900 5,704,585
Investment in affiliate..................................... -- 5,002,000
Goodwill.................................................... 73,651,856 31,660,201
Other assets................................................ 12,165,155 11,236,298
------------ ------------
Total Assets...................................... $248,621,160 $225,282,741
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt............................................. $ 1,883,877 $ 81,739
Accounts payable............................................ 17,592,293 9,339,588
Accrued payroll and benefits................................ 2,338,117 2,589,461
Purchase price payable...................................... -- 3,700,000
Other accrued liabilities................................... 8,895,260 2,219,237
------------ ------------
Total Current Liabilities......................... 30,709,547 17,930,025
Long-term debt.............................................. 115,527,707 115,263,984
Noncurrent liabilities...................................... 1,686,026 333,802
Minority interests.......................................... 11,593,650 --
------------ ------------
Total Liabilities................................. 159,516,930 133,527,811
------------ ------------
Stockholders' equity Common Stock........................... 217,059 193,062
Capital in excess of par value.............................. 130,289,184 84,162,478
Retained earnings (deficit)................................. (41,402,013) 7,399,390
------------ ------------
Total Stockholders' Equity........................ 89,104,230 91,754,930
------------ ------------
Total Liabilities and Stockholders' Equity........ $248,621,160 $225,282,741
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Sales of products........................................... $ 28,228,956 $15,470,050
Service revenues............................................ 7,502,089 4,781,374
------------ -----------
Total Sales............................................... 35,731,045 20,251,424
Cost of products sold....................................... 16,772,449 9,969,627
Cost of services............................................ 7,427,684 4,083,481
------------ -----------
Total Cost of Sales....................................... 24,200,133 14,053,108
------------ -----------
Gross Profit.............................................. 11,530,912 6,198,316
Engineering and development................................. 788,184 316,410
Selling, general and administrative......................... 3,255,854 1,917,563
Amortization of goodwill.................................... 863,997 284,131
In-process research and development......................... 50,000,000 --
Special charges............................................. 3,240,000 --
------------ -----------
Operating Income (Loss)................................... (46,617,123) 3,680,212
Interest and other income................................... 1,269,284 367,186
Interest expense............................................ (1,514,913) (28,930)
------------ -----------
Income (Loss) Before Income Taxes and Minority
Interests.............................................. (46,862,752) 4,018,468
Income taxes................................................ 1,255,000 1,406,000
------------ -----------
Income (Loss) Before Minority Interests................... (48,117,752) 2,612,468
Minority interests in earnings of subsidiary................ 683,651 --
------------ -----------
Net Income (Loss)......................................... $(48,801,403) $ 2,612,468
============ ===========
Net Income (Loss) Per Common Share:
Basic..................................................... $ (2.52) $ .16
============ ===========
Diluted................................................... $ (2.52) $ .15
============ ===========
Weighted Average Shares Outstanding:
Basic..................................................... 19,342,627 16,399,548
============ ===========
Diluted................................................... 19,342,627 17,320,714
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL IN RETAINED
COMMON EXCESS OF EARNINGS
STOCK PAR VALUE (DEFICIT) TOTAL
-------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at January 1, 1998................. $193,062 $ 84,162,478 $ 7,399,390 $ 91,754,930
Net loss................................... (48,801,403) (48,801,403)
Issuance of 1,429,907 shares for NACT
acquisition.............................. 14,299 26,867,953 26,882,252
Issuance of stock options for NACT
acquisition.............................. 8,359,737 8,359,737
Issuance of 633,982 shares for ATI
acquisition.............................. 6,340 6,508,200 6,514,540
Issuance of 334,252 shares for stock
options and warrants..................... 3,343 1,691,516 1,694,859
Tax benefit from exercises of stock options
and warrants............................. 2,662,400 2,662,400
Issuance of 1,511 shares for matching
contribution to 401K plan................ 15 36,900 36,915
-------- ------------ ------------ ------------
Balance at March 31, 1998.................. $217,059 $130,289,184 $(41,402,013) $ 89,104,230
======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
WORLD ACCESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)........................................... $(48,801,403) $ 2,612,468
Adjustments to reconcile net income (loss) to net cash from
(used by) operating activities:
Depreciation and amortization............................. 1,545,009 503,439
Income tax benefit from stock warrants and options........ 2,662,400 --
Special charges........................................... 55,992,766 --
Minority interests in earnings of subsidiary.............. 683,651 --
Provision for inventory reserves.......................... 77,500 60,000
Stock contributed to employee benefit plan................ 36,915 13,201
Changes in operating assets and liabilities, net of effects
from businesses acquired:
Accounts receivable....................................... (9,993,053) (3,554,300)
Notes receivable.......................................... (1,092,946) --
Inventories............................................... (3,101,070) (3,521,014)
Accounts payable.......................................... 3,606,024 2,087,347
Other assets and liabilities.............................. 423,374 462,255
------------ -----------
Net Cash From (Used By) Operating Activities................ 2,039,167 (1,336,604)
------------ -----------
Cash Flows From Investing Activities:
Acquisitions of businesses.................................. (57,406,573) (4,099,852)
Loan repayments by affiliate................................ -- 582,500
Expenditures for property and equipment..................... (1,919,355) (725,793)
------------ -----------
Net Cash Used By Investing Activities....................... (59,325,928) (4,243,145)
------------ -----------
Cash Flows From Financing Activities:
Short-term debt borrowings.................................. 1,771,651 4,024,000
Proceeds from exercise of stock warrants and options........ 1,694,859 160,548
Long-term debt repayments................................... (966,542) --
Issuance of long-term debt for capital lease................ -- 291,500
------------ -----------
Net Cash From Financing Activities.......................... 2,499,968 4,476,048
------------ -----------
Decrease in Cash and Equivalents............................ (54,786,793) (1,103,701)
Cash and Equivalents at Beginning of Period................. 118,065,045 22,480,082
------------ -----------
Cash and Equivalents at End of Period....................... $ 63,278,252 $21,376,381
============ ===========
Supplemental Schedule of Noncash Financing and Investing
Activities:
Issuance of common stock for businesses acquired............ $ 33,396,792 $ 2,088,118
Issuance of stock options for businesses acquired........... 8,359,737
Conversion of note receivable to investment in ATI.......... 4,484,534
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiary companies, all of which are
wholly-owned except for 67.3% ownership in NACT Telecommunications, Inc.
("NACT"). Minority interests represent the minority stockholders proportionate
share of NACT's equity. These financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the results of the interim periods covered have been included.
For further information, refer to the audited consolidated financial statements
and footnotes included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results expected for the full year. Certain
reclassifications have been made to the prior period's financial information to
conform with the presentations used in 1998.
NOTE 2. ACQUISITIONS
ATI Acquisition
On December 24, 1997, the Company entered into an agreement to acquire
Advanced TechCom, Inc. ("ATI"), a Wilmington, Massachusetts based designer and
manufacturer of digital microwave and millimeterwave radio systems for short and
long haul voice, data and/or video applications. On January 29, 1998, the
transaction was completed in its final form whereby ATI was merged with and into
Cellular Infrastructure Supply, Inc. ("CIS"), a wholly-owned subsidiary of the
Company (the "ATI Merger").
In connection with the ATI Merger, the stockholders of ATI received
approximately $300,000 in cash and 424,932 restricted shares of the Company's
common stock. These shares had an initial fair value of approximately $6.5
million. The Company's policy is to value restricted stock issued in
acquisitions at the average market price of its common stock for the three
trading days prior and the three trading days subsequent to the date economic
terms of the acquisition are announced less a discount to reflect the lack of
marketability caused by trading restrictions, size of the share issuances and
other relevant factors. A discount factor of 30% was used to value the 424,932
restricted shares, which was based on previous sales of restricted Company
common stock and independent studies regarding discount attributable to lack of
marketability. Management believes the discount rate used to value these
restricted shares was appropriate and reasonable.
In addition to the shares noted above, the stockholders of ATI were issued
209,050 restricted shares of the Company's common stock. These shares were
immediately placed into escrow and will be released to the stockholders of ATI
contingent upon the realization of predefined levels of pre-tax income from
ATI's operations during calendar years 1998 and 1999. Upon issuance, the 209,050
escrowed shares were valued by the Company at par value only, or $2,091. As it
becomes probable that the conditions for release from escrow will be met, the
fair market value of the shares as measured at that time will be recorded as
additional goodwill and stockholders' equity, respectively.
6
<PAGE> 7
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of ATI has been accounted for using the purchase method of
accounting. Accordingly, the results of ATI's operations have been included in
the accompanying consolidated financial statements from February 1, 1998. The
purchase price was allocated to net assets acquired and to approximately $5.4
million of purchased in-process research and development (R&D). The excess of
purchase price over the fair value of net assets acquired and purchased
in-process R&D, currently estimated at approximately $2.7 million, has been
recorded as goodwill and is being amortized over a 15 year period.
Purchased in-process R&D, which consisted of the value of ATI products in
the development stage that were not considered to have reached technological
feasibility as of the date of the ATI Merger, was expensed in the first quarter
of 1998 in accordance with applicable accounting rules. See Management's
Discussion and Analysis.
NACT Acquisition
In the fourth quarter of 1997, the Company began a three phase acquisition
of NACT, a Provo, Utah based single-source provider of advanced
telecommunications switching platforms with integrated telephony software
applications and network telemanagement capabilities. During November and
December 1997, the Company purchased 355,000 shares of NACT common stock in the
open market for approximately $5.0 million.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST Telecommunications, Inc. ("GST") and GST USA, Inc. ("GST USA") to
acquire 5,113,712 shares of NACT common stock owned by GST USA, representing
approximately 63% of the outstanding shares of NACT (the "NACT Acquisition"). On
February 27, 1998, the NACT Acquisition was completed with GST USA receiving
$59.7 million in cash and 1,429,907 restricted shares of the Company's common
stock valued at approximately $26.9 million. These shares were valued at $18.80
per share, a 20% discount to the closing market price of Company common stock on
February 26, 1998. Management believes this valuation was appropriate and
reasonable based on the fact GST USA sold all 1,429,907 restricted shares at
$18.80 per share to an independent third party in a private transaction
completed on February 27, 1998.
In addition, the Company issued 740,543 non-qualified options to purchase
Company common stock at $11.15 per share and 106,586 non-qualified options to
purchase Company common stock at $16.25 per share in exchange for substantially
all the options held by NACT employees, which became immediately vested in
connection with the NACT Acquisition. These options had an initial fair value of
approximately $8.4 million.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already owned by the Company or GST USA. Pursuant to the terms of the
merger agreement, each share of NACT common stock will be converted into shares
of Company common stock having a value of $17.50 per share based on the average
of the daily closing price of Company common stock on the Nasdaq National Market
for a pre-defined period prior to the closing (the "Closing Price"), provided
that if the Closing Price is more than $25.52, then each share of NACT common
stock will be converted into 0.6857 shares of Company common stock. If the
Closing Price is less than $20.88, then the Company may elect to terminate the
agreement. The merger is subject to, among other things, the approval of the
NACT stockholders and the satisfaction of certain other customary conditions.
This merger is expected to be consummated in September 1998.
The acquisition of the 67.3% majority interest in NACT has been accounted
for using the purchase method of accounting. Accordingly, the results of NACT's
operations have been included in the accompanying consolidated financial
statements from March 1, 1998. The purchase price of the majority interest in
NACT was allocated to the net assets acquired and to approximately $66.5 million
of purchased in-process R&D. The excess of purchase price over 67.3% of the fair
value of net assets acquired and purchased in-
7
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
process R&D, currently estimated at approximately $40.8 million, has been
recorded as goodwill and is being amortized over a 20 year period.
During the first quarter of 1998, 67.3%, or $44.6 million, of purchased
in-process R&D, which consists of the value of NACT products in the development
stage that are not considered to have reached technological feasibility as of
the date of the NACT Acquisition, was expensed in accordance with the applicable
accounting rules. See Management's Discussion and Analysis.
Pro Forma Results of Operations
On a pro forma, unaudited basis, as if the acquisitions of ATI and NACT had
occurred as of January 1, 1997, total sales, operating income, net income and
diluted net income per common share for the three months ended March 31, 1998
and 1997 would have been approximately $38,893,000 and $32,220,000; $1,129,000
and $3,699,000; $42,000 and $2,244,000; and $0.12 and $0.0, respectively.
These unaudited pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of the results of operations
which would actually have occurred had the acquisitions been in effect on the
date indicated. In addition, the portion of the purchase price allocated to
in-process R&D expensed in accordance with applicable accounting rules of $50.0
million will not recur, therefore, the pro forma results have been prepared
excluding this charge.
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
Switching systems, frames and related circuit
boards............................................ $15,940,114 $13,445,770
Transport and access products....................... 598,418 779,674
Electronic components............................... 6,948,217 4,879,213
Pay telephone parts................................. 1,542,754 1,332,835
Work in progress.................................... 2,971,689 1,744,368
Other finished goods................................ 339,017 245,058
----------- -----------
$28,340,209 $22,426,918
=========== ===========
</TABLE>
NOTE 4. GOODWILL
Goodwill from acquisitions, representing the excess of purchase price paid
over the value of net assets acquired, is as follows:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
NACT................................................ $40,802,140 $ --
CIS................................................. 12,485,239 12,485,239
AIT................................................. 10,657,917 11,557,917
Galaxy.............................................. 5,089,265 5,089,265
ATI................................................. 2,953,512 --
Other............................................... 5,034,062 5,034,062
----------- -----------
77,022,135 34,166,483
Accumulated amortization............................ (3,370,279) (2,506,282)
----------- -----------
$73,651,856 $31,660,201
=========== ===========
</TABLE>
8
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WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill is being amortized on a straight-line basis over a 15 to 20 year
period. The Company reviews the net carrying value of goodwill on a regular
basis, and if deemed necessary, charges are recorded against current operations
for any impairment in the value of these assets. No significant impairment
charges have been recorded to date. Goodwill is removed from the books when
fully amortized.
NOTE 5. DEBT
The Company has a $10.0 million revolving line of credit with a large
European bank. As of March 31, 1998, the Company had borrowings of $1.8 million
outstanding under this facility. These borrowing were repaid to the bank in
April 1998.
The bank agreement, which expires in March 2001, contains standard lending
covenants including financial ratios, restrictions on dividends and limitations
on additional debt and the disposition of Company assets. Interest is paid at
the rate of prime plus 1 and 1/4% or Libor plus 2 and 1/2%, at the option of
the Company.
NOTE 6. SPECIAL CHARGES
Special charges in the first quarter of 1998 included $6.6 million for
costs related to the consolidation of several operations and the Company's exit
from the contract manufacturing business. The Company's AIT and circuit board
repair operations have been consolidated into a new facility in Orlando,
Florida; the Company's manufacturing operations have moved from Orlando to a new
facility in Alpharetta, Georgia; and the Company's Scottsdale, Arizona
operations are being integrated into ATI's facility in Wilmington,
Massachusetts.
The special charges included $3,360,000 to cost of sales for obsolete
contract manufacturing inventories and inventories deemed obsolete or redundant
as a result of the consolidation activities. The additional charges consisted
of:
<TABLE>
<S> <C>
Severance and termination benefits.......................... $ 550,000
Idle facility costs......................................... 1,340,000
Idle equipment costs........................................ 1,350,000
----------
$3,240,000
==========
</TABLE>
The consolidated program began in the first quarter of 1998 and was
completed as of June 30, 1998. No costs were included in the special charges
that are expected to derive future economic benefit to the Company. As of March
31, 1998, approximately $1.8 million of accrued special charges is included in
Other current liabilities on the Company's March 31, 1998 balance sheet. See
Management's Discussion and Analysis.
NOTE 7. EARNINGS PER SHARE
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share". The computation of basic earnings per
share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share is based on the
weighted average number of common shares outstanding plus, when their effect is
dilutive, potential common stock consisting of shares subject to stock options,
stock warrants and convertible notes. Potential common stock shares of 921,166
were included in computing diluted earnings per share for the first quarter of
1997. A total of 1,204,000 and 1,246,000 shares of common stock held in escrow
from certain acquisitions and a license agreement were excluded from the
earnings per share calculations for the three months ended March 31, 1998 and
1997, respectively, because the conditions for release of shares from escrow had
not been satisfied.
9
<PAGE> 10
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common stock issued and outstanding at March 31, 1998 and 1997 was
21,705,887 and 17,663,007 shares, respectively.
NOTE 8. LEGAL PROCEEDINGS
On August 24, 1996, Aerotel, Ltd. and Aerotel U.S.A. Inc. (collectively,
"Aerotel") commenced an action against NACT and a customer of NACT in the United
States District Court, Southern District of New York, 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 (the "Aerotel
Patent"). The initial complaint further alleged defamation and unfair
competition as a result of a communication disseminated by NACT to its customers
and tortious interference with prospective business relations, alleging that
NACT induced third parties to abandon licensing negotiations with Aerotel.
Aerotel sought injunctive relief, damages in an unspecified amount, damages of
up to three times damages found for willful infringement of the Aerotel Patent
and an order requiring NACT to publish a written apology to Aerotel. NACT filed
an answer and Counterclaim in which it denied infringement of the Aerotel Patent
and sought judgement that the Aerotel patent is invalid and unenforceable and
that Aerotel has misused its patent in violation of antitrust laws. NACT has
denied that it has committed defamation, unfair competition and tortious
interference with prospective business relations. In August 1997, Aerotel
amended its complaint to include as defendants GST, GST USA, and two former
executive officers of NACT. The amended pleadings seek in excess of $18.7
million in damages and allege that GST and GST USA have infringed the Aerotel
patent, aided and abetted infringement by others, including NACT, and
participated in, and aided and abetted alleged tortious conduct by NACT. GST,
GST USA and the two former executive officers of NACT have served answers
denying all material allegations.
Under the terms of the Company's stock purchase agreement with GST, the
Company and GST have agreed to share evenly the costs of any judgement against
NACT as a result of the Aerotel litigation, including NACT's legal fees.
Subsequent to the NACT Acquisition, the Company has been actively engaged in
settlement negotiations. On July 9, 1998, the Company, GST and Aerotel entered
into a Memorandum of Understanding with respect to the settlement of this
action, and as of the date of this Report, the parties are negotiating the terms
and conditions of a final settlement agreement.
The Company currently estimates that its portion of the total settlement
costs, including legal fees, will be approximately $3.3 million. Any payment
made to Aerotel is expected to be paid through the issuance of Company common
stock. The settlement costs expected to be incurred by the Company as a result
of the Aerotel litigation have been accounted for as additional NACT purchase
price as of March 31, 1998.
Management expects a final Aerotel settlement agreement to be executed in
the near future. If a settlement does not occur, NACT's patent counsel believes
that NACT has valid defenses to the Aerotel claims (which, if upheld, would be
valid for all defendants), and the defendants intend to vigorously defend.
However, no assurances can be given as to the outcome of this action. An
unfavorable decision in this action, however, could have a material adverse
effect on the Company's business, financial condition and results of operations.
NOTE 9. PENDING ACQUISITIONS
RESURGENS ACQUISITION
On February 12, 1998, the Company executed a letter of intent to acquire
Cherry Communications Incorporated, d/b/a Resurgens Communications Group
("RCG"), and Cherry Communications U.K. Limited ("Cherry U.K., and together with
RCG, "Resurgens"). On May 12, 1998, the Company signed definitive agreements to
acquire Resurgens. The agreement to acquire RCG is subject to the approval of
the
10
<PAGE> 11
WORLD ACCESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bankruptcy Court. The transactions, which will be accounted for under the
purchase method of accounting, are currently expected to close in August 1998.
Pursuant to the terms of the agreements, the creditors of RCG and the
shareholders of Cherry U.K. will receive approximately 3.7 million restricted
shares of Company common stock in the aggregate, with an estimated fair value of
approximately $90 million. In addition, the RCG creditors and Cherry U.K.
shareholders have the right to receive additional consideration of up to 7.5
million restricted shares of Company common stock over the next two and one-half
years, contingent upon the achievement of certain EBITDA levels by Resurgens
during this timeframe. The transaction is subject to, among other things,
Resurgens exceeding pre-defined levels of monthly revenues and gross margin, the
receipt of the requisite corporate and regulatory approvals, the confirmation of
RCG's Plan of Reorganization and the approval of Company stockholders.
RCG, currently operating under the protection of Chapter 11 of the United
States Bankruptcy Code, and Cherry U.K. are facilities-based providers of
international network access, commonly referred to in the industry as carriers'
carrier. In October 1997, John D. ("Jack") Phillips, a director of the Company,
entered into a series of agreements whereby, among other things, he became the
new Chairman and Chief Executive Officer of Resurgens. RCG filed for bankruptcy
protection shortly thereafter. WorldCom, Inc. ("WorldCom"), a major customer and
vendor of Resurgens, has subsequently provided Resurgens approximately $26
million of direct financial support through a debtor in possession facility and
additional financial support, primarily through trade credits. Upon completion
of the Resurgens acquisition, WorldCom is expected to own approximately 15% of
Company on a fully diluted basis.
NOTE 10. COMPREHENSIVE INCOME.
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income", effective January 1, 1998. For
the three months ended March 31, 1998 and 1997, respectively, comprehensive and
net income were the same for the Company.
11
<PAGE> 12
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Disclosure Regarding Forward-Looking Statements
Under the Private Securities Litigation Reform Act of 1995, companies are
provided a "safe harbor" for making forward-looking statements about the
potential risks and rewards of their strategies. The Company believes that it is
in the best interest of its stockholders to use these provisions in discussing
future events in this Form 10-Q and other communications. These forward-looking
statements include the Company's plans for growth, the potential for
development, acceptance of the Company's products and other factors that could
affect the Company's future operations or financial position.
The Company's ability to achieve its goals depends on many known and
unknown risks and uncertainties, as well as changes in general economic and
business conditions. These factors could cause the anticipated performance and
results of the Company to differ materially from those described or implied in
such forward-looking statements.
Factors that could cause or contribute to such differences include the
risks and uncertainties described in the Company's SEC reports, including the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1997 and the Company's Registration Statement on Form S-3 (No. 333-43497).
Overview
The Company develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The products offered by the Company include those manufactured by the
Company as well as those manufactured by other telecommunications equipment
manufacturers. To support and complement its product sales, the Company also
provides its customers with a broad range of design, engineering, manufacturing,
testing, installation, repair and other value-added services.
During 1995 and 1996, the Company completed strategic and financial
restructuring programs to strengthen its management team, reposition the Company
as a provider of telecommunications products, improve its financial condition,
reduce its operating costs and position the Company for future growth. These
programs were undertaken following the significant losses incurred by the
Company in the early 1990s, primarily due to a discontinued smart pay telephone
business, and to take advantage of the significant growth opportunities within
the Company's existing customer base and related markets. In November 1994, the
Company began to rebuild its management team and change its strategic focus. The
Company strengthened its management team by appointing a new Chief Executive
Officer and by recruiting and hiring a new President and Chief Operating
Officer, Executive Vice President of Business Development and experienced
product development and manufacturing professionals. These individuals, together
with other key managers recruited into the Company, have brought significant
experience in manufacturing and marketing telecommunications equipment to the
Company.
The Company acquired five businesses during 1995 to 1997 in an effort to
broaden its line of switching, transport and access products, enhance its
product development capabilities and strengthen its technical base. Effective
May 1995, the Company acquired AIT, Inc. ("AIT"), a full service provider of
Northern Telecom switching systems, add-on frames and related circuit boards;
effective October 1995, the Company acquired Westec Communications, Inc.
("Westec"), a provider of wireless products and services primarily to the cable
television industry; effective January 1996, the Company acquired Sunrise
Sierra, Inc. ("Sunrise"), a developer and manufacturer of intelligent transport
and access products; effective January 1997, the Company acquired Cellular
Infrastructure Supply, Inc. ("CIS"), a provider of mobile network equipment and
related design, installation and technical support services to cellular, PCS and
other wireless service providers; and effective August 1997, the Company
acquired Galaxy Personal Communication Services ("Galaxy"), a RF engineering
firm that provide system design, implementation, optimization and other
value-added radio engineering and consulting services to the wireless service
markets. The markets served by CIS and Galaxy complement the Company's
traditional telephone service provider and private network operator markets.
In the first quarter of 1998, the Company acquired ATI, a manufacturer of
digital point-to-point microwave radio systems for short and long haul
applications and a majority stake in NACT, a provider of
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<PAGE> 13
advanced telecommunications switching platforms with integrated applications
software. In May 1998, the Company signed definitive agreements to acquire
Resurgens, a facilities-based provider of international network access, commonly
referred to in the industry as carriers' carrier. These acquisitions have
positioned the Company to offer its customers a complete telecommunications
network solution, including proprietary equipment, planning and engineering
services and access to international long distance.
The Company realized significant improvements in its sales and operating
results since 1994 as a result of the acquisitions and internal growth
initiatives. The Company's total sales increased by 82.3% in 1997, 69.2% in 1996
and 97.2% in 1995. Total sales for the first quarter of 1998 increased by 68.0%
over the fourth quarter of 1997. As the Company increased its product sales from
18.2% of total sales in 1994 to 79.0% of total sales in the first quarter of
1998, its gross profit margin before special charges increased from 12.9% in
1994 to 21.1% in 1995, 29.4% in 1996, 34.6% in 1997 and 41.7% in the first
quarter of 1998. As a percentage of total sales, the Company's operating income
(loss) before special charges increased from (8.5%) in 1994 to 5.0% in 1995,
14.4% in 1996, 21.0% in 1997 and 27.9% in the first quarter of 1998. The Company
will continue to seek further improvements in gross profit margin over time as
product offerings include more internally developed, acquired and licensed
products containing proprietary technology.
Although the Company has aggressively pursued acquisitions in recent years,
over 60 percent of the Company's total sales growth since 1994 has come from
internal growth initiatives. The Company has had considerable success in growing
businesses post acquisition, most notably AIT and CIS, as a result of its
ability to provide working capital, an extensive base of telecommunications
customers and a broad range of support services.
Since January 1, 1995, the Company has significantly strengthened its
balance sheet through improved operating results, a $115.0 million sale of
convertible subordinated notes, a $26.2 million secondary public equity
offering, proceeds from stock warrant and option exercises, and a five-year
$10.0 million credit facility. The Company has used this capital for
acquisitions and to support the working capital requirements associated with the
Company's growth. The Company's working capital and stockholders' equity have
increased from $2.3 million and $1.2 million, respectively, at December 31, 1994
to $118.2 million and $89.1 million, respectively, at March 31, 1998.
Fluctuations in Quarterly Operating Results
The Company's operating results have fluctuated significantly in the past.
As the Company increases its number of telecommunications product offerings, its
future operating results may vary significantly depending on factors such as the
timing and shipment of significant orders, new product offerings by the Company
and its competitors, market acceptance of new and enhanced versions of the
Company's products, changes in pricing policies by the Company and its
competitors, the availability of new technologies, the mix of distribution
channels through which the Company's products are sold, the inability to obtain
sufficient supplies of sole or limited source components for the Company's
products, gains or losses of significant customers, the timing of customers'
upgrade and expansion programs, changes in the level of operating expenses, the
timing of acquisitions, seasonality and general economic conditions.
The Company's sales during the first three months of 1998 included
approximately $13.5 million from its AIT and CIS subsidiaries. AIT sells new and
used Northern Telecom switching systems, add-on frames and circuit cards. CIS
sells re-engineered cellular base stations and related mobile network equipment.
These operations depend on a consistent supply of equipment to sustain their
revenue levels. Additionally, individual sales by AIT and CIS are relatively
large ($500,000 to $2.0 million), which subjects the Company to the risk of
revenue fluctuations in the event that customers adjust the timing of their
orders.
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<PAGE> 14
Results of Operations
The following table sets forth certain financial data, representing each
line item in the Company's consolidated statements of operations expressed as a
percentage of total sales, except other data, which is expressed as a percentage
of the applicable revenue type:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------
1998 1997
------ -----
<S> <C> <C>
Statement of Operations Data:
Sales of products........................................... 79.0% 76.4%
Service revenues............................................ 21.0 23.6
------ -----
Total sales....................................... 100.0 100.0
Cost of products sold....................................... 46.9 49.2
Cost of services............................................ 20.8 20.2
------ -----
Total cost of sales............................... 67.7 69.4
------ -----
Gross profit.............................................. 32.3 30.6
Engineering and development................................. 2.2 1.6
Selling, general and administrative......................... 9.1 9.4
Amortization of goodwill.................................... 2.4 1.4
In-process research and development......................... 140.0 --
Special charges............................................. 9.1 --
------ -----
Operating income (loss)................................... (130.5) 18.2
Interest and other income................................... 3.5 1.6
Interest expense............................................ (4.2) --
------ -----
Income (loss) before income taxes and minority
interests.............................................. (131.2) 19.8
Income taxes................................................ 3.5 6.9
------ -----
Income (loss) before minority interests................... (134.7) 12.9
Minority interests in earnings of subsidiary................ 1.9 --
------ -----
Net income (loss)......................................... (136.6)% 12.9%
------ -----
Other Data:
Gross margin (before special charges):
Products.................................................. 45.3% 35.6%
Services.................................................. 28.1 14.6
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Sales. Total sales increased $15.5 million, or 76.4%, to $35.7 million in
the first quarter of 1998 from $20.3 million in the first quarter of 1997.
Product sales increased to 79.0% of total sales in the first quarter of 1998
from 76.4% in the first quarter of 1997.
Product sales increased $12.8 million, or 82.5%, to $28.2 million in the
first quarter of 1998 from $15.5 million in the first quarter of 1997. The
increase related to sales generated by NACT and ATI, which were acquired
effective March 1, 1998 and February 1, 1998, respectively, and an increase of
mobile network equipment sold by CIS.
Service revenues increased $2.7 million, or 56.9%, to $7.5 million in the
first quarter of 1998 from $4.8 million in the first quarter of 1997. The
increase related to engineering services performed by Galaxy, which was acquired
effective July 1, 1997, and additional pay telephone refurbishment revenues.
Gross Profit. Gross profit increased $5.3 million, or 86.0%, to $11.5
million in the first quarter of 1998 from $6.2 million in the first quarter of
1997. Gross profit margin increased to 32.3% in the first quarter of 1998 from
30.6% in the first quarter of 1997. Gross profit margin excluding the special
charge of approximately $3.4 million (see Note 6 to "Financial Statements") was
41.7% in the first quarter of 1998. The improved
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<PAGE> 15
performance resulted from economies of scale associated with the 76.4% increase
in total sales and the change in sales mix to products, which generally carry a
higher gross profit margin than service revenues.
Gross profit margin on products sold increased to 40.6% in the first
quarter of 1998 from 35.6% in the first quarter of 1997. Gross profit margin
excluding the special charge was 45.3% in the first quarter of 1998. The
improved margins related to the NACT and ATI sales of proprietary equipment and
systems and the increase in sales of CIS mobile network equipment, all of which
generally carry margins in excess of 40.0%. The Company's switching products
experienced declines in gross margin during the first quarter of 1998 primarily
related to margin pressure on sales of Northern Telecom add-on frames and
related circuit boards.
Gross profit margin on service revenues was 1.0% in the first quarter of
1998 as compared to 14.6% in the first quarter of 1997. Gross profit margin
excluding the special charge was 28.1% in the first quarter of 1998. The
improvement was due to the addition of consulting revenues from Galaxy, which
was acquired effective July 1, 1997, and improved margins on pay telephone
refurbishment revenues.
Engineering and Development. Engineering and development expenses
increased $472,000, or 149.1%, to $788,000 in the first quarter of 1998 from
$316,000 in the first quarter of 1997. The increase in expenses was attributable
to the acquisitions of NACT and ATI and the continued expansion of the Company's
development group. Engineering and development expenses increased to 2.2% of
total sales in the first quarter of 1998 from 1.6% of total sales in the first
quarter of 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.3 million, or 69.8%, to $3.3 million in the
first quarter of 1998 from $1.9 million in the first quarter of 1997. The
increase related primarily to expenses associated with the operations of NACT,
ATI and Galaxy, which were acquired subsequent to the first quarter of 1997. As
a percentage of total sales, selling, general and administrative expenses
decreased to 9.1% in the first quarter of 1998 from 9.5% in the first quarter of
1997.
Amortization of Goodwill. Amortization of goodwill increased $580,000 to
$864,000 in the first quarter of 1998 from $284,000 in the first quarter of
1997, primarily as a result of goodwill recorded in connection with the NACT,
ATI and Galaxy acquisitions and additional goodwill recorded related to earnout
performances for the CIS, AIT and Galaxy acquisitions.
Operating Income Before Special Charges. Operating income before special
charges increased $6.3 million, or 171.3%, to $10.0 million in the first quarter
of 1998 from $3.7 million in the first quarter of 1997. Operating income margin
increased to 27.9% in the first quarter of 1998 from 18.2% in the first quarter
of 1997.
Interest and Other Income. Interest and other income increased $902,000 to
$1.3 million in the first quarter of 1998 from $367,000 in the first quarter of
1997 due to a significant increase in invested cash balances of the Company,
resulting primarily from the sale of $115.0 million convertible subordinated
notes in October 1997.
Interest and Other Expense. Interest expense increased to $1.5 million in
the first quarter of 1998 from $29,000 in the first quarter of 1997. The
increase is primarily due to the interest recorded on the $115.0 million
convertible subordinated notes sold in October 1997, which bear interest at 4.5%
and the related debt issuance cost amortization.
Income Taxes. The Company's effective income tax rate increased to 40.0%
in the first quarter of 1998 from 35.0% in the first quarter of 1997. The
Company's 1998 effective rate is unfavorably impacted by the significant
increase in non-deductible goodwill amortization resulting from acquisitions.
Purchased In-Process R&D
Special charges in the first quarter of 1998 included $50.0 million for
in-process research and development related to the first quarter 1998
acquisitions of ATI and a 67.3% interest in NACT (see Note 2 to the "Financial
Statements"). Purchased in-process research and development, which consists of
the value of NACT and ATI products in the development stage that are not
considered to have reached technological feasibility, were expensed in
accordance with applicable accounting rules. The Company expects to record an
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<PAGE> 16
additional in-process research and development charge of approximately $22.0
million in the third quarter of 1998 in connection with the acquisition of the
remaining 32.7% of NACT.
The Income Approach was utilized to value the acquired research and
development technologies in the NACT Acquisition. The Income Approach values
technologies by projecting the potential cash flows related to those
technologies and discounting the cash flows to their present values using a
discount rate reflective of the risk of achieving the cash flows. The projected
cash flows include estimates of the remaining costs to complete the in-process
technologies.
NACT provides advanced telecommunications switching platforms with
integrated applications software and network telemanagement capabilities. NACT
designs, develops, and manufacturers all hardware and software elements
necessary for a fully integrated, turnkey telecommunications switching solution.
The nature of the in-process research and development was such that
technological feasibility had not been attained as of the date of Acquisition.
Failure to attain technological feasibility, especially given the high degree of
customization required for complete integration into the NACT solution, would
have rendered partially designed hardware and software useless for other
applications. Incomplete design of hardware and software coding would create a
non-connective, inoperable product that would have no alternative use.
NACT's business plan called for a shift in market focus to larger
customers, both domestic and international; therefore, NACT had numerous
projects in development at the time of the acquisition. Additionally, the
pending completion of a major release of NACT's billing system required
significant development efforts to ensure continued integration with NACT's
product suite.
NACT had nine principal projects in the development pipeline at the time of
acquisition. Most major projects had several ongoing sub-projects (e.g., a
hardware design project and a software design project). These projects include
significant redevelopment of some existing products and the creation of new
products. The research and development projects were at various stages of
development. Most new or redeveloped products were scheduled for release in
1998, while several other were scheduled for release in 1999. None of the
in-process projects considered in the write-off had attained technological
feasibility.
For all in-process technologies, management estimated remaining costs to
complete. These estimates were $3.3 million for 1998, and $1 million for 1999.
The expected sources of funding were scheduled research and development expenses
from the operating budget of NACT provided by the operating assets and
liabilities of NACT.
The Income Approach was also used to value the acquired research and
development technologies in the ATI acquisition.
ATI develops and manufactures a series of high-performance digital
microwave/millimeter radio equipment. Their products reach across all frequency
bands and data rates and offer numerous features. The nature of the in-process
research and development was such that technological feasibility had not been
attained as of the date of Acquisition. 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. Product is only partially completed for certain
bandwidths cannot be used in other bandwidths.
At the time of acquisition, ATI's primary product lines were FSK+, Compact,
and QAM. ATI's management determined the following percentages of each product
line were in-process technologies:
<TABLE>
<S> <C>
FSK+: 15.0% of units in development
Compact: 95.0% of units in development
QAM: 100.0% of units in development
</TABLE>
Between each product line, various stages of development had been reached.
Additionally, within each product line, different units had reached various
stages of development. Of the products management considered in-process, none
had attained technological feasibility.
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<PAGE> 17
For all in-process products, management estimated remaining costs to
complete to be $3.1 million for 1998, $7.2 million for 1999, $7.6 million for
2000, $5.1 million for 2001, and $1.1 million for 2002. The expected sources of
funding were scheduled R&D expenses from the operating budget of ATI provided by
the operating assets and liabilities of ATI.
SPECIAL CHARGES
In January 1998, the Company's senior management decided that the following
actions were necessary to streamline operations and position the Company to
service anticipated sales growth:
- Close down the existing Orlando, Florida manufacturing and repair
facility. Move the manufacturing of certain World Access products to the
Company's Alpharetta, Georgia manufacturing facility.
- Exit the contract manufacturing business.
- Close down the four Lakeland, Florida facilities and move AIT operations
to a new facility in Orlando, Florida. Repair operations would be
integrated with AIT in this new facility.
- Close down Westec's facility in Scottsdale, Arizona and integrate its
operations into ATI's facility in Wilmington, Massachusetts.
Shortly thereafter, senior management informed the operating management of
the applicable divisions. All Orlando and Lakeland employees were informed in
January and Westee employees were informed in February (subsequent to the
closing of the ATI acquisition).
Management carefully reviewed the provisions of EITF 94-3 in determining
which costs related to the above actions should be included in a first quarter
special charge. No costs were included in the charge that would derive future
economic benefit to the Company, e.g., relocation of existing employees,
recruiting and training of new employees and facility start-up costs. The
special charge consisted of:
<TABLE>
<S> <C>
Obsolete and redundant inventories.......................... $3,360,000
Severance and termination benefits.......................... 550,000
Idle facility costs......................................... 1,340,000
Idle equipment costs........................................ 1,350,000
----------
$6,600,000
==========
</TABLE>
Severance and termination benefits were clearly communicated up front to
the approximately 60 employees who lost their jobs as a direct result of the
consolidations. Affected employees were notified shortly after the January and
February employee meetings. Benefits were determined consistent with the
Company's severance policy of one week of pay for each full year of service
(minimum of two weeks) and continued benefits through the month severance pay is
exhausted. Approximately 10 of these employees were involuntarily terminated in
February and March, approximately 40 employees were involuntarily terminated in
April and approximately 10 employees were involuntarily terminated in June. The
Orlando and Lakeland facilities were closed in April and the Scottsdale facility
was closed in June. The actual severance and termination benefit costs incurred
by the Company were not materially different from the $550,000 recorded in the
special charge.
The idle facility and equipment portion of the special charge included the
write-off of "old Orlando", Lakeland and Scottsdale leasehold improvements,
provisions for the estimated costs to terminate idle facility and equipment
leases, the write-off of Orlando manufacturing equipment not relocated to the
Company's Alpharetta facility and certain phase-down expenses associated with
the six facilities closed down. As of the date of this Report, the Company does
not expect the actual costs for these items to be materially different from
amounts recorded in the special charge.
As previously noted, all activities that resulted in the first quarter
special charge were completed by the Company as of June 30, 1998. Of the
$3,240,000 special charge, approximately $1.4 million related to assets directly
written-off of amounts charged to the reserve in the first quarter. As of March
31, 1998, approximately
17
<PAGE> 18
$1.8 million of accrued special charges is included in Other current liabilities
on the Company's March 31, 1998 balance sheet.
Liquidity and Capital Resources
Overview. Cash management is a key element of the Company's operating
philosophy and strategic plans. Acquisitions to date have been structured to
minimize the cash element of the purchase price and ensure that appropriate
levels of cash are available to support the increased product development,
marketing programs and working capital normally associated with the growth
initiatives of acquired businesses. As of March 31, 1998, the Company had $63.3
million of cash and equivalents and $8.2 million in borrowings available under
its credit line to support its current working capital requirements and
strategic growth initiatives.
Operating Activities. Cash provided from operating activities was $2.0
million in the first quarter of 1998 as compared to cash used by operations of
$1.3 million in the first quarter of 1997.
Accounts receivable increased $19.4 million, or 95.8%, to $39.7 million at
March 31, 1998 from $20.3 million at December 31, 1997. This was due to the
acquisitions of NACT, ATI and Galaxy and increased sales activity at the Company
(first quarter 1998 sales were $35.7 million as compared to fourth quarter 1997
sales of $21.3 million). Average days sales outstanding at March 31, 1998 were
approximately 90 days as compared to 81 days at December 31, 1997.
Inventories increased $5.9 million, or 26.4%, to $28.3 million at March 31,
1998 from $22.4 million at December 31, 1997. This increase was due to the
acquisitions of NACT and ATI and the planned build-up of CDX switching and
WX-5501 inventories related to the closure of the Company's Orlando
manufacturing facility. The increases above were offset by the $3.4 million
provision for obsolete and redundant inventories related to the consolidation
program initiated in the first quarter of 1998 (see Note 6 to "Financial
Statements").
Investing Activities. Cash used by investing activities, primarily for the
acquisitions of businesses, was $59.3 million and $4.2 million for the first
quarters of 1998 and 1997, respectively.
On December 31, 1997, the Company entered into a stock purchase agreement
with GST and GST USA to acquire 5,113,712 shares of NACT common stock owned by
GST USA, representing approximately 63% of the outstanding shares of NACT common
stock (the "NACT Stock Acquisition"). On February 27, 1998 the NACT Stock
Acquisition was completed with GST USA receiving $59.7 million in cash and
1,429,907 restricted shares of the Company's common stock. These shares had an
initial fair value of approximately $26.9 million. This transaction increased
the Company's ownership of NACT to 67.3%.
On February 24, 1998 the Company entered into a merger agreement with NACT
pursuant to which the Company agreed to acquire all of the shares of NACT common
stock not already then owned by the Company or GST USA. Pursuant to the terms of
the merger agreement, each share of NACT common stock will be converted into
shares of Company common stock having a value of $17.50 per share based on the
average of the daily closing price of Company common stock on the NASDAQ
National Market for a pre-defined period prior to the closing (the "Closing
Price"), provided that if the Closing Price is more than $25.52, then each share
of NACT common stock will be converted into 0.6857 shares of Company common
stock. If the Closing Price is less than $20.88, then the Company may elect to
terminate the agreement. This merger is expected to be consummated in July 1998.
On December 24, 1997, the Company entered into an agreement to acquire ATI.
On January 29, 1998, the transaction was completed in its final form whereby ATI
was merged with and into CIS (the "ATI Merger"). In connection with the ATI
Merger, the stockholders of ATI received approximately $300,000 and 424,932
restricted shares of the Company's common stock. These shares had an initial
fair value of approximately $6.5 million.
In addition to the 424,932 shares noted above, the stockholders of ATI were
issued 209,050 restricted shares of the Company's common stock. These shares
were immediately placed into escrow and will be
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<PAGE> 19
released to the stockholders of ATI contingent upon the realization of
predefined levels of pre-tax net income from ATI's operations during calendar
years 1998 and 1999.
In December 1997, the Company loaned ATI approximately $4.5 million. ATI
used $2.6 million of the proceeds to pay off its line of credit with a bank and
the remainder for working capital purposes. The note receivable from ATI is
included in Other assets on the Company's December 31, 1997 balance sheet.
During the first quarter of 1998, the note receivable was included in the
Company's purchase price of ATI.
During the first quarter of 1998 and 1997, the Company invested $1.9
million and $726,000, respectively, in capital expenditures. These expenditures
were primarily for new manufacturing and test equipment, computer network and
related communications equipment designed to upgrade the Company's management
information systems and facilitate the integration of acquisitions, and facility
improvements required in connection with the Company's growth.
Financing Activities. Cash provided from financing activities was $2.5
million and $4.5 million for the first quarter of 1998 and 1997, respectively.
On October 1, 1997, the Company sold $100.0 million in aggregate principal
amount of convertible subordinated notes (the "Notes") under Rule 144A of the
Securities Act of 1933. The Notes bear interest at the rate of 4.5% per annum,
are convertible into Company common stock at an initial price of $37.03 per
share and mature on October 1, 2002. Interest on the Notes is payable on April 1
and October 1 of each year, commencing on April 1, 1998. The Notes are general
unsecured obligations of the Company and are subordinate in right of payment to
all existing and senior indebtedness. The Company received $97.0 million from
the sale of the Notes, after the initial purchasers' discount fees of $3.0
million.
In addition to the Notes sold on October 1, 1997, the Company granted the
initial purchasers an option to purchase up to an additional $15.0 million in
Notes to cover over-allotments. On October 28, 1997, the initial purchasers
exercised the over-allotment option in full and the Company received an
additional $14.6 million, after the application of the initial purchasers'
discount fees.
The total discount fees of $3,450,000, along with approximately $550,000 of
legal, accounting, printing and other expenses (the "Debt issuance costs") are
being amortized to expense over the five year term of the Notes. Debt issuance
costs of approximately $3.2 million, net of amortization, are included in Other
assets on the Company's March 31, 1998 balance sheet.
As of March 31, 1998 and 1997, the Company had borrowings of $1.8 million
and $4.5 million, respectively, outstanding under its $10.0 revolving line of
credit. Borrowings under the Company's line of credit are secured by a first
lien on substantially all the assets of the Company. The bank agreement, which
expires in March 2001, contains standard lending covenants, including financial
ratios, restrictions on dividends and limitations on additional debt and the
disposition of Company assets. Interest is paid at the rate of prime plus 1 1/4%
or LIBOR plus 2 1/2%, at the option of the Company. As of the date of this
Report, there were no amounts outstanding under the Company's line of credit.
During the first quarter of 1998, the Company received approximately $4.4
million in cash, including related federal income tax benefits, from the
exercises of incentive and non-qualified stock options and warrants by the
Company's directors and employees.
Income Taxes. As a result of the exercises of non-qualified stock options
and warrants by the Company's directors and employees, the Company has realized
a federal income tax benefit of approximately $2.7 million for the first quarter
of 1998. Although this tax benefit does not have any effect on the Company's
provision for income tax expense for 1998, it represents a significant cash
benefit to the Company. This tax benefit is accounted for as a decrease in
current income taxes payable and an increase in capital in excess of par value.
Summary. The Company's improved operating performance and completion of
the sale of $115.0 million of Notes in 1997 has significantly enhanced its
financial strength and improved its liquidity. As of the date of this Report,
the Company has approximately $60.0 million of cash and a $10.0 million
revolving line of credit available. The Company believes that existing cash
balances, available borrowings under the Company's
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<PAGE> 20
line of credit and cash projected to be generated from operations will provide
the Company with sufficient capital resources to support its current working
capital requirements and business plans for at least the next 12 months.
YEAR 2000
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, any of the Company's computer
systems that have date sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000 (the so-called "Year 2000 Issue"). This
could result in a system failure or miscalculations causing disruptions,
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities.
The Company is in the process of evaluating its computer systems to
determine what modifications (if any) are necessary to make such systems
compatible with the year 2000 requirements. However, because many of the
Company's computer systems have been put into service within the last several
years, the Company does not expect any such modifications to have a material
adverse effect on the Company's consolidated results of operations, liquidity
and capital resources.
In addition, the Company is in the process of developing a plan whereby it
will review the year 2000 readiness of its customers and suppliers. In doing so,
the Company will undertake appropriate internal reviews and will contact certain
of its significant customers to assess, to the extent possible, Year 2000 Issues
related to the Company's products. In that regard, the Company has identified
that certain of its products, including NACT's NTS 1000 billing System, are not
year 2000 compliant. The Company is in the process of releasing new versions of
such products and making necessary modifications to existing products to address
the Year 2000 Issue. These new and revised products are expected to be available
commencing in the first quarter of 1999. The Company expects that many of its
customers will upgrade to the new products. However, there can be no assurance
that the Company's customers will upgrade to the new year 2000 compliant
products or that the modifications planned to certain of the existing products
will be successful or completed in a timely manner. Although, the Company
believes that it can address year 2000 readiness issues related to products,
there may still be disruptions and or product failures that are unforeseen.
The Company also intends to request assurances from its major suppliers
that they are addressing the Year 2000 Issue and that the products and services
procured or used by the Company will function properly or be available without
interruption in the year 2000. Nevertheless, it will be impossible for the
Company to fully assess the potential consequences if service interruptions
occur from suppliers or in infrastructure areas such as utilities,
communications, transportation, banking and government. As a result, the Company
also intends to develop a business continuity plan to minimize the impact of
such external events.
While the Company's efforts to address year 2000 issues will involve
additional costs and the time and effort of a number of Company employees, the
Company believes, based on currently available information, that it will be able
to manage its total year 2000 exposure.
There can be no assurance, however, that the Company will be successful in
its effort or that the computer systems of other companies on which World Access
will rely will be timely modified, or that a failure to modify such systems by
another company, or modifications that are incompatible with the Company's
systems, would not have a material adverse effect on the Company's consolidated
results of operations, liquidity and capital resources.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Restated Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Vice President, Controller and
Secretary
Dated: September 2, 1998
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH DOCUMENT.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 63,278
<SECURITIES> 3,500
<RECEIVABLES> 48,088
<ALLOWANCES> (1,497)
<INVENTORY> 28,340
<CURRENT-ASSETS> 148,863
<PP&E> 20,886
<DEPRECIATION> (6,945)
<TOTAL-ASSETS> 248,621
<CURRENT-LIABILITIES> 30,710
<BONDS> 115,000
0
0
<COMMON> 217
<OTHER-SE> 88,887
<TOTAL-LIABILITY-AND-EQUITY> 248,621
<SALES> 28,229
<TOTAL-REVENUES> 35,731
<CGS> 16,772
<TOTAL-COSTS> 24,200
<OTHER-EXPENSES> 58,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,515
<INCOME-PRETAX> (46,863)
<INCOME-TAX> 1,255
<INCOME-CONTINUING> (48,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,801)
<EPS-PRIMARY> (2.52)
<EPS-DILUTED> (2.52)
</TABLE>
