<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
(AMENDING ITEMS 5 AND 7(A)-(C))
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 20, 1998
WORLD ACCESS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-19998 65-0044209
(State or Other Jurisdiction of (Commission File Number) (IRS Employer Identification
Incorporation) Number)
</TABLE>
<TABLE>
<S> <C>
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 5. OTHER EVENTS
As previously reported, on May 12, 1998, World Access, Inc. (the "Company")
announced that it had entered into (i) a definitive Agreement and Plan of Merger
and Reorganization, as subsequently amended (as so amended, the "Merger
Agreement"), with Cherry Communications Incorporated (d/b/a Resurgens
Communications Group) ("RCG") pursuant to which the Company will acquire RCG in
a merger transaction (the "Merger"), and (ii) a Share Exchange Agreement and
Plan of Reorganization (the "Exchange Agreement") with the sole shareholder (the
"Shareholder") of Cherry Communications U.K. Limited ("Cherry U.K.") pursuant to
which the Company will acquire Cherry U.K. in a share exchange transaction (the
"Exchange").
In connection with the Merger, the former creditors of RCG will receive an
aggregate of 9,375,000 shares of common stock of WAXS INC. ("New World Access").
New World Access is a wholly-owned subsidiary of the Company that will become
the parent of the Company upon the completion of the previously reported
acquisition of the shares of NACT Telecommunications, Inc. ("NACT") not already
owned by the Company and the holding company reorganization to be effective in
connection therewith (the "Holding Company Reorganization"). Of the shares of
New World Access common stock to be issued to the RCG creditors, two-thirds will
be held in escrow and will be released to the RCG creditors over the two and
one-half years following the consummation of the Merger subject to the
attainment of certain earnings levels for the combined business of RCG and
Cherry U.K.
In connection with the Exchange, the Shareholder will receive an aggregate
of 1,875,000 shares of New World Access common stock, of which one-third will be
issued to the Shareholder at closing and the remaining two-thirds will be issued
and held in escrow and will be released to the Shareholder over the two and
one-half year period following the consummation of the Exchange subject to the
attainment of certain earnings levels for the combined business of RCG and
Cherry U.K. The Exchange Agreement pursuant to which provides, however, that the
number of shares of New World Access common stock to be received by the
Shareholder will be reduced to the extent that New World Access is required to
convert options to acquire shares of Cherry U.K. capital stock, which options
may only be granted with the permission of New World Access, into options to
acquire New World Access common stock. It is currently expected that no such
options will be granted.
Each of the Merger and the Exchange is subject to the satisfaction of
certain conditions customary in similar transactions, including the approval of
the Company's stockholders and the consummation of the Holding Company
Reorganization. The consummation of the Merger is also subject to the Bankruptcy
Court's approval and confirmation of RCG's Plan of Reorganization pursuant to an
order dated September 3, 1998. Finally, the consummation of the Merger is a
condition to the consummation of the Exchange, and the Exchange is a condition
to the consummation of the Merger.
The foregoing description of the Merger and the Exchange is qualified in
its entirety by reference to the Merger Agreement and the Exchange Agreement
which have been filed as exhibits to the Company's Form 8-K filed with the
Commission on May 18, 1998; however, the First and Second Amendments to the
Merger Agreements are filed as exhibits herewith.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statement of Business Acquired. Included in this report are
the following financial statements:
(i) The combined unaudited financial statements of RCG and Cherry U.K.
for the six months ended June 30, 1998 and 1997;
(ii) The combined financial statements of RCG and Cherry U.K. for the
year ended December 31, 1997, which have been audited by the independent
accounting firm of Ernst & Young LLP, whose opinion thereon is included
herein; and
1
<PAGE> 3
(iii) The combined financial statements of RCG and Cherry U.K. for the
year ended December 31, 1996, which have been audited by the independent
accounting firm of Grant Thornton 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 are currently
contemplated. The Unaudited Pro Forma Combined Statements of Operations give
effect to: (1) the acquisition of Advanced TechCom, Inc.; (2) the acquisition of
a majority interest in NACT (the "NACT Stock Purchase"); (3) the acquisition of
the remainder of NACT (the "NACT Transaction"); (4) the acquisition of RCG and
Cherry U.K. (the "Resurgens Transaction"); and (5) the acquisition of Telco
Systems, Inc. ("Telco 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 Transaction, Resurgens Transaction and the Telco Merger as if it had
been completed on June 30, 1998.
As the fiscal year end of Telco Systems, Inc. ("Telco"), August 31, differs
from the Company's 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 May 31, 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 Company's management 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 Company's
preliminary determination of these adjustments based upon available information.
There can be no assurance that the actual adjustments will not differ
significantly from the pro forma adjustments reflected in the Unaudited Pro
Forma Combined Financial Statements.
In connection with the consummation of the pending acquisition
transactions, the Company expects New World Access to record charges
representing the estimated portion of the purchase price allocated to in-
process research and development of $21.9 million and $73.9 million for the NACT
Transaction and Telco Merger, respectively. In addition, in the three month
period ended March 31, 1998, the Company recorded charges representing the
estimated portion of the purchase price allocated to in-process research and
development of $44.6 million and $5.4 million for the NACT Stock Purchase and
ATI acquisition, respectively. Since these charges are directly related to the
acquisitions and will not recur, the Unaudited Pro Forma Combined Statements of
Operations have been prepared excluding these one-time non-recurring charges.
The Unaudited Pro Forma Combined Financial Statements are not necessarily
indicative of the financial position or the future results of operations or
results that might have been achieved if the foregoing acquisition transactions
had been consummated as of the indicated dates. The Unaudited Pro Forma Combined
Financial Statements should be read in conjunction with the historical
consolidated financial statements of the Company, ATI, NACT, Resurgens and
Telco, and the related notes thereto.
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "EDGAR."
<TABLE>
<C> <C> <S>
2.1 -- First Amendment to Agreement and Plan of Merger and
Reorganization
2.2 -- Second Amendment to Agreement and Plan of Merger and
Reorganization
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Grant Thornton LLP
99.1 -- Press Release dated September 3, 1998
</TABLE>
2
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLD ACCESS, INC.
By: /s/ MARTIN D. KIDDER
------------------------------------
Martin D. Kidder
Its Vice President and Controller
Dated as of September 4, 1998
3
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
The combined unaudited financial statements of RCG and
Cherry U.K. for the six months ended June 30, 1998 and
1997
Combined balance sheets as of June 30, 1998 and December
31, 1997............................................... F-2
Combined statements of operations for the three months
ended June 30, 1998 and 1997 and for the six months
ended June 30, 1998 and 1997........................... F-3
Combined statements of cash flows for the six months ended
June 30, 1998 and 1997................................. F-4
Combined statement of net stockholders' deficiency as of
June 30, 1998 and December 31, 1997.................... F-5
Notes to combined unaudited financial statements.......... F-6
The combined financial statements of RCG and Cherry U.K. for
the year ended December 31, 1997.......................... F-7
Report of independent auditors............................ F-9
Combined balance sheet as of December 31, 1997............ F-10
Combined statement of operations for the year ended
December 31, 1997...................................... F-11
Combined statement of net stockholders' deficiency for the
year ended December 31, 1997........................... F-12
Combined statement of cash flows for the year ended
December 31, 1997...................................... F-13
Notes to combined financial statements.................... F-14
The combined balance sheet of RCG and Cherry U.K. for the
year ended December 31, 1996 and the related combined
statements of operations, stockholders' equity (deficit)
and cash flows for the two years in the period ended
December 31, 1996......................................... F-25
Report of independent certified public accountants........ F-26
Combined balance sheet as of December 31, 1996............ F-27
Combined statements of operations for the years ended
December 31, 1995 and 1996............................. F-28
Combined statements of stockholder's equity (deficit) for
the two years ended December 31, 1996.................. F-29
Combined statements of cash flows for the years ended
December 31, 1995 and 1996............................. F-30
Notes to combined financial statements.................... F-31
The unaudited pro forma combined financial statements of New
World Access..............................................
Unaudited pro forma combined balance sheets as of June 30,
1998................................................... F-39 - F-43
Unaudited pro forma combined statements of operations for
the six months ended June 30, 1998..................... F-44 - F-48
Unaudited pro forma combined statements of operations for
the year ended December 31, 1997....................... F-49 - F-53
Notes to pro forma combined financial statements.......... F-54
</TABLE>
F-1
<PAGE> 6
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,637 $ 4,347
Accounts receivable, net.................................. 3,354 1,757
Prepaid expenses.......................................... 3,831 1,838
Other..................................................... 645 648
-------- --------
Total current assets.............................. 9,467 8,590
Property and equipment, net................................. 52,126 54,958
Deposits and other assets, net.............................. 152 295
-------- --------
Total assets...................................... $ 61,745 $ 63,843
======== ========
Current liabilities not subject to compromise:
Accounts payable.......................................... $ 19,731 $ 8,761
Accrued expenses.......................................... 7,243 1,719
Debtor in possession facility............................. 22,000 7,250
Current portion of capitalized lease obligations.......... 3,542 3,630
-------- --------
Total current liabilities......................... 52,516 21,360
Liabilities subject to compromise........................... 334,542 336,751
Long-term obligations not subject to compromise
Capitalized lease obligations, less current portion....... 29,050 30,820
-------- --------
Total liabilities................................. 416,108 388,931
Net stockholders' deficiency:
Common stock - Resurgens.................................. 1 1
Common stock - Cherry U.K................................. 84 84
Additional paid-in capital................................ 61,467 61,467
Accumulated deficit....................................... (415,915) (386,640)
-------- --------
Net stockholders' deficiency...................... (354,363) (325,088)
-------- --------
Total liabilities and net stockholders'
deficiency...................................... $ 61,745 $ 63,843
======== ========
</TABLE>
F-2
<PAGE> 7
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues....................................... $ 10,009 $ 60,207 $ 10,377 $131,774
Cost of services............................... 17,943 77,382 27,028 164,140
-------- -------- -------- --------
Gross margin................................... (7,934) (17,175) (16,651) (32,366)
Operating expenses:
Selling, general and administrative
expenses.................................. 4,756 9,959 7,306 16,981
Depreciation and amortization................ 1,488 1,354 3,096 2,019
Provision for doubtful accounts.............. -- 8,355 2 17,561
-------- -------- -------- --------
Total operating expenses............. 6,244 19,668 10,404 36,561
Operating loss................................. (14,178) (36,843) (27,055) (68,927)
Other income, (expense):
Interest expense............................. (1,437) (1,964) (2,631) (3,772)
Other........................................ 4 727 (1) 256
-------- -------- -------- --------
Total other income, (expense) net.... (1,433) (1,237) (2,632) (3,516)
Loss before reorganization costs............... (15,611) (38,080) (29,687) (72,443)
Reorganization items income.................... 778 -- 412 --
-------- -------- -------- --------
Net loss............................. $(14,833) $(38,080) $(29,275) $(72,443)
======== ======== ======== ========
</TABLE>
F-3
<PAGE> 8
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Operating activities
Net loss.................................................. $(29,275) $(72,443)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts........................ 0 17,562
Depreciation and amortization.......................... 3,096 2,019
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,597) 3,918
Prepaid expenses and other........................... (1,990) (5,103)
Accounts payable..................................... 10,970 47,168
Accrued expenses and other liabilities............... 5,524 10,400
-------- --------
Net cash used in operating activities before
reorganization items............................. (13,272) 3,521
Decrease in liabilities subject to compromise............. (2,209) --
-------- --------
Net cash used in operating activities..................... (15,481) 3,521
Investing activities
Fixed asset acquisitions.................................. (264) (9,526)
Deposits and other assets................................. 143 1,356
-------- --------
Net cash used in investing activities (121) (8,170)
Financing activities
Proceeds from debtor-in-possession financing 14,750 --
Proceeds from long-term debt -- 1,309
Payments on capitalized lease obligations (1,858) (1,496)
-------- --------
Net cash provided by (used in) financing
activities....................................... 12,892 (187)
Net decrease in cash and cash equivalents................... (2,710) (4,836)
Cash and cash equivalents, beginning of year................ 4,347 4,836
-------- --------
Cash and cash equivalents, end of year...................... $ 1,637 $ --
======== ========
</TABLE>
F-4
<PAGE> 9
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF NET STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
CHERRY CHERRY U.K.
COMMUNICATIONS INC. LIMITED
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
-------------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
------- ------- ------ ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997... 1,249 $1 50,000 $84 $61,467 $(386,640) $(325,088)
Net loss (unaudited)........ -- -- -- -- -- (29,275) (29,275)
----- -- ------ --- ------- --------- ---------
Balance June 30, 1998
(unaudited)............... 1,249 $1 50,000 $84 $61,467 $(415,915) $(354,363)
===== == ====== === ======= ========= =========
</TABLE>
F-5
<PAGE> 10
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited combined financial statements include the
accounts of Cherry Communications Incorporated (d/b/a Resurgens Communications
Group) ("RCG") and Cherry Communications U.K. Limited ("Cherry U.K."). Cherry
U.K.'s financial statements are prepared on a March 31 fiscal year-end. For
combination purposes, March 31, 1998 financial statements of Cherry U.K., which
were previously included in the combined entity as of December 31, 1997, have
been combined with the March 31, 1998 financial statements of RCG. Therefore,
the statement of net stockholders' deficiency and statement of cash flows
reflect an adjustment for Cherry U.K. which was previously included in fiscal
year 1997. For combination purposes, the six months ended June 30, 1997 of
Cherry U.K. have been combined with the six months ended June 30, 1997 for RCG.
These financial statements do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of the interim periods covered have been included. For further information,
refer to the audited combined financial statements and footnotes included
elsewhere in this Proxy.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of the results expected for the full year. Certain
reclassifications have been made to the prior period's financial information to
conform with the presentations used in 1998.
F-6
<PAGE> 11
COMBINED FINANCIAL STATEMENTS
CHERRY COMMUNICATIONS INCORPORATED,
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND
CHERRY COMMUNICATIONS U.K. LIMITED
YEAR ENDED DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
F-7
<PAGE> 12
CHERRY COMMUNICATIONS INCORPORATED,
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
AUDITED COMBINED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-9
Audited Combined Financial Statements
Combined Balance Sheet as of December 31, 1997.............. F-10
Combined Statement of Operations for the year ended December
31, 1997.................................................. F-11
Combined Statement of Net Stockholders' Deficiency for the
year ended December 31, 1997.............................. F-12
Combined Statement of Cash Flows for the year ended December
31, 1997.................................................. F-13
Notes to Combined Financial Statements...................... F-14
</TABLE>
F-8
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cherry Communications Incorporated,
d/b/a Resurgens Communications Group
and Cherry Communications U.K. Limited
We have audited the accompanying combined balance sheet of Cherry
Communications Incorporated (d/b/a Resurgens Communications Group), and Cherry
Communications U.K. Limited (collectively referred to as the "Companies") as of
December 31, 1997, and the related statements of operations, net stockholders'
deficiency, and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position at December 31, 1997,
of the Companies and the combined results of their operations and their cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying combined financial statements have been prepared assuming
that the Companies will continue as a going concern. As more fully described in
Note 2 to the financial statements, the Companies have not complied with the
repayment schedule for several of its loan agreements and is party to
significant litigation, the outcome of which cannot be predicted. In addition,
the Companies have incurred recurring operating losses, have a working capital
deficiency and have lost virtually all of their customer base. Cherry
Communications Incorporated (d/b/a Resurgens Communications Group) filed
voluntary bankruptcy under Chapter 11 of the United States Bankruptcy Code on
October 24, 1997, and is currently operating its business as a
debtor-in-possession under the supervision of the Bankruptcy Court. These
conditions raise substantial doubt about the Companies' ability to continue as a
going concern. Although Cherry Communications Incorporated (d/b/a Resurgens
Communications Group) is currently operating as a Debtor-In-Possession under the
jurisdiction of the Bankruptcy Court, the continuation of the business as a
going concern is contingent upon, among other things, the ability to formulate a
plan of reorganization which will gain approval of the creditors and
confirmation by the Bankruptcy Court, success of future operations, and the
ability to recover the carrying amount of assets and/or the amount and
classification of liabilities. The 1997 financial statements do not include any
adjustments to reflect the possible future effect on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of the bankruptcy proceedings and related
uncertainties.
ERNST & YOUNG LLP
June 5, 1998
Atlanta, Georgia
F-9
<PAGE> 14
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,347
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$1,062................................................ 1,757
Other.................................................. 648
---------
2,405
Prepaid expenses....................................... 1,838
---------
Total current assets.............................. 8,590
Property and equipment:
Telecommunications equipment.............................. 50,456
Furniture, fixtures and equipment......................... 10,266
Leasehold improvements.................................... 2,593
---------
63,315
Less accumulated depreciation and amortization............ (8,357)
---------
Net property and equipment................................ 54,958
Deposits and other assets, net.............................. 295
---------
Total assets...................................... $ 63,843
=========
</TABLE>
LIABILITIES AND NET STOCKHOLDERS' DEFICIENCY
<TABLE>
<S> <C>
Current liabilities not subject to compromise:
Accounts payable.......................................... $ 8,761
Accrued expenses.......................................... 1,719
Debtor-in-possession (DIP) loan........................... 7,250
Current portion of capitalized lease obligations.......... 3,630
---------
Total current liabilities......................... 21,360
Liabilities subject to compromise (Note 3).................. 336,751
Long-term obligations not subject to compromise:
Capitalized lease obligations, less current portion....... 30,820
---------
Total liabilities................................. 388,931
Net stockholders' deficiency:
Common stock, Resurgens, no par value, authorized 10,000
shares, issued 1,249 at December 31, 1997.............. 1
Common stock, Cherry U.K., no par value, authorized and
issued 50,000 shares at December 31, 1997.............. 84
Additional paid-in capital................................ 61,467
Accumulated deficit....................................... (386,640)
---------
Net stockholders' deficiency...................... (325,088)
---------
Total liabilities and net stockholders'
deficiency........................................ $ 63,843
=========
</TABLE>
See accompanying notes
F-10
<PAGE> 15
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
--------------
(IN THOUSANDS)
<S> <C>
Revenues.................................................... $ 165,489
Cost of services............................................ 246,494
---------
Gross margin................................................ (81,005)
Operating expenses:
Selling, general and administrative expenses.............. 34,891
Depreciation and amortization............................. 5,814
Provision for doubtful accounts........................... 33,743
---------
Total operating expenses.......................... 74,448
Operating loss.............................................. (155,453)
Other income (expense):
Interest and finance charges.............................. (11,939)
Loss on disposition of property........................... (2,977)
Litigation settlements -- non bankruptcy.................. (1,328)
Other income.............................................. 642
---------
Total other expense, net.......................... (15,602)
Loss before reorganization costs............................ (171,055)
Reorganization items (Note 4)............................... (665)
---------
Net loss.................................................... $(171,720)
=========
</TABLE>
See accompanying notes
F-11
<PAGE> 16
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF NET STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
CHERRY
CHERRY COMMUNICATIONS
COMMUNICATIONS INC. U.K. LIMITED
COMMON STOCK COMMON STOCK ADDITIONAL NET
-------------------- --------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
------ ------ ------ ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996..................... 1,000 $1 50,000 $84 $61,467 $(214,920) $(153,368)
Additional shares issued
related to WorldCom
settlement (Note 3)... 249 -- -- -- -- -- --
Net loss................. -- -- -- -- -- (171,720) (171,720)
----- -- ------ --- ------- --------- ---------
Balance, December 31,
1997..................... 1,249 $1 50,000 $84 $61,467 $(386,640) $(325,088)
===== == ====== === ======= ========= =========
</TABLE>
See accompanying notes
F-12
<PAGE> 17
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(171,720)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts........................... 33,743
Depreciation and amortization............................. 5,814
Loss on disposition of property and equipment............. 2,977
Write-off of unrealizable deposits and other assets....... 1,450
Changes in operating assets and liabilities:
Accounts receivables................................... 6,520
Prepaid expenses and other............................. (669)
Accounts payable....................................... (181,332)
Accrued expenses and other liabilities................. (8,559)
---------
Net cash used in operating activities before
reorganization items.............................. (311,776)
Increase in liabilities subject to compromise............... 314,228
---------
Net cash provided by operating activities......... 2,452
INVESTING ACTIVITIES
Purchases of property and equipment......................... (9,545)
Deposits and other assets................................... 851
---------
Net cash used in investing activities............. (8,694)
FINANCING ACTIVITIES
Proceeds from DIP loan...................................... 7,250
Payments on capitalized lease obligations................... (1,496)
---------
Net cash provided by financing activities................... 5,754
---------
Net decrease in cash and cash equivalents................... (488)
Cash and cash equivalents, beginning of year................ 4,835
---------
Cash and cash equivalents, end of year...................... $ 4,347
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest and finance charges paid........................... $ 830
=========
Supplemental schedule of noncash investing and financing
activities:
Capitalized lease obligations incurred for property and
equipment............................................. $ 13,756
=========
Deposits applied to capital lease obligations.......... $ 1,165
=========
</TABLE>
See accompanying notes
F-13
<PAGE> 18
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Cherry Communications Incorporated (d/b/a Resurgens Communications Group)
("Resurgens") is a facilities-based international long-distance carrier
operating five long distance switch centers throughout the United States and
overseas, and has arrangements with domestic and foreign long distance carriers
for processing international calls. Resurgens primarily provides long distance
network services to U.S. based long distance carriers. Although there are a
number of domestic and foreign long distance carriers, a change in carriers
could disrupt Resurgens' ability to service its customers, which would result in
a possible loss of operating revenues. In August 1997 Resurgens began
experiencing a substantial decline in revenues, and in October 1997 Resurgens
began restructuring its network to improve quality and eliminate those costs not
necessary to implement Management's decision to focus its business efforts as a
carrier's carrier. Resurgens' bankruptcy filing (as described in Note 2) which
resulted in a substantial loss of customers and a corresponding write-off in
accounts receivable was an initial step in implementing the new business
strategy.
The combined financial statements presented herein also include financial
statements of Cherry Communications U.K. Limited ("Cherry U.K.") which is held
under common ownership. This subsidiary has licensing and operating agreements
for international telephone access in association with Resurgens. Cherry U.K.
records an administrative revenue fee derived solely from Resurgens, based on an
agreed upon percentage of operating expense, which is eliminated in these
combined financial statements.
In October 1996, WorldCom Network Services ("WorldCom") threatened to stop
providing private line services and switch services to Resurgens as a result of
Resurgens' failure to pay WorldCom. In response, Resurgens commenced a lawsuit
against WorldCom asserting various claims including substantial billing
disputes. Effective July 24, 1997 the Companies settled their litigation and
claims against WorldCom. The settlement resulted, among other things, in the
execution by Resurgens of two promissory notes in the aggregate principal amount
of $165,000 (terms of which are further described in Note 3), the issuance of
shares of Resurgens to WorldCom (representing 19.9% of outstanding shares) and
the executions of a pledge and security agreement for 51% of the outstanding
shares of Resurgens and 51% of the outstanding shares of Cherry U.K. This pledge
and security agreement gave WorldCom the ability to effectively control 71% and
51% of the voting common shares of Resurgens and Cherry U.K., respectively.
After this settlement was reached WorldCom, Resurgens, Cherry U.K., James
R. Elliott (owner of 80.1% of Resurgens and sole owner of Cherry U.K.), and John
D. Phillips entered into a series of agreements, effective October 1, 1997,
whereby John D. Phillips received an option to purchase ("call right") James R.
Elliott's common stock of the combined Companies (1,000 shares of Resurgens and
50,000 shares of Cherry U.K.) for $1,000 and James R. Elliott received the right
to require ("put right") John D. Phillips to purchase the common stock of the
companies for $1,000. John D. Phillips was also granted a revocable voting proxy
for all of the shares owned and controlled by WorldCom, thereby giving him
effective control of Resurgens and Cherry U.K. In conjunction with John D.
Phillips obtaining effective control of the Companies, Resurgens filed a
voluntary petition for relief under the provisions of Chapter 11 of the Federal
Bankruptcy Code. In addition, WorldCom agreed to provide debtor-in-possession
financing (see Note 5). Effective May 8, 1998, John D. Phillips closed on his
option and acquired all of the outstanding shares of common stock of Cherry U.K.
for $1,000. James R. Elliott's exercise of his put right related to the 1,000
shares of Resurgens stock has been enjoined by the Bankruptcy Court and the Plan
of Reorganization currently provides that Resurgens stockholders will receive no
consideration under the Plan.
F-14
<PAGE> 19
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Resurgens and
Cherry U.K. (which is commonly controlled) (collectively, the "Companies").
Cherry U.K. was purchased by the major shareholder of Resurgens in November
1995. Cherry U.K.'s financial statements are prepared on a March 31 fiscal year
end. For combination purposes, March 31, 1998 financial statements of Cherry
U.K. have been combined with the December 31, 1997 financial statements of
Resurgens. Significant intercompany accounts and transactions have been
eliminated in combination.
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are generally computed using the straight-line method over the estimated useful
lives of the related assets as indicated below:
<TABLE>
<S> <C>
Telecommunications equipment.............................. 5-10 years
Furniture, fixtures and equipment......................... 4-5 years
Leasehold improvements.................................... Life of lease
</TABLE>
In the event facts and circumstances indicate the cost of any long-lived
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the assets would be compared to the carrying amount of the
assets to determine if a write down to fair value may be required.
REVENUE RECOGNITION
Revenues are derived primarily from the provision of long-distance
telecommunications services and are recognized when the services are provided.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
The Companies intend to adopt the provisions of SFAS 130 in 1998 and do not
expect its application to have a material impact on the financial position or
results of operations of the Companies.
F-15
<PAGE> 20
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Companies to significant
concentrations of credit risk consist principally of cash and cash equivalents,
trade accounts receivable, accounts payable and long term debt.
The Companies maintain cash and cash equivalents and certain other
financial instruments with various financial institutions. The Companies' policy
is designed to limit exposure at any one institution by performing periodic
evaluations of the relative credit standing of those financial institutions.
Fair Value of Financial Instruments
The fair value of the Companies' financial instruments classified as
current assets or liabilities, including cash and cash equivalents, accounts
receivable, and accounts payable approximate carrying value, principally because
of the short maturity of these items.
The carrying amounts of the long-term debt payable approximate fair value
due to the interest rates on these agreements approximating the Companies'
incremental borrowing rates, and the fair values of capitalized lease
obligations approximate carrying value based on their effective interest rates
compared to current market rates.
SIGNIFICANT CUSTOMERS
The Companies' revenues are derived from a variety of customers including
one customer, which accounted for 19% of the Companies' revenues during 1997.
ADVERTISING COSTS
Pursuant to American Institute of Certified Public Accountants (AICPA)
Statement of Position No. 93-7, "Reporting on Advertising Cost," the Companies
expensed advertising costs of $2,226 as incurred in 1997.
COST OF SERVICES AND PRODUCTS
Cost of services include payments primarily to local exchange carriers
("LECs") and interexchange carriers, primarily for access and transport charges.
INCOME TAXES
Due to Resurgens' conversion from a subchapter S Corporation to a C
Corporation as of August 1, 1997, Resurgens began accounting for income taxes
under the liability method. Under this method, deferred income taxes are
recorded to reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and the
amounts for income tax purposes.
For the period prior to August 1, 1997, all taxable losses were allocated
to the owners of Resurgens. Accordingly no income taxes are reflected for
Resurgens in the accompanying financial statements for the period prior to the
conversion. Cherry U.K. accounted for income taxes under the liability method
for fiscal 1997.
F-16
<PAGE> 21
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates and such
differences could be material.
FOREIGN OPERATIONS
Summarized financial information for Cherry U.K. in US dollars, prior to
intercompany elimination, is:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
BALANCE SHEET
Current assets............................................ $ 792
Property and equipment.................................... 6,932
-------
Total assets...................................... 7,724
Current liabilities, including amount due to Resurgens of
$4,496.................................................... 6,337
Long-term debt.............................................. 3,996
-------
Total liabilities................................. 10,333
-------
Net deficiency.................................... $(2,609)
=======
STATEMENT OF OPERATIONS
Revenues.................................................. $ 2,848
Expenses.................................................. 3,665
=======
Net loss.......................................... $ (817)
=======
</TABLE>
FOREIGN CURRENCY TRANSLATION
Translation adjustments arising from combining Cherry U.K. are reflected
within the statements of operations as the US dollar is the functional currency
of Cherry U.K.
2. PETITION FOR RELIEF UNDER CHAPTER 11 BANKRUPTCY
On October 24, 1997, Resurgens filed a voluntary petition for relief under
the provisions of Chapter 11 of the Federal Bankruptcy Code ("Chapter 11") in
the United States Bankruptcy Court for the Northern District of Illinois (the
"Court"). Cherry U.K. was not included in this bankruptcy filing. Under Chapter
11, certain claims against Resurgens in existence prior to the filing for relief
under the federal bankruptcy laws are stayed while Resurgens continues business
operations as a Debtor-in-Possession subject to the supervision of the Court.
Management filed a plan of reorganization on June 15, 1998 which contemplates
emergence in the third quarter of 1998. There can be no assurance at this time
that a plan of reorganization will be approved or confirmed by the Bankruptcy
Court, or that such plan will be consummated.
After an exclusivity period, creditors of Resurgens have the right to
propose alternative plans of reorganization. Any plan of reorganization, among
other things, is likely to result in material dilution of the equity of existing
stockholders as a result of a possible issuance of equity to creditors or new
investors.
F-17
<PAGE> 22
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. PETITION FOR RELIEF UNDER CHAPTER 11 BANKRUPTCY -- (CONTINUED)
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Chapter 11 filing and circumstances relating to this event,
including Resurgens' leveraged financial structure and losses from operations,
such realization of assets and liquidation of liabilities is subject to
significant uncertainty. While under protection of Chapter 11, Resurgens may
sell or otherwise dispose of assets and liquidate or settle liabilities, for
amounts other than those reflected in the financial statements. Further, a plan
of reorganization could materially change the amounts reported in the financial
statements. Accordingly such financial statements do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization or the inability of the
Companies to continue as a going concern.
The ability to continue as a going concern is dependent upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
and the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.
3. LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under the reorganization proceedings are identified below. These
amounts may be subject to future adjustment depending on the Court's action,
further developments with respect to disputed claims, determination as to the
value of any collateral securing claims, and other events. Additional claims may
arise resulting from rejection of additional executory contracts or unexpired
leases by Resurgens.
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Accounts payable............................................ $136,095
Long-term debt.............................................. 168,545
Governmental entities....................................... 7,314
Former employees............................................ 2,485
Professional fees........................................... 2,098
Accrued interest............................................ 2,939
Other liabilities........................................... 17,275
--------
$336,751
========
</TABLE>
As a result of the bankruptcy filing, no principal or interest payments
will be made on any pre-petition debt without Court approval or until a
reorganization plan defining the repayment terms has been approved. Contractual
interest expense not recorded on certain pre-petition debt totaled $2,100 for
the period from October 24, 1997 through December 31, 1997.
F-18
<PAGE> 23
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIABILITIES SUBJECT TO COMPROMISE -- (CONTINUED)
LONG-TERM DEBT, SUBJECT TO COMPROMISE
<TABLE>
<CAPTION>
1997
--------
<S> <C>
WorldCom installment note due December 30, 1997, interest to
accrue at 18% for default of payment...................... $ 50,000
WorldCom installment note due July 23, 2000, bearing
interest at 10%. Interest only payments are due quarterly
beginning March 31, 1998 and payments of principal and
interest beginning October 23, 1998....................... 115,000
Illinois Capital Group installment note due September 1997,
bearing interest at 10% with monthly principal and
interest payments of $60. Penalty of $250 added to
principal for nonpayment of principal balance on due
date...................................................... 367
Esplanade at Locust Point installment note due June 1999,
with monthly payments of $100, including interest imputed
at 12.5%. Includes interest penalty of $894 added to
principal in 1998 due to nonpayments on account........... 3,008
Eastern Telecom installment note due on or before November
1, 1998 bearing interest at 8%............................ 170
--------
Total long-term debt, subject to compromise....... $168,545
========
</TABLE>
Under the two WorldCom installment notes, which are secured by
substantially all of the Companies' assets and stock of the Corporations, any
defaults allow WorldCom to charge interest at 18% annually on all outstanding
balances, and to request the entire indebtedness to become due. The Companies
have defaulted on the $50,000 note payable due December 30, 1997, and subsequent
to year end, defaulted on the March 31, 1998 interest payment due on the
$115,000 note. Remedies of default are not waived under this agreement by any
failure or delay by any party in exercising any remedy of default.
On April 2, 1996 Resurgens settled a litigation case with Illinois Capital
Group related to delinquent payments for leased switching equipment. In
connection with this settlement, a promissory note was executed for
approximately $1,300. The note required monthly payments beginning April 15,
1996 with a penalty amount of $250 if Resurgens did not make payments when due.
Resurgens ceased payment on this note in mid 1997 and therefore this penalty
amount has been added to the principal balance.
Resurgens entered into a settlement agreement with Esplanade at Locust
Point Limited Partnership ("Esplanade") on January 29, 1996 which released
Resurgens from litigation claims involving leased office space. In connection
with this settlement, a promissory note was issued in the amount of $4,000, with
monthly payments of $100 to begin in March 1996, with no interest. Resurgens
failed to remit the required monthly payments during 1997. The agreement stated
that an additional $1,000 would be assessed and due if the companies failed to
meet the required payment schedule. Esplanade filed a claim against Resurgens
for the outstanding balance of the loan plus the additional penalty amount.
Prior to December 31, 1997, a judgment was reached in this case and an
additional amount of $894 was granted to Esplanade. This amount is subject to an
interest rate of 12.5% and is included in the principal balance amount at
December 31, 1997.
The Eastern Telecom installment note was signed on August 1, 1997, based
upon judicial court settlement, for $190. The amount relates to non-performance
of a purchase agreement for switching equipment by Resurgens.
As part of the Chapter 11 reorganization process, Resurgens has attempted
to notify all known or potential creditors of the Chapter 11 filing for the
purpose of identifying all pre-petition claims against Resurgens. Generally,
creditors whose claims arose prior to the Petition Date had until February 6,
1998 ("Bar Date") to file claims or be barred from asserting claims in the
future. Claims arising from rejection of
F-19
<PAGE> 24
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. LIABILITIES SUBJECT TO COMPROMISE -- (CONTINUED)
executory contracts by Resurgens, and claims related to certain other items were
permitted to be filed within other dates as set by the Court.
Differences between amounts shown by Resurgens and claims filed by
creditors are being investigated and will either be resolved or adjudicated. The
ultimate amount of and settlement terms for such liabilities are subject to the
confirmed plan of reorganization and are not presently determinable. The total
amount of proofs of claims filed in Court approximate $434,000, while the amount
accrued by Resurgens at December 31, 1997 is $336,751. This difference of
approximately $95,000 pertains to claims that management believes to be
duplicate claims, amounts relating to outstanding litigation (See Note 11) and
other disputed claims for which management is unable to predict the ultimate
outcome of and therefore, no provision has been recorded in the financial
statements for this difference.
4. REORGANIZATION ITEMS
Reorganization items recorded in 1997 consisted of:
<TABLE>
<S> <C>
Rejected lease expense...................................... $ 956
Professional fees........................................... 233
Professional fees abated.................................... (524)
-----
$ 665
=====
</TABLE>
Professional fees incurred consisted of consulting and legal fees for
bankruptcy activity and restructuring efforts on behalf of Resurgens and the
creditor's committee.
5. DEBTOR-IN-POSSESSION (DIP) FINANCING
In November 1997, the Court authorized Resurgens to enter into a financing
agreement with WorldCom in order to facilitate continued operations as a
debtor-in-possession. The terms of this financing agreement originally provided
for maximum advances thereunder to $19,000 and required repayment on April 30,
1998 at 12% interest.
On April 16, 1998 the financing agreement was amended to provide for an
increased maximum amount of $25,000 and an extended term through July 31, 1998.
As of June 5, 1998, the Company had borrowed an additional $13,700.
6. CAPITALIZED LEASE OBLIGATIONS
The Companies lease telecommunications and other equipment through
capitalized lease arrangements.
F-20
<PAGE> 25
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. CAPITALIZED LEASE OBLIGATIONS -- (CONTINUED)
Future minimum lease payments on these capitalized lease obligations at
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 6,930
1999........................................................ 10,499
2000........................................................ 10,382
2001........................................................ 9,966
2002........................................................ 5,493
--------
Net minimum lease payments........................ 43,270
Less amount representing interest........................... (8,820)
--------
Present value of minimum lease payments..................... 34,450
Less current portion of capitalized lease obligations....... (3,630)
--------
Long-term portion of capitalized lease obligations, not
subject to compromise..................................... $ 30,820
========
</TABLE>
The net carrying value of assets under capital leases was $35,900 at
December 31, 1997, and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
7. EMPLOYEE 401(K) PLAN
Effective January 1, 1997, Resurgens established a defined contribution
savings plan, intended to qualify under IRS Code Section 401(k), available to
all employees who complete six months of service and are at least age 21.
Employees may contribute up to 15% of their salary per year, subject to
statutory limitations, and Resurgens matches 100% of employee contributions up
to 5% of each employee's salary. Resurgens' matching contributions vest 20% per
year. Resurgens' expense under the plan during 1997 amounted to approximately
$98.
8. INCOME TAXES
For the period from inception through July 31, 1997, Resurgens elected to
have its income taxed directly to its individual shareholders under the
provisions of Subchapter S of the Internal Revenue Code ("the Code").
Accordingly, no deferred income taxes were established for Resurgens. Effective
August 1, 1997, the S-Corporation election was terminated due to a change in
ownership and Resurgens is now subject to federal and state income taxes. Upon
conversion to C corporation status, Resurgens recorded a net deferred tax asset
which was fully offset by the establishment of a valuation reserve. Accordingly,
no charge or benefit was made to the income tax provision to reflect the impact
of this change in tax status.
Effective August 1, 1997, the accompanying financial statements reflect
provisions for income taxes computed in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 109. With respect to
Cherry U.K., the accompanying financial statements reflect provisions for income
taxes calculated under the provisions of SFAS No. 109 since acquisition. For the
period prior to the change in tax status, the provision has been presented on a
pro forma basis as if Resurgens had been liable for federal and state income
taxes since January 1, 1997.
The Companies have generated significant net operating losses ("NOLs") both
in the United States and in the United Kingdom. These NOLs may be available to
offset future taxable income, subject to the limitations discussed below.
Resurgens has generated NOL carryforwards totaling $128,000 in the United
F-21
<PAGE> 26
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES -- (CONTINUED)
States after the date of the conversion from S-Corporation to C-Corporation
status. Cherry U.K. has NOLs available at December 31, 1997 approximating $1,500
in the United Kingdom. The United States federal NOL generated in 1997 expires
in the year 2012, while the United Kingdom NOLs do not expire.
The significant components of the Companies' deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
AUGUST 1, DECEMBER 31,
1997 1997
--------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for bad debts........................... $ 2,846 $ 4,889
Net operating loss carry-forward.................. -- 48,871
Accruals.......................................... 341 319
Depreciation and amortization..................... 452 458
Contested liabilities............................. 31,064 6,825
Other............................................. 17 29
Valuation allowance............................... (29,347) (56,061)
------- -------
5,373 5,330
------- -------
Deferred tax liabilities:
Depreciation and amortization..................... 474 441
Installment sale.................................. 4,899 4,889
------- -------
5,373 5,330
------- -------
Net deferred assets....................... $ -- $ --
======= =======
</TABLE>
The pro forma reconciliation of income tax benefit attributable to
operations computed at the US federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Tax benefit at US statutory rate............................ $(58,079)
State income tax benefit.................................... (6,833)
Permanent differences....................................... 1,025
Change in valuation allowance............................... 63,887
--------
$ --
========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Companies' offices, along with various equipment and property access
rights, are leased under operating leases expiring in 1998 through 2006. Certain
leases contain escalation clauses based upon increases in the consumer price
index.
F-22
<PAGE> 27
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Future minimum lease payments on noncancellable operating leases at
December 31 are as follows:
<TABLE>
<CAPTION>
1997
------
<S> <C>
1998........................................................ $1,347
1999........................................................ 1,007
2000........................................................ 765
2001........................................................ 516
2002........................................................ 255
Thereafter.................................................. 568
------
Total future minimum lease payments............... $4,458
======
</TABLE>
Rent expense for the year ended December 31, 1997 was approximately $3,538.
10. RELATED PARTY TRANSACTIONS
Effective April 1, 1997, Resurgens entered into a ten-year lease agreement
for an office building with shareholder related trusts. Until occupancy on or
about January 1, 1998, Resurgens is required to pay 50% of the monthly lease
amount or approximately $11 per month. For the year ended December 31, 1997, the
Companies recorded rent expense of $200 associated with this lease. In December
1997, Resurgens recorded a liability of $444 for rejecting the lease in
accordance with Chapter 11 provisions.
During fiscal 1997, Resurgens utilized WorldCom, a shareholder, for
transport services aggregating $27,834, which have been expensed by the
Companies in cost of service. The amount owed to WorldCom at December 31, 1997
is $188,992, of which $178,863 is recorded as liabilities subject to compromise.
Effective April 1998, Resurgens entered into a Carrier Service Agreement
with WorldCom pursuant to which WorldCom is obligated to purchase international
long distance services up to $25,000 a month provided the services are of
acceptable quality and the rates are at least equal to rates from other third
parties. The contract is for a one year initial term but automatically renews
each month, subject to a one year termination notice.
11. LITIGATION
The Companies are subject to numerous lawsuits, investigations and claims
(a number of which involve amounts that are material to these financial
statements) arising out of the conduct of its business, including those relating
to commercial transactions and regulatory matters. Such items generally relate
to claims made previous to Resurgens filing bankruptcy; therefore, the ultimate
liability of Resurgens is generally included in the liabilities subject to
compromise (see Note 3).
Resurgens is party to an action with AT&T in which AT&T filed suit against
Resurgens. Resurgens purchased long distance and international service from AT&T
from January 1996 through February 1997, and disputed the accuracy of certain
charges which prompted AT&T to terminate all services. AT&T seeks in excess of
$16,000 for alleged unpaid services. Resurgens has filed a counterclaim against
AT&T, alleging offset claims for the full amount of AT&T's claims, resulting
from alleged inaccurate billing by AT&T. Resurgens also alleges false and
deceptive advertising claims, unfair competition and deceptive business
practices claims against AT&T. Resurgens has recorded all disputed invoices
aggregating $16,528 and cannot predict the ultimate outcome of this case.
Resurgens is party to an action with MidCom Communications Inc. (MidCom).
Resurgens initially sued MidCom during 1996 and MidCom subsequently filed a case
against Resurgens. Resurgens sold a portion of its commercial customer base to
MidCom during 1995, but did not receive the full payment for the customer
F-23
<PAGE> 28
CHERRY COMMUNICATIONS INCORPORATED
(D/B/A RESURGENS COMMUNICATIONS GROUP)
(DEBTOR-IN-POSSESSION) AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. LITIGATION -- (CONTINUED)
base and sued MidCom for $16,200. MidCom filed a counter suit against the
Company asserting that Resurgens' actions related to the sale of the customer
base allegedly breached the contract, violated the Uniform Commercial Code, and
constituted tortious interference with the contract. MidCom filed a $36,000
proof of claim in Resurgens' bankruptcy case. The litigation of both parties has
been stayed and remanded to a bankruptcy court hearing. Given the uncertainty of
this matter, Management is unable to predict the ultimate outcome of this case
and accordingly, has not accrued any liability for this claim.
Coast to Coast Plus, Inc., a former customer, filed suit in November 1996
alleging that it suffered $10,000 in damages from Resurgens' "wrongful"
termination of its long-distance telecommunications services and overbillings
for services Resurgens did not provide. Resurgens filed an answer denying
liability and filed a counterclaim and a third party claim against the
principals of Coast to Coast which asserted four claims: two RICO claims, a
fraud claim, and a breach of contract, including $250 owed for long-distance
services. Management is unable to predict the ultimate outcome of this case and
accordingly, has not accrued any liability for this claim.
First Premier Bank asserted a claim for approximately $44,000 against
Cherry Payment Systems and Dallas Leasing Group, which are companies that were
merged into Resurgens in prior years, for non-payment on past due loans. First
Premier Bank did not file a proof of claim as of the bar date with the Court and
therefore management does not believe it is obligated for this amount. Given the
uncertainty of this asserted claim, Management can not predict the ultimate
outcome of this matter and accordingly, has not accrued any liability for this
claim.
The Companies are also involved in other claims, inquiries and litigation
arising in the ordinary course of business. The Companies believe that these
matters, taken individually or in the aggregate, would not have a material
adverse impact on the Companies' financial position or results of operations.
12. SUBSEQUENT EVENTS
On May 12, 1998 the Companies and World Access, Inc. ("World Access") entered
into a merger agreement whereby World Access will acquire the Companies. The
agreement is subject to, among other things, Bankruptcy Court approval, certain
monthly revenue and gross margin levels, confirmation of Resurgens' Plan of
Reorganization and World Access shareholder approval. Pursuant to the terms of
the agreements, the creditors of Resurgens and shareholders of Cherry U.K. will
receive 3,125,000 and 625,000 shares of World Access common stock, respectively,
in the aggregate at the closing of the mergers. In addition, Resurgens'
creditors and Cherry U.K. shareholders would have the right to receive
additional consideration of up to 6,250,000 and 1,250,000 shares of World Access
common stock, respectively, over the next two and one-half years contingent upon
the achievement of certain financial criteria by the Companies.
F-24
<PAGE> 29
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
AUDITED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-26
Audited Financial Statements
Combined Balance Sheet as of December 31, 1996.............. F-27
Combined Statements of Operations for the years ended
December 31, 1995 and 1996................................ F-28
Combined Statement of Stockholder's Equity (Deficit) for the
two years ended December 31, 1996......................... F-29
Combined Statements of Cash Flows for the years ended
December 31, 1995 and 1996................................ F-30
Notes to Combined Financial Statements...................... F-31
</TABLE>
F-25
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS
CHERRY COMMUNICATIONS INCORPORATED AND CHERRY COMMUNICATIONS U.K. LIMITED
We have audited the accompanying balance sheet of Cherry Communications
Incorporated and Cherry Communications U.K. Limited (collectively referred to as
the "Companies") as of December 31, 1996 and the related combined statements of
operations, stockholder's equity (deficit) and cash flows for each of the two
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Cherry
Communications Incorporated and Cherry Communications U.K. Limited as of
December 31, 1996, and the combined results of their operations and their
combined cash flows for each of the two years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Companies will continue as a going concern. As discussed in Notes 2 and 9 to the
financial statements, the Companies incurred substantial losses in 1995 and 1996
and have disputed significant net accounts payable balances due their primary
vendor. Although the dispute has been settled, as discussed in Note 10, and 1996
balances payable have been reduced, significant balances converted to notes
payable remain. The Companies' ability to obtain an equity infusion or
replacement financing for these notes is limited by the terms and collateral
arrangements of the settlement. The terms of the settlement agreement will
continue the Companies' dependence on this vendor as one of the Companies'
primary long distance carriers. These matters raise substantial doubt about the
Companies' ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. Continuation of the Companies is
dependent upon the Companies' ability to return to profitability and to achieve
sufficient cash flow from operations, additional debt or equity. The
accompanying combined statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Companies be
unable to continue as a going concern.
GRANT THORNTON LLP
Chicago, Illinois
July 11, 1997, except for Notes 2 and 10,
as to which the date is July 24, 1997
F-26
<PAGE> 31
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT FOR SHARE
INFORMATION)
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 4,836
Accounts receivable
Trade, net of allowance for doubtful accounts of
$41,346................................................ 42,275
Other..................................................... 392
--------
42,667
Prepaid expenses and other................................ 1,170
--------
Total current assets.............................. 48,673
Property and equipment, net................................. 40,447
Other assets
Deposits and other assets, net............................ 3,760
--------
Total assets...................................... $ 92,880
========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt......................... $ 12,230
Current portion of capitalized lease obligations.......... 5,083
Accounts payable.......................................... 198,760
Accrued excise and other taxes............................ 3,967
Accrued expenses.......................................... 4,910
Accrued litigation costs.................................. 892
Other liabilities......................................... 500
--------
Total current liabilities......................... 226,342
Long-term obligations
Capitalized lease obligations, less current portion....... 18,272
Long-term debt, less current portion...................... 1,634
--------
Total liabilities................................. 246,248
Commitments and contingencies............................... --
Stockholder's equity (deficit)
Common stock, Cherry Communications Incorporated, no par
value, authorized 10,000 shares, issued and outstanding
1,000 shares........................................... 1
Common stock, Cherry Communications U.K. Limited, no par
value, authorized and issued 50,000 shares............. 84
Additional paid-in capital................................ 61,467
Accumulated deficit....................................... (214,920)
--------
Total stockholder's equity (deficit).............. (153,368)
--------
Total liabilities and stockholder's equity
(deficit)......................................... $ 92,880
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-27
<PAGE> 32
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating revenues
Carrier long distance..................................... $ 41,646 $ 315,699
Commercial long distance.................................. 24,215 19,739
Residential long distance................................. 12,940 7,857
Other income.............................................. 2,868 9,710
-------- ---------
Total operating revenues.......................... 81,669 353,005
Operating expenses
Cost of services and products............................. 80,982 391,615
Selling, general and administrative expenses.............. 20,447 32,622
Provision for doubtful accounts........................... 6,032 32,004
-------- ---------
Total operating expenses.......................... 107,461 456,241
-------- ---------
Operating loss.................................... (25,792) (103,236)
Other income (expense)
Interest and finance charges.............................. (2,142) (15,299)
Gain on sale of customer base............................. 5,486 1,339
Loss on disposition of property and equipment............. -- (394)
Loss on disposition of investment securities.............. -- (643)
Other income.............................................. 278 93
-------- ---------
Total other expense, net.......................... 3,622 (14,904)
-------- ---------
Loss before income tax expense.................... (22,170) (118,140)
Income tax expense.......................................... 5 10
-------- ---------
Net loss.......................................... $(22,175) $(118,150)
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 33
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
FOR THE TWO YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CHERRY CHERRY
COMMUNICATIONS COMMUNICATIONS
INCORPORATED U.K. LIMITED UNREALIZED TOTAL
COMMON STOCK COMMON STOCK ADDITIONAL GAIN ON STOCKHOLDER'S
--------------- --------------- PAID-IN ACCUMULATED INVESTMENT EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES (DEFICIT)
------ ------ ------ ------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.............. 1,000 $1 -- $-- $35,672 $ (73,045) $ -- $ (37,372)
Stockholder's contribution of notes
payable and accrued interest payable
of $500............................. -- -- -- -- 25,795 -- -- 25,795
Stockholder's acquisition of common
stock of Cherry Communications U.K.
Limited, November 1995.............. -- -- 50,000 84 -- (1,550) -- (1,466)
Unrealized gain on investment
securities.......................... -- -- -- -- -- -- 476 476
Net loss.............................. -- -- -- -- -- (22,175) -- (22,175)
----- -- ------ --- ------- --------- ----- ---------
Balance, December 31, 1995............ 1,000 1 50,000 84 61,467 (96,770) 476 (34,742)
Change in unrealized gain on
investment securities............... -- -- -- -- -- -- (476) (476)
Net loss.............................. -- -- -- -- -- (118,150) -- (118,150)
----- -- ------ --- ------- --------- ----- ---------
Balance, December 31, 1996............ 1,000 $1 50,000 $84 $61,467 $(214,920) $ -- $(153,368)
===== == ====== === ======= ========= ===== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-29
<PAGE> 34
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(22,175) $(118,150)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposition of investment securities............ -- 643
Depreciation and amortization........................... 1,118 4,923
Loss on disposition of property and equipment........... -- 394
Gain on sale of customer base........................... (5,486) (1,339)
Increase in receivables................................. (25,672) (15,276)
Increase in prepaid expenses and other.................. (234) (936)
Increase in accounts payable............................ 53,996 146,311
Increase in accrued excise and other taxes.............. 1,913 1,269
Increase in accrued expenses............................ 2,359 2,308
Decrease in accrued litigation costs.................... (5,846) (2,816)
Increase in other liabilities........................... 346 154
-------- ---------
Total adjustments.................................. 22,494 135,635
-------- ---------
Net cash provided by operating activities.......... 319 17,485
Cash flows from investing activities:
Proceeds from sale of customer base....................... 2,486 1,339
Proceeds from sales of investment securities.............. 423 --
Purchases of property and equipment....................... (5,106) (8,141)
Deposits and other assets................................. (1,192) (835)
-------- ---------
Net cash used in investing activities.............. (3,389) (7,637)
Cash flows from financing activities:
Proceeds from notes payable............................... 1,378 313
Payments on notes payable................................. (698) (1,174)
Payments on capitalized lease obligations................. (1,608) (7,010)
Increase in notes payable to stockholder.................. 5,336 --
-------- ---------
Net cash provided by (used in) financing
activities........................................ 4,408 (7,871)
-------- ---------
Net increase in cash and cash equivalents.......... 1,338 1,977
Cash and cash equivalents, beginning of year................ 1,521 2,859
-------- ---------
Cash and cash equivalents, end of year...................... $ 2,859 $ 4,836
======== =========
Supplemental disclosure of cash flow information:
Interest and finance charges.............................. $ 856 $ 2,193
Income taxes paid......................................... 4 12
Supplemental schedule of noncash investing and financing
activities:
Assets received in settlement of accounts receivable...... $ 3,000 $ 1,880
Investment securities assigned to vendors................. -- 2,357
Accounts payable converted into notes payable............. 9,002 --
Capitalized lease obligations incurred.................... 6,195 24,803
Contribution of notes payable and accrued interest to
equity.................................................. 25,795 --
Unrealized gain on investment securities.................. 476 (476)
Decrease in contingency reserve through issuance of notes
payable................................................. -- (4,258)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 35
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Cherry Communications Incorporated ("Cherry") commenced operations in 1991
as a successor through merger of five businesses operating in the payment
processing and credit authorization industry, including leasing of bank card
processing machinery. During 1992, Cherry discontinued the operations of the
five businesses and began the new business of a non-switch-based reseller of
long distance services to residential and commercial customers throughout the
United States. In late 1994, Cherry acquired its first long distance switch. As
of December 31, 1996, Cherry is a switch-based carrier operating nine long
distance switch centers throughout the United States and overseas, and has
arrangements with foreign carriers for processing of international calls. Cherry
provides its long distance network services to resellers, agents and end users
consisting of business and residential customers. At December 31, 1996, Cherry
primarily uses one long distance carrier, WorldCom, Inc., as its major long
distance carrier. Although there are a number of long distance carriers, a
change in carriers could disrupt Cherry's ability to service its customers,
which could result in a possible loss of operating revenues.
The combined financial statements presented herein also include financial
statements of Cherry Communications U.K. Limited ("Cherry U.K.") which is held
under common ownership. This affiliate has licensing and operating agreements
for international telephone access in association with Cherry.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Cherry and Cherry
U.K. (collectively, the "Companies"). Cherry U.K. was purchased by the
shareholder of Cherry in November 1995. Cherry U.K.'s financial statements are
prepared on a March 31 fiscal year end. For combination purposes, Cherry U.K.'s
financial statements as of and for the year ended March 31, 1997 and for the
period ended March 31, 1996 have been combined with the December 31, 1996 and
1995 financial statements of Cherry, respectively. Significant intercompany
accounts and transactions have been eliminated in combination.
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents
consist of money market fund investments and short-term certificates of deposit.
Exclusive of cash in banks, cash equivalents at December 31, 1996 approximate
fair value. At December 31, 1996, the Companies' certificates of deposits
approximated $2,176,000. The certificates of deposit are collateral for the
Companies' line of credit agreement (note 4).
INVESTMENTS
Short-term investments are comprised of equity securities. Investment
securities are classified as available-for-sale and are stated at fair value as
determined by quoted prices on exchanges. During the year ending December 31,
1996, all of the Companies' investment securities were transferred to the
Companies' primary vendor in partial settlement of outstanding line charges. The
fair value of these securities at the date of transfer approximated $2,357,000.
The Companies recognized a loss of $643,000 from the transfer. During the year
ending December 31, 1995, proceeds from the sale of investment securities was
$423,000 with no realized gain or loss recognized.
F-31
<PAGE> 36
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are generally computed using the straight-line method over the estimated useful
lives of the related assets.
INCOME TAXES
Income taxes on net taxable earnings are payable personally by the
stockholder, pursuant to an election under Subchapter S of the Internal Revenue
Code, which states Cherry is not taxed as a corporation. Accordingly, no
provision has been made for Federal income taxes for Cherry. Cherry U.K. income
taxes are not material to the combined financial statements.
REVENUE RECOGNITION
Revenues are recorded upon placing of calls or rendering of other related
services.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Companies to
concentration of credit risk consist principally of trade receivables.
Concentration of credit risk with respect to these receivables is generally
diversified because the Companies' customer base includes many entities spread
across a large geographic area. The Companies routinely address the financial
strength of its customers and, as a consequence, believe that its receivable
credit risk exposure is limited.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
FOREIGN OPERATIONS
Summarized financial information (in thousands of U.S. dollars) for Cherry
U.K., prior to intercompany eliminations, is:
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
Current assets.............................................. $ 712
Property and equipment...................................... 1,633
-------
Total assets...................................... 2,345
Current liabilities, including amount due to Cherry of
$2,952.................................................... 4,137
-------
Net deficiency.................................... $(1,792)
=======
</TABLE>
F-32
<PAGE> 37
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
MARCH 31, MARCH 31,
1997 1996
---------- ------------
<S> <C> <C>
Revenues.................................................... $2,377 $ 809
Expenses.................................................... 2,214 1,293
------ ------
Net income (loss)................................. $ 163 $ (484)
====== ======
</TABLE>
The functional currency of Cherry U.K. is the U.S. dollar. Consequently,
gains or losses from remeasurement of Cherry U.K.'s accounts are recognized in
operations.
NOTE 2. GOING CONCERN
The accompanying financial statements have been prepared assuming the
Companies will continue as a going concern. The Companies have sustained
significant losses in 1995 and 1996, and has a deficit in stockholder's equity
of approximately $153.4 million at December 31, 1996. As discussed in Note 9 --
Litigation, the Companies have various disputes with carriers for out-bound and
in-bound line charges which affect timing and amounts of collections and
payments. The most significant of these disputes is with WorldCom, Inc.
("WorldCom"), historically the Companies' primary carrier. As discussed in Note
10 -- Subsequent Events, the dispute with WorldCom has been settled as of July
24, 1997, resulting in, among other matters, a settlement of outstanding net
liabilities of $202,415,000 at July 15, 1997 ($175,633,000 at December 31, 1996)
for $165,000,000 in notes. The first new note of $50,000,000 is due on December
31, 1997. The second new note of $115,000,000 is due in quarterly installments
commencing October 23, 1998 through June 23, 2000, with interest payable
quarterly at 10% per annum.
Other terms of the settlement require the Companies to continue to pledge
all assets as collateral for the notes, except for equipment under capitalized
lease obligations; the Companies will issue shares representing 19.9% ownership
to WorldCom; and the sole shareholder must pledge 51% of total outstanding
shares as collateral. WorldCom will subordinate its collateral position up to
$100,000,000 for new borrowings by the Company if 75% of the proceeds from a
single new borrowing of up to $70.0 million or 50% of the proceeds from a single
new borrowing over $70.0 million are used to pay WorldCom.
These developments continue to have a material adverse effect and limit
their Companies' ability to meet their obligations as they come due and to
obtain financing or an equity infusion. The Companies' actions to address their
current liquidity constraints and their financial performance include
negotiations with potential lenders or equity participants. However, there can
be no assurances that the Companies' actions will improve their financial
performance or liquidity position or that they can avoid default on the December
31, 1997 payment of the $50,000,000 note obligation.
F-33
<PAGE> 38
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation consist of the
following at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
-------------
<S> <C> <C>
Equipment under capitalized lease obligations:
Telecommunications equipment.............................. $31,052 5-10 years
Other..................................................... 2,150 7 years
-------
33,202
Furniture, fixtures and equipment........................... 13,227 4-5 years
Leasehold improvements...................................... 1,457 Life of lease
-------
Total property and equipment...................... 47,886
Less accumulated depreciation and amortization.............. 7,439
-------
Net property and equipment........................ $40,447
=======
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995
and 1996 was $1,068,000 and $4,226,000, respectively.
NOTE 4. LONG-TERM DEBT
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
WorldCom installment note (Note 1) due December, 1995,
bearing interest at 12%. Due to the disputed balances with
WorldCom, Cherry has not paid principal or interest on
this note (1)............................................. $ 679
WorldCom installment note (Note 2) due January, 1996,
bearing interest at 16%. Due to the disputed balances with
WorldCom, Cherry has not paid principal or interest on
this note (1)............................................. 8,323
WorldCom installment note (Note 3) due December, 1995,
bearing interest at 10%. Due to the disputed balances with
WorldCom, Cherry has not paid principal or interest on
this note (1)............................................. 1,378
Illinois Capital Group installment note due September, 1997,
bearing interest at 10% with monthly principal and
interest payments of $60,500.............................. 519
Esplanade at Locust Point installment note due June, 1999,
with monthly payments of $100,000, including interest
imputed at 12.5%.......................................... 2,565
First National Bank of Wheaton $400,000 (as of December 31,
1996) line of credit bearing interest at the prime rate
(8.5% as of December 31, 1996). The line of credit is due
upon demand and is collateralized by certificates of
deposits and general business assets...................... 400
-------
Total long-term obligations................................. 13,864
Less current portion of long-term debt...................... 12,230
-------
Long-term portion of long-term debt......................... $ 1,634
=======
</TABLE>
- ---------------
(1) See Note 10 -- Subsequent Events.
In January 1996, Cherry and Esplanade at Locust Point ("Esplanade") entered
into an agreement as a settlement on an office property lease. As part of the
$5,000,000 settlement, Cherry agreed to pay Esplanade
F-34
<PAGE> 39
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. LONG-TERM DEBT -- (CONTINUED)
$1,000,000 on February 9, 1996 and then make 40 monthly payments of $100,000
beginning March 1996. Interest on the note was imputed at a rate of 12.5% as no
interest rate was explicitly stated in the agreement.
In March, 1996, Cherry entered into an agreement with Illinois Capital
Group ("ICG") as a settlement on equipment leases sold to ICG. Under the terms
of the agreement, Cherry is to make 17 equal monthly payments of $60,500,
including interest stated at 10% commencing April 15, 1996, with the final
payment of approximately $56,900 in principal and interest due on September 15,
1997. In the event Cherry or the shareholder interferes with existing leases
under the security agreement, an additional $250,000 penalty provision is due
ICG.
Principal amounts due under all of these debt arrangements at December 31,
1996 mature as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $12,230
1998........................................................ 1,055
1999........................................................ 579
-------
$13,864
=======
</TABLE>
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Companies' financial instruments classified as
current assets or liabilities, including cash and cash equivalents, accounts
receivable, and accounts payable and accrued expenses approximate carrying
value, principally because of the short maturity of these items.
The carrying amounts of the long-term debt payable approximates fair value
due to the interest rates on these agreements approximating Cherry's incremental
borrowing rates.
The fair values of capitalized lease obligations approximate carrying value
based on their effective interest rates compared to current market rates.
NOTE 6. CAPITALIZED LEASE OBLIGATIONS
The Companies lease telecommunications and other equipment through various
equipment lease financing facilities. Such leases have been accounted for as
capitalized lease obligations in accordance with Statement of Financial
Accounting Standards No. 13, "Accounting for Leases."
F-35
<PAGE> 40
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. CAPITALIZED LEASE OBLIGATIONS -- (CONTINUED)
Future minimum lease payments on these capitalized lease obligations (in
thousands) are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997........................................................ $ 7,869
1998........................................................ 7,431
1999........................................................ 7,155
2000........................................................ 6,174
2001........................................................ 1,782
Thereafter.................................................. --
-------
Net minimum lease payments........................ 30,411
Less amount representing interest........................... 7,056
-------
Present value of minimum lease payments..................... 23,355
Less current portion of capitalized lease obligations....... 5,083
-------
Long-term portion of capitalized lease obligations.......... $18,272
=======
</TABLE>
The net carrying value of assets under capital leases was $30,083,000 at
December 31, 1996, and is included in property and equipment. Amortization of
these assets is included in depreciation expense.
NOTE 7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Companies' offices, along with various equipment and roof access
rights, are leased under operating leases expiring in 1997 through 2006. Certain
leases contain escalation clauses based upon increases in the consumer price
index.
Future minimum lease payment on noncancellable operating leases (in
thousands) are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1997........................................................ $1,744
1998........................................................ 1,328
1999........................................................ 935
2000........................................................ 767
2001........................................................ 636
Thereafter.................................................. 2,170
------
$7,580
======
</TABLE>
Rent expense for the years ended December 31, 1995 and 1996, was $972,000
and $2,062,000, respectively.
USAGE AND DEDICATED CIRCUIT AGREEMENTS
The Companies have entered into agreements with various long distance
providers which require minimum usage. The Companies have also entered into
agreements with various long distance carriers for dedicated circuits. These
agreements guarantee the provider a base monthly charge regardless of the actual
volume of usage or use of dedicated circuits by the Companies or their
customers.
F-36
<PAGE> 41
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS
Effective April 1, 1997, Cherry entered into a ten-year lease agreement for
an office building with shareholder related trusts. Until occupancy on or about
January 1, 1998, Cherry is required to pay 50% of the monthly lease amount or
approximately $11,000 per month. Lease payment terms, as determined by
independent appraisers, over the ten-year period range from $265,000 to $345,000
annually. At December 31, 1996, Cherry had recorded an initial deposit of
$100,000 for the lease. Tenant finish and other improvements to the office
facility are expected to approximate $4,000,000.
NOTE 9. LITIGATION
The Companies are subject to a number of lawsuits, investigations and
claims (some of which involve substantial amounts) arising out of the conduct of
their business, including those relating to commercial transactions and
regulatory matters. One such lawsuit was brought by Cherry against Digital
Communications of America, WorldCom Network Services Inc. and WorldCom Inc.
(collectively referred to as "WorldCom"), asserting various claims including
substantial billing disputes. WorldCom asserted various counterclaims.
Subsequent to December 31, 1996, the parties reached a settlement. See Note
10 -- Subsequent Events.
Cherry is also party to an action with AT&T in which AT&T filed suit
against Cherry. Cherry purchased long distance and international service from
AT&T from January, 1996 through February, 1997. Cherry disputed the accuracy of
certain charges and AT&T terminated all services. AT&T seeks $17.2 million for
alleged unpaid services. Cherry has counterclaimed against AT&T, alleging offset
claims for the full amount of AT&T's claims, resulting from alleged inaccurate
billing by AT&T. Cherry also alleges false and deceptive advertising claims,
unfair competition and deceptive business practices claims against AT&T. The
litigation is at an early stage. Parties have not yet engaged in discovery.
Cherry has recorded all disputed invoices.
In addition, the Companies are also party to an action with a U.K.-based
carrier in which the carrier filed suit in the U.K. against the Companies. The
Companies purchased international service from this carrier from February, 1996
through April, 1997. The carrier seeks approximately $5.0 million for alleged
unpaid services and finance charges. The litigation is at an early stage. The
Companies recorded all of the carrier's invoices.
The Companies are also involved in other litigation concerning significant
collection matters, some of which have resulted in counterclaims. Based on
advice of counsel, the Companies believe such matters will be resolved within
the limits of its collection reserves.
Coast to Coast Plus, Inc., a former carrier customer, filed suit in
November, 1996 alleging that it suffered $10 million in damages from Cherry's
"wrongful" termination of its long-distance telecommunication services and
overbillings for services Cherry did not provide. Cherry filed an answer denying
liability and filed a counterclaim and a third party claim against the
principals of Coast to Coast which asserted four claims: two RICO claims, a
fraud claim, and a breach of contract, including $250,000 owed for long-distance
services. Deposition and discovery is underway. Based on advice of counsel,
Cherry believes this litigation will not have a material effect on the combined
financial position.
The Companies are also involved in other miscellaneous claims, inquiries
and litigation arising in the ordinary course of business. The Companies believe
that these matters, taken individually or in the aggregate, would not have a
material adverse impact on the Companies' combined financial position or results
of operations.
F-37
<PAGE> 42
CHERRY COMMUNICATIONS INCORPORATED
AND CHERRY COMMUNICATIONS U.K. LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. SUBSEQUENT EVENTS
Effective April 1, 1997, Cherry entered into a new lease with a related
party for new office facilities. See Note 8 -- Related Party Transactions.
On July 2, 1997, Cherry entered into a letter of intent with EqualNet
Holding Corp. ("EqualNet") for a proposed business transaction expected to be a
merger of the Company into EqualNet, with Cherry's stockholder retaining 91% of
the combined entity. The transaction is expected to be treated as a reverse
purchase acquisition and is subject to due diligence, shareholder approval and
certain other preconditions.
Effective July 24, 1997, Cherry settled its litigation and claims against
WorldCom. The settlement provides for, among other matters, the following:
(1) All claims of both parties as of July 15, 1997 (estimated by
Cherry to be approximately $202.4 million net accounts, notes and interest
payable) to be converted to two notes payable in the individual amounts of
$50.0 million and $115.0 million. The first note of $50.0 million is
non-interest bearing and due December 31, 1997. The second note of $115.0
million is due in quarterly installments commencing October 23, 1998
through July 23, 2000. Interest is payable at 10% per annum and is due on
March 31, 1998, June 30, 1998, July 23, 1998 and quarterly thereafter.
(2) WorldCom is granted continued security interests in all of the
assets of Cherry, except for the limited security interest granted to
Cherry's bank up to $2.0 million.
(3) The sole shareholder executes a pledge and security agreement
granting a first-priority interest in 51% of the outstanding shares of
Cherry subject to anti-dilution provisions.
(4) On August 1, 1997, Cherry is required to issue common shares
equivalent to 19.9% of the then-outstanding shares of Cherry to WorldCom,
also subject to anti-dilution provisions.
(5) Similar pledge (51%) agreement requirement applies to the
shareholder's interest in Cherry U.K..
(6) WorldCom will subordinate its security interests up to $100.0
million for new borrowings if certain proceeds of such borrowings are
remitted to WorldCom (75% for a single borrowing up to $70.0 million or 50%
for a single borrowing over $70 million).
(7) If Cherry repays both notes by December 30, 1997, it or its
nominee may repurchase the transferred shares totaling 19.9% for $10.
Cherry has reflected the settlement reduction of net payables of
approximately $37.4 million as a reduction of disputed costs and finance charges
of $11.4 million and $26.0 million for the year ended December 31, 1996 and the
six months ended June 30, 1997, respectively.
F-38
<PAGE> 43
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS
& NACT
COMBINED NEW WORLD
NACT MINORITY ("NEW ACCESS
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 9,960(A) 84,338 -- 71,251(C) 155,589
Other assets......................... 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total Assets.................. $268,518 $ 9,960 $278,478 $ 61,745 $ 91,551 $431,774
======== ======== ======== ======== ======== ========
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 -- 1,564 29,050 -- 30,614
Minority interests................... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total Liabilities............. 169,944 (12,443) 157,501 59,566 2,000 219,067
Stockholders' Equity
Common stock........................ 219 18(A) 237 85 (85)(D) 273
36(C)
Capital in excess of par value...... 133,286 44,285(A) 177,571 61,467 (61,467)(D) 269,265
91,694(C)
Accumulated deficit................. (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total Stockholders' Equity.... 98,574 22,403 120,977 2,179 89,551 212,707
-------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders' Equity......... $268,518 $ 9,960 $278,478 $ 61,745 $ 91,551 $431,774
======== ======== ======== ======== ======== ========
<CAPTION>
NEW WORLD
ACCESS,
RESURGENS
TELCO & TELCO
TELCO ADJUSTMENTS COMBINED
-------- ----------- ---------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 13,999 $ -- $ 66,289
Marketable securities............... 1,599 -- 5,099
Accounts receivable................. 20,353 -- 65,526
Inventories......................... 22,234 (4,500)(E) 52,207
Other current assets................ 1,002 -- 20,907
-------- -------- ---------
Total Current Assets.......... 59,187 (4,500) 210,028
Property and equipment............... 8,956 (2,800)(E) 84,485
Goodwill............................. 7,680 67,941(E) 231,210
Other assets......................... -- 16,000(E) 58,515
-------- -------- ---------
Total Assets.................. $ 75,823 $ 76,641 $ 584,238
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt..................... $ -- $ -- $ 7,950
Accounts payable.................... 6,818 -- 49,636
Other accrued liabilities........... 12,816 6,650(E) 41,622
-------- -------- ---------
Total Current Liabilities..... 19,634 6,650 99,208
Long-term debt....................... -- -- 115,529
Noncurrent liabilities............... 1,056 -- 31,670
Minority interests................... -- -- --
-------- -------- ---------
Total Liabilities............. 20,690 6,650 246,407
Stockholders' Equity
Common stock........................ 110 (110)(F) 338
65(E)
Capital in excess of par value...... 78,474 (78,474)(F) 468,224
198,959(E)
Accumulated deficit................. (23,451) 23,451(F) (130,731)
(73,900)(G)
-------- -------- ---------
Total Stockholders' Equity.... 55,133 69,991 337,831
-------- -------- ---------
Total Liabilities and
Stockholders' Equity......... $ 75,823 $ 76,641 $ 584,238
======== ======== =========
</TABLE>
F-39
<PAGE> 44
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW WORLD
MINORITY ACCESS &
WORLD INTEREST NEW RESURGENS RESURGENS
ACCESS ADJUSTMENTS WORLD 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 9,960(A) 84,338 -- 71,251(C) 155,589
Other assets........... 24,063 -- 24,063 152 18,300(C) 42,515
-------- -------- -------- -------- -------- --------
Total
Assets..... $268,518 $ 9,960 $278,478 $ 61,745 $ 91,551 $431,774
======== ======== ======== ======== ======== ========
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 -- 1,564 29,050 30,614
Minority interests..... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities.. 169,944 (12,443) 157,501 59,566 2,000 219,067
Stockholders' Equity
Common stock......... 219 18(A) 237 85 (85)(D) 273
36(C)
Capital in excess of
par value......... 133,286 44,285(A) 177,571 61,467 (61,467)(D) 269,265
91,694(C)
Accumulated
deficit........... (34,931) (21,900)(B) (56,831) (59,373) 59,373(D) (56,831)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity..... 98,574 22,403 120,977 2,179 89,551 212,707
-------- -------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity..... $268,518 $ 9,960 $278,478 $ 61,745 $ 91,551 $431,774
======== ======== ======== ======== ======== ========
</TABLE>
F-40
<PAGE> 45
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT NEW
MINORITY WORLD ACCESS
INTEREST NEW WORLD TELCO & TELCO
WORLD ACCESS ADJUSTMENTS ACCESS TELCO ADJUSTMENTS COMBINED
------------ ----------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and
equivalents........ $ 57,653 $ -- $ 57,653 $ 13,999 $ -- $ 71,652
Marketable
securities......... 3,500 -- 3,500 1,599 -- 5,099
Accounts
receivable......... 41,819 -- 41,819 20,353 -- 62,172
Inventories.......... 34,473 -- 34,473 22,234 (4,500)(E) 52,207
Other current
assets............. 15,429 -- 15,429 1,002 -- 16,431
-------- -------- -------- -------- -------- --------
Total Current
Assets...... 152,874 -- 152,874 59,187 (4,500) 207,561
Property and
equipment............ 17,203 -- 17,203 8,956 (2,800)(E) 23,359
Goodwill............... 74,378 9,960(A) 84,338 7,680 67,941(E) 159,959
Other assets........... 24,063 -- 24,063 -- 16,000(E) 40,063
-------- -------- -------- -------- -------- --------
Total
Assets...... $268,518 $ 9,960 $278,478 $ 75,823 $ 76,641 $430,942
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt...... $ 4,408 $ -- $ 4,408 $ -- $ -- $ 4,408
Accounts payable..... 23,087 -- 23,087 6,818 -- 29,905
Other accrued
liabilities........ 12,913 -- 12,913 12,816 6,650(E) 32,379
-------- -------- -------- -------- -------- --------
Total Current
Liabilities... 40,408 -- 40,408 19,634 6,650 66,692
Long-term debt......... 115,529 -- 115,529 -- -- 115,529
Noncurrent
liabilities.......... 1,564 -- 1,564 1,056 -- 2,620
Minority interests..... 12,443 (12,443)(A) -- -- -- --
-------- -------- -------- -------- -------- --------
Total
Liabilities.. 169,944 (12,443) 157,501 20,690 6,650 184,841
Stockholders' Equity
Common stock......... 219 18(A) 237 110 (110)(F) 302
65(E)
Capital in excess of
par value.......... 133,286 44,285(A) 177,571 78,474 (78,474)(F) 376,530
198,959(E)
Accumulated
deficit............ (34,931) (21,900)(B) (56,831) (23,451) 23,451(F) (130,731)
(73,900)(G)
-------- -------- -------- -------- -------- --------
Total
Stockholders'
Equity...... 98,574 22,403 120,977 55,133 69,991 246,101
-------- -------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity...... $268,518 $ 9,960 $278,478 $ 75,823 $ 76,641 $430,942
======== ======== ======== ======== ======== ========
</TABLE>
F-41
<PAGE> 46
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NACT
MINORITY
INTEREST NEW WORLD
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 9,960(A) 84,338
Other assets......................................... 24,063 -- 24,063
-------- -------- --------
Total Assets............................... $268,518 $ 9,960 $278,478
======== ======== ========
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 -- 1,564
Minority interests................................... 12,443 (12,443)(A) --
-------- -------- --------
Total Liabilities.......................... 169,944 (12,443) 157,501
Stockholders' Equity
Common stock....................................... 219 18(A) 237
Capital in excess of par value..................... 133,286 44,285(A) 177,571
Accumulated deficit................................ (34,931) (21,900)(B) (56,831)
-------- -------- --------
Total Stockholders' Equity................. 98,574 22,403 120,977
-------- -------- --------
Total Liabilities and Stockholders'
Equity................................... $268,518 $ 9,960 $278,478
======== ======== ========
</TABLE>
F-42
<PAGE> 47
NEW WORLD ACCESS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WORLD ACCESS
TELCO & TELCO
WORLD ACCESS TELCO ADJUSTMENTS COMBINED
------------ -------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents....................... $ 57,653 $ 13,999 $ -- $ 71,652
Marketable securities...................... 3,500 1,599 -- 5,099
Accounts receivable........................ 41,819 20,353 -- 62,172
Inventories................................ 34,473 22,234 (4,500)(E) 52,207
Other current assets....................... 15,429 1,002 -- 16,431
-------- -------- -------- ---------
Total Current Assets............... 152,874 59,187 (4,500) 207,561
Property and equipment....................... 17,203 8,956 (2,800)(E) 23,359
Goodwill..................................... 74,378 7,680 67,941(E) 149,999
Other assets................................. 24,063 -- 16,000(E) 40,063
-------- -------- -------- ---------
Total Assets....................... $268,518 $ 75,823 $ 76,641 $ 420,982
======== ======== ======== =========
Current Liabilities
Short-term debt............................ $ 4,408 $ -- $ -- $ 4,408
Accounts payable........................... 23,087 6,818 -- 29,905
Other accrued liabilities.................. 12,913 12,816 6,650(E) 32,379
-------- -------- -------- ---------
Total Current Liabilities.......... 40,408 19,634 6,650 66,692
Long-term debt............................... 115,529 -- -- 115,529
Noncurrent liabilities....................... 1,564 1,056 -- 2,620
Minority interests........................... 12,443 -- -- 12,443
-------- -------- -------- ---------
Total Liabilities.................. 169,944 20,690 6,650 197,284
Stockholders' Equity
Common stock............................... 219 110 (110)(F) 284
65(E)
Capital in excess of par value............. 133,286 78,474 (78,474)(F) 332,245
198,959(E)
Accumulated deficit........................ (34,931) (23,451) 23,451(F) (108,831)
(73,900)(G)
-------- -------- -------- ---------
Total Stockholders' Equity......... 98,574 55,133 69,991 223,698
-------- -------- -------- ---------
Total Liabilities and Stockholders'
Equity........................... $268,518 $ 75,823 $ 76,641 $ 420,982
======== ======== ======== =========
</TABLE>
F-43
<PAGE> 48
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,
WORLD NACT ATI & NACT NACT
ACCESS & MAJORITY MAJORITY MINORITY
WORLD ATI 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 -- 40,398 --
Cost of services........ 12,189 -- -- 12,189 1,220 -- 13,409 --
-------- ------ ------- -------- ------- -------- ------- -------
Total Cost of Sales.... 51,201 631 -- 51,832 1,975 -- 53,807 --
Gross Profit........... 32,037 195 -- 32,232 360 -- 32,592 --
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 39 325(D) 2,262 250(G)
-- -- -- -- --
In-process research and
development............ 50,000 -- (5,400)(B) 44,600 -- (44,600)(E) -- --
Special charges......... 3,240 -- -- 3,240 -- -- 3,240 --
-------- ------ ------- -------- ------- -------- ------- -------
Operating Income
(Loss)............... (33,603) (395) 5,384 (28,614) (1,552) 44,275 14,109 (250)
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) 44,275 13,031 (250)
Income taxes............ 6,135 -- (140)(C) 5,995 (620) -- 5,375 --
-------- ------ ------- -------- ------- -------- ------- -------
Income (Loss) Before
Minority Interests... (40,798) (413) 5,524 (35,687) (932) 44,275 7,656 (250)
Minority interests in
earnings of
subsidiary............. 1,533 -- -- 1,533 -- (305)(F) 1,228 (1,228)(H)
-------- ------ ------- -------- ------- -------- ------- -------
Net Income (Loss)...... $(42,331) $ (413) $ 5,524 $(37,220) $ (932) $ 44,580 $ 6,428 $ 978
======== ====== ======= ======== ======= ======== ======= =======
Net Income (Loss) Per
Common Share
Basic..................
Diluted................
Weighted Average Shares
Outstanding
Basic..................
Diluted................
<CAPTION>
NEW
NEW WORLD
WORLD ACCESS,
NEW ACCESS & RESURGENS
WORLD RESURGENS RESURGENS TELCO & 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... 40,398 -- -- 40,398 32,969 (120)(N) 73,247
Cost of services........ 13,409 27,028 -- 40,437 -- 40,437
-------- -------- ------- -------- ------- ------- ---------
Total Cost of Sales.... 53,807 27,028 -- 80,835 32,969 (120) 113,684
Gross Profit........... 32,592 (16,651) -- 15,941 21,583 120 37,644
Engineering and
development............ 3,327 -- -- 3,327 7,809 -- 11,136
Selling, general and
administrative......... 9,654 10,404 620(J) 20,678 11,974 -- 32,652
Amortization of
goodwill............... 2,512 -- 1,780(K) 4,292 406 (160)(O) 6,238
-- -- -- 1,700(P)
In-process research and
development............ -- -- -- -- 5,135 -- 5,135
Special charges......... 3,240 -- -- 3,240 -- -- 3,240
-------- -------- ------- -------- ------- ------- ---------
Operating Income
(Loss)............... 13,859 (27,055) (2,400) (15,596) (3,741) (1,420) (20,757)
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... 12,781 (29,275) (2,400) (18,894) (3,418) (1,420) (23,732)
Income taxes............ 5,375 -- (5,375)(L) -- 100 (100)(Q) --
-------- -------- ------- -------- ------- ------- ---------
Income (Loss) Before
Minority Interests... 7,406 (29,275) 2,975 (18,894) (3,518) (1,320) (23,732)
Minority interests in
earnings of
subsidiary............. -- -- -- -- -- -- --
-------- -------- ------- -------- ------- ------- ---------
Net Income (Loss)...... $ 7,406 $(29,275) $ 2,975 $(18,894) $(3,518) $(1,320) $ (23,732)
======== ======== ======= ======== ======= ======= =========
Net Income (Loss) Per
Common Share
Basic.................. $ (0.73)(R)
=========
Diluted................ $ (0.73)(R)
=========
Weighted Average Shares
Outstanding
Basic.................. 32,521(R)
=========
Diluted................ 32,521(R)
=========
</TABLE>
F-44
<PAGE> 49
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 & NACT NACT NEW
MAJORITY MINORITY WORLD ACCESS
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................... 40,398 -- 40,398 -- -- 40,398
Cost of services........................ 13,409 -- 13,409 27,028 -- 40,437
------- ------- ------- -------- ------- --------
Total Cost of Sales................... 53,807 -- 53,807 27,028 -- 80,835
Gross Profit.......................... 32,592 -- 32,592 (16,651) -- 15,941
Engineering and development............. 3,327 -- 3,327 -- -- 3,327
Selling, general and administrative..... 9,654 -- 9,654 10,404 620(J) 20,678
Amortization of goodwill................ 2,262 250(G) 2,512 -- 1,780(K) 4,292
Special charges......................... 3,240 -- 3,240 -- -- 3,240
------- ------- ------- -------- ------- --------
Operating Income (Loss)............... 14,109 (250) 13,859 (27,055) (2,400) (15,596)
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.................. 13,031 (250) 12,871 (29,275) (2,400) (18,894)
Income taxes............................ 5,375 -- 5,375 -- (5,375)(L) --
------- ------- ------- -------- ------- --------
Income (Loss) Before Minority
Interests........................... 7,656 (250) 7,406 (29,275) 2,975 (18,894)
Minority interests in earnings of
subsidiary............................ 1,228 (1,228)(H) -- -- -- --
------- ------- ------- -------- ------- --------
Net Income (Loss)..................... $ 6,428 $ 978 $ 7,406 $(29,275) $ 2,975 $(18,894)
======= ======= ======= ======== ======= ========
Net Income (Loss) Per Common Share
Basic................................. $ (0.73)(M)
========
Diluted............................... $ (0.73)(M)
========
Weighted Average Shares Outstanding
Basic................................. 26,016(M)
========
Diluted............................... 26,016(M)
========
</TABLE>
F-45
<PAGE> 50
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 &
NACT NACT NEW
MAJORITY MINORITY WORLD ACCESS
INTEREST INTEREST NEW TELCO & 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................. 40,398 -- 40,398 32,969 (120)(N) 73,247
Cost of services...................... 13,409 -- 13,409 -- 13,409
------- ------ ------- ------- ------- --------
Total Cost of Sales................. 53,807 -- 53,807 32,969 (120) 86,656
Gross Profit........................ 32,592 -- 32,592 21,583 120 54,295
Engineering and development........... 3,327 -- 3,327 7,809 -- 11,136
Selling, general and administrative... 9,654 -- 9,654 11,974 -- 21,628
Amortization of goodwill.............. 2,262 250(G) 2,512 406 (160)(O) 4,458
1,700(P)
In-process research and development... -- -- -- 5,135 5,135
Special charges....................... 3,240 -- 3,240 -- -- 3,240
------- ------ ------- ------- ------- --------
Operating Income (Loss)............. 14,109 (250) 13,859 (3,741) (1,420) 8,698
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............ 13,031 (250) 12,781 (3,418) (1,420) 7,943
Income taxes.......................... 5,375 -- 5,375 100 (100)(Q) 5,375
------- ------ ------- ------- ------- --------
Income (Loss) Before Minority
Interests......................... 7,656 (250) 7,406 (3,518) (1,320) 2,568
Minority interests in earnings of
subsidiary.......................... 1,228 (1,228)(H) -- -- -- --
------- ------ ------- ------- ------- --------
Net Income (Loss)................... $6,428 $ 978 $ 7,406 $(3,518) $(1,320) $ 2,568
======= ====== ======= ======= ======= ========
Net Income (Loss) Per Common Share
Basic............................... $ 0.09(R)
========
Diluted............................. $ 0.08(R)
========
Weighted Average Shares Outstanding
Basic............................... 28,771(R)
========
Diluted............................. 30,451(R)
========
</TABLE>
F-46
<PAGE> 51
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 & NACT NACT
MAJORITY MINORITY
INTEREST INTEREST NEW
COMBINED ADJUSTMENTS WORLD 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............................... 40,398 -- 40,398
Cost of services.................................... 13,409 -- 13,409
------- ----- -------
Total Cost of Sales............................... 53,807 -- 53,807
Gross Profit...................................... 32,592 -- 32,592
Engineering and development......................... 3,327 -- 3,327
Selling, general and administrative................. 9,654 -- 9,654
Amortization of goodwill............................ 2,262 250(G) 2,512
Special charges..................................... 3,240 -- 3,240
------- ----- -------
Operating Income.................................. 14,109 (250) 13,859
Interest and other income........................... 1,971 -- 1,971
Interest expense.................................... (3,049) -- (3,049)
------- ----- -------
Income Before Income Taxes and Minority
Interests...................................... 13,031 (250) 12,781
Income taxes........................................ 5,375 -- 5,375
------- ----- -------
Income Before Minority Interests.................. 7,656 (250) 7,406
Minority interests in earnings of subsidiary........ 1,228 1,228(H) --
------- ----- -------
Net Income........................................ $ 6,428 $ 978 $ 7,406
======= ===== =======
Net Income Per Common Share
Basic............................................. $ 0.33(I)
=======
Diluted........................................... $ 0.31(I)
=======
Weighted Average Shares Outstanding
Basic............................................. 22,266(I)
=======
Diluted........................................... 23,766(I)
=======
</TABLE>
F-47
<PAGE> 52
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 &
NACT MAJORITY WORLD ACCESS &
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....................... 40,398 32,969 (120)(N) 73,247
Cost of services............................ 13,409 -- 13,409
------- ------- ------- --------
Total Cost of Sales....................... 53,807 32,969 (120) 86,656
Gross Profit.............................. 32,592 21,583 120 54,295
Engineering and development................. 3,327 7,809 -- 11,136
Selling, general and administrative......... 9,654 11,974 -- 21,628
Amortization of goodwill.................... 2,262 406 (160)(O) 4,208
1,700(P)
In-process research and development......... -- 5,135 5,135
Special charges............................. 3,240 -- -- 3,240
------- ------- ------- --------
Operating Income.......................... 14,109 (3,741) (1,420) 8,948
Interest and other income................... 1,971 323 -- 2,294
Interest expense............................ (3,049) -- -- (3,049)
------- ------- ------- --------
Income Before Income Taxes and Minority
Interests.............................. 13,031 (3,418) (1,420) 8,193
Income taxes................................ 5,375 100 (100)(Q) 5,375
------- ------- ------- --------
Income Before Minority Interests.......... 7,656 (3,518) (1,320) 2,818
Minority interests in earnings of
subsidiary................................ 1,228 -- -- 1,228
------- ------- ------- --------
Net Income................................ $ 6,428 $(3,518) $(1,320) $ 1,590
======= ======= ======= ========
Net Income Per Common Share
Basic..................................... $ 0.06(R)
========
Diluted................................... $ 0.06(R)
========
Weighted Average Shares Outstanding
Basic..................................... 26,947(R)
========
Diluted................................... 28,627(R)
========
</TABLE>
F-48
<PAGE> 53
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,
WORLD NACT ATI & NACT NACT
ACCESS & NACT MAJORITY MAJORITY MINORITY
WORLD ATI ATI MAJORITY INTEREST INTEREST INTEREST
ACCESS ATI ADJUSTMENTS COMBINED INTEREST ADJUSTMENTS COMBINED ADJUSTMENTS
------- -------- ----------- -------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products.... $71,392 $ 13,687 $ (150)(A) $ 84,929 $24,502 $ -- $109,431 $ --
Service revenues..... 21,593 -- -- 21,593 5,493 -- 27,086 --
------- -------- ------- -------- ------- ------- -------- ------
Total Sales......... 92,985 13,687 (150) 106,522 29,995 -- 136,517 --
Cost of products
sold................ 43,827 13,586 (70)(A) 57,343 7,569 -- 64,912 --
Cost of services..... 17,018 -- -- 17,018 5,756 -- 22,774 --
------- -------- ------- -------- ------- ------- -------- ------
Total Cost of
Sales............. 60,845 13,586 (70) 74,361 13,325 -- 87,686 --
Gross Profit........ 32,140 101 (80) 32,161 16,670 -- 48,831 --
Engineering and
development......... 1,862 4,283 -- 6,145 2,761 -- 8,906 --
Selling, general and
administrative...... 9,000 6,265 -- 15,265 6,913 -- 22,178 --
Amortization of
goodwill............ 1,756 -- 200(B) 1,956 573 2,150(D) 4,679 500(F)
------- -------- ------- -------- ------- ------- -------- ------
Operating Income
(Loss)............ 19,522 (10,447) (280) 8,795 6,423 (2,150) 13,068 (500)
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 (2,150) 14,995 (500)
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 (2,150) 8,502 (500)
Minority Interests in
Earnings of
Subsidiary.......... -- -- -- -- -- (1,433)(E) (1,433) 1,433(G)
------- -------- ------- -------- ------- ------- -------- ------
Net Income (Loss)... $13,134 $(10,383) $ 3,520 $ 6,271 $ 4,381 $(3,583) $ 7,069 $ 933
======= ======== ======= ======== ======= ======= ======== ======
Net Income (Loss) Per
Common Share
Basic...............
Diluted.............
Weighted Average
Shares Outstanding
Basic...............
Diluted.............
<CAPTION>
NEW WORLD
NEW WORLD ACCESS,
NEW ACCESS & RESURGENS
WORLD RESURGENS RESURGENS TELCO & TELCO
ACCESS RESURGENS ADJUSTMENTS COMBINED TELCO ADJUSTMENTS COMBINED
-------- --------- ----------- ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of products.... $109,431 $ -- $ -- $ 109,431 $113,013 $ -- $ 222,444
Service revenues..... 27,086 165,489 -- 192,575 -- -- 192,575
-------- --------- ------- --------- -------- -------- ---------
Total Sales......... 136,517 165,489 -- 302,006 113,013 -- 415,019
Cost of products
sold................ 64,912 -- -- 64,912 72,638 (240)(M) 137,310
Cost of services..... 22,774 246,494 1,230(I) 270,498 -- -- 270,498
-------- --------- ------- --------- -------- -------- ---------
Total Cost of
Sales............. 87,686 246,494 1,230 335,410 72,638 (240) 407,808
Gross Profit........ 48,831 (81,005) (1,230) (33,404) 40,375 240 7,211
Engineering and
development......... 8,906 -- -- 8,906 14,927 -- 23,833
Selling, general and
administrative...... 22,178 74,448 -- 96,626 28,181 -- 124,807
Amortization of
goodwill............ 5,179 -- 3,560(J) 8,739 669 (669)(N) 12,139
3,400(O)
-------- --------- ------- --------- -------- -------- ---------
Operating Income
(Loss)............ 12,568 (155,453) (4,790) (147,675) (3,402) (2,491) (153,568)
Interest and other
income.............. 3,301 642 -- 3,943 692 -- 4,635
Interest and other
expense............. (1,374) (16,909) -- (18,283) -- -- (18,283)
-------- --------- ------- --------- -------- -------- ---------
Income (Loss) Before
Income Taxes and
Minority
Interests......... 14,495 (171,720) (4,790) (162,015) (2,710) (2,491) (167,216)
Income taxes......... 6,493 -- (6,493)(K) -- --
-------- --------- ------- --------- -------- -------- ---------
Income (Loss) Before
Minority
Interests......... 8,002 (171,720) 1,703 (162,015) (2,710) (2,491) (167,216)
Minority Interests in
Earnings of
Subsidiary.......... -- -- -- -- -- -- --
-------- --------- ------- --------- -------- -------- ---------
Net Income (Loss)... $ 8,002 $(171,720) $ 1,703 $(162,015) $ (2,710) $ (2,491) $(167,216)
======== ========= ======= ========= ======== ======== =========
Net Income (Loss) Per
Common Share
Basic............... $ (5.36)(P)
=========
Diluted............. $ (5.36)(P)
=========
Weighted Average
Shares Outstanding
Basic............... 31,176(P)
=========
Diluted............. 31,176(P)
=========
</TABLE>
F-49
<PAGE> 54
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 & NACT NACT NEW WORLD
MAJORITY MINORITY NEW ACCESS &
INTEREST INTEREST WORLD RESURGENS RESURGENS
COMBINED ADJUSTMENTS 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.................. 64,912 -- 64,912 -- -- 64,912
Cost of services....................... 22,774 -- 22,774 246,494 1,230(I) 270,498
-------- ------ -------- --------- ------- ---------
Total Cost of Sales.................. 87,686 -- 87,686 246,494 1,230 335,410
Gross Profit......................... 48,831 -- 48,831 (81,005) (1,230) (33,404)
Engineering and development............ 8,906 -- 8,906 -- -- 8,906
Selling, general and administrative.... 22,178 -- 22,178 74,448 -- 96,626
Purchased research and development..... -- -- -- -- -- --
Amortization of goodwill............... 4,679 500(F) 5,179 -- 3,560(J) 8,739
-------- ------ -------- --------- ------- ---------
Operating Income (Loss).............. 13,068 (500) 12,568 (155,453) (4,790) (147,675)
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................. 14,995 (500) 14,495 (171,720) (4,790) (162,015)
Income taxes........................... 6,493 -- 6,493 -- (6,493)(K) --
-------- ------ -------- --------- ------- ---------
Income (Loss) Before Minority
Interests.......................... 8,502 (500) 8,002 (171,720) 1,703 (162,015)
Minority Interests in Earnings of
Subsidiary........................... (1,433) 1,433(G) -- -- -- --
-------- ------ -------- --------- ------- ---------
Net Income (Loss).................... $ 7,069 $ 933 $ 8,002 $(171,720) $ 1,703 $(162,015)
======== ====== ======== ========= ======= =========
Net Income (Loss) Per Common Share
Basic................................ $ (6.57)(L)
=========
Diluted.............................. $ (6.57)(L)
=========
Weighted Average Shares Outstanding
Basic................................ 24,671(L)
=========
Diluted.............................. 24,671(L)
=========
</TABLE>
F-50
<PAGE> 55
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 & NACT NACT NEW WORLD
MAJORITY MINORITY ACCESS
INTEREST INTEREST NEW WORLD TELCO & 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............... 64,912 -- 64,912 72,638 (240)(M) 137,310
Cost of services.................... 22,774 -- 22,774 -- 22,774
-------- ------ -------- -------- ------- --------
Total Cost of Sales............... 87,686 -- 87,686 72,638 (240) 160,084
Gross Profit...................... 48,831 -- 48,831 40,375 240 89,446
Engineering and development......... 8,906 -- 8,906 14,927 -- 23,833
Selling, general and
administrative.................... 22,178 -- 22,178 28,181 -- 50,359
Amortization of goodwill............ 4,679 500(F) 5,179 669 (669)(N) 8,579
3,400(O)
-------- ------ -------- -------- ------- --------
Operating Income (Loss)........... 13,068 (500) 12,568 (3,402) (2,491) 6,675
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.......... 14,995 (500) 14,495 (2,710) (2,491) 9,294
Income taxes........................ 6,493 -- 6,493 -- -- 6,493
-------- ------ -------- -------- ------- --------
Income (Loss) Before Minority
Interests....................... 8,502 (500) 8,002 (2,710) (2,491) 2,801
Minority Interests in Earnings of
Subsidiary........................ (1,433) 1,433(G) -- -- -- --
-------- ------ -------- -------- ------- --------
Net Income (Loss)................. $ 7,069 $ 933 $ 8,002 $ (2,710) $(2,491) $ 2,801
======== ====== ======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................. $ 0.10(P)
========
Diluted........................... $ 0.10(P)
========
Weighted Average Shares Outstanding
Basic............................. 27,426(P)
========
Diluted........................... 28,891(P)
========
</TABLE>
F-51
<PAGE> 56
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 & NACT NACT
MAJORITY MINORITY
INTEREST INTEREST NEW WORLD
COMBINED ADJUSTMENTS 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................................. 64,912 -- 64,912
Cost of services...................................... 22,774 -- 22,774
-------- ----- --------
Total Cost of Sales................................. 87,686 -- 87,686
Gross Profit........................................ 48,831 -- 48,831
Engineering and development........................... 8,906 -- 8,906
Selling, general and administrative................... 22,178 -- 22,178
Purchased research and development.................... -- -- --
Amortization of goodwill.............................. 4,679 500(F) 5,179
-------- ----- --------
Operating Income.................................... 13,068 (500) 12,568
Interest and other income............................. 3,301 -- 3,301
Interest and other expense............................ (1,374) -- (1,374)
-------- ----- --------
Income Before Income Taxes and Minority Interests... 14,995 (500) 14,495
Income taxes.......................................... 6,493 -- 6,493
-------- ----- --------
Income Before Minority Interests.................... 8,502 (500) 8,002
Minority Interests in Earnings of Subsidiary.......... (1,433) 1,433(G) --
-------- ----- --------
Net Income.......................................... $ 7,069 $ 933 $ 8,002
======== ===== ========
Net Income Per Common Share
Basic............................................... $ 0.38(H)
========
Diluted............................................. $ 0.36(H)
========
Weighted Average Shares Outstanding
Basic............................................... 20,921(H)
========
Diluted............................................. 22,387(H)
========
</TABLE>
F-52
<PAGE> 57
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 & NACT
MAJORITY WORLD ACCESS &
INTEREST TELCO 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.............. 64,912 72,638 (240)(M) 137,310
Cost of services................... 22,774 -- 22,774
-------- -------- ------- --------
Total Cost of Sales.............. 87,686 72,638 (240) 160,084
Gross Profit..................... 48,831 40,375 240 89,446
Engineering and development........ 8,906 14,927 -- 23,833
Selling, general and
administrative................... 22,178 28,181 -- 50,359
Amortization of goodwill........... 4,679 669 (669)(N) 8,079
3,400(O)
-------- -------- ------- --------
Operating Income (Loss).......... 13,068 (3,402) (2,491) 7,175
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........ 14,995 (2,710) (2,491) 9,794
Income taxes....................... 6,493 -- -- 6,493
-------- -------- ------- --------
Income (Loss) Before Minority
Interests..................... 8,502 (2,710) (2,491) 3,301
Minority Interests in Earnings of
Subsidiary....................... (1,433) -- -- (1,433)
-------- -------- ------- --------
Net Income (Loss)................ $ 7,069 $ (2,710) $(2,491) $ 1,868
======== ======== ======= ========
Net Income (Loss) Per Common Share
Basic............................ $ 0.07(P)
========
Diluted.......................... $ 0.07(P)
========
Weighted Average Shares Outstanding
Basic............................ 25,602(P)
========
Diluted.......................... 27,067(P)
========
</TABLE>
F-53
<PAGE> 58
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 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
Acquisition, 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 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 attained. Failure to attain technological
feasibility, especially given the high degree of customization required
F-54
<PAGE> 59
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
NACT 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. The majority of the products were scheduled to be
released during 1998 and 1999.
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
F-55
<PAGE> 60
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
ATI 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 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.
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 Merger. 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.................. $ 44,303
--------
Allocation:
Minority interest in subsidiaries......................... (12,443)
Adjust assets and liabilities.............................
In-process research and development costs(i)........... (21,900)
--------
(34,343)
--------
Unallocated excess purchase price over net assets
acquired.................................................. $ 9,960
========
</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 Merger. New World Access will obtain an updated
F-56
<PAGE> 61
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
valuation of the in-process research and development projects as of the closing
of the NACT Merger for use in determining the final purchase accounting for the
NACT Merger.
(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 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 Transaction.......... 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 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 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 former creditors and Renaissance Partners at the closing
date will be $25.17, the seven trading days average closing price of World
Access common stock, including the three days prior and the three days
subsequent to May 12, 1998, the date economic terms of the Transaction were
announced, less a 30% discount attributable to the restrictive nature of the
shares. Management of 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 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.
F-57
<PAGE> 62
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the shares noted above, the former 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 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 New
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 World Access 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
F-58
<PAGE> 63
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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).
(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 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 confirmed by the
bankruptcy court pursuant to an order dated September 3, 1998. Upon the closing
of the Transaction, the former creditors will receive shares of RCG common stock
in exchange for the surrender of all of their claims against RCG. Immediately
thereafter, the former 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 Transaction. Therefore, the combined historical stockholders
deficit of $354.4 million as of June 30, 1998 has been adjusted to reflect a
$356.6 million reduction for the liabilities subject to compromise and the
WorldCom 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 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 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
F-59
<PAGE> 64
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
purchase price, and accordingly, the amount ultimately determined may differ
significantly from the amounts shown below.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Purchase price:
Stock issued in exchange for Telco shares(i).............. $190,324
Fair market value of New World Access options issued in
exchange for Telco options............................. 8,700
--------
Total stock and options........................... $ 199,024
Fees and expenses related to the merger................... 3,750
---------
Total purchase price.............................. 202,774
---------
Allocation:
Historical stockholders' equity........................... (55,133)
Adjust assets and liabilities:
Write-down of inventories related to outsourcing,
recent procurement agreements and those that are
non-strategic as a result of the merger to net
realizable value..................................... 4,500
Write-down to fair market value of certain redundant
equipment resulting from the merger.................. 1,500
Write-off of leaseholds associated with Telco's current
Norwood facility which is expected to be relocated... 1,300
Accrue involuntary employee termination benefits....... 1,500
Accrue lease termination provision related to Telco's
current Norwood facility............................. 1,400
Establish deferred tax asset(ii)....................... (16,000)
In-process research and development costs(iii)......... (73,900)
---------
(134,833)
---------
Unallocated excess purchase price over net assets
acquired.................................................. $ 67,941
=========
</TABLE>
(i) Based on the terms of the Telco Merger Agreement and the value of New
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.
It is the opinion of management that these tax assets are likely to be utilized
by Telco.
(iii) The amount of in-process research and development costs has been
estimated by management based on factors considered such as the number of
projects in process, the potential alternative future uses of those projects and
estimated future projected revenues from those projects. The valuation of the
in-process research and development projects will be performed by an independent
valuation firm. The independent valuation of the in-process research and
development projects will be utilized in the final purchase price allocation.
(F) Eliminate existing stockholders' equity.
F-60
<PAGE> 65
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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 EARNINGS 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 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 unallocated excess purchase price over net assets
acquired over 20 years relating to the two month period ended February 28, 1998
not included in the World Access historical statement of earnings.
(E) Eliminate the one-time non-recurring in-process research and
development charge recorded in connection with the purchase of the majority
interest in NACT.
(F) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(G) Amortization of unallocated excess purchase price over net assets
acquired related to the purchase of the remaining minority interest in NACT over
20 years.
(H) Reverse the minority interests in earnings of NACT.
(I) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of World Access Common Stock issued in the
merger calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(J) 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.
(K) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(L) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(M) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New World Access Common Stock issued to
Resurgens's former creditors and Renaissance Partners calculated in accordance
with SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(N) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
F-61
<PAGE> 66
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the Telco Merger.
(P) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(Q) Adjust tax provision for the benefit of the loss incurred by the
combined entities.
(R) 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 EARNINGS 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 unallocated excess purchase price over net assets
acquired over 20 years.
(E) Record the 32.7% minority interest in net income of NACT.
NACT MINORITY INTEREST PRO FORMA ADJUSTMENTS
(F) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(G) Reverse the minority interests in earnings of NACT.
(H) Represents basic and diluted earnings per share, including
approximately 1.8 million shares of World Access Common Stock issued in the
merger calculated in accordance with SFAS 128.
RESURGENS PRO FORMA ADJUSTMENTS
(I) 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.
(J) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(K) Adjust tax provision for the benefit of the loss incurred by Resurgens
and the pro forma adjustments.
(L) Represents basic and diluted earnings per share, including
approximately 3.8 million shares of New World Access Common Stock issued to
Resurgens's former creditors and Renaissance Partners calculated in accordance
with SFAS 128.
TELCO PRO FORMA ADJUSTMENTS
(M) Record an adjustment to depreciation expense related to the write-down
of certain redundant equipment.
(N) Represents the elimination of the portion of Telco's historical
intangible asset amortization written down in connection with the Telco Merger.
F-62
<PAGE> 67
NEW WORLD ACCESS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) Amortization of unallocated excess purchase price over net assets
acquired over 20 years.
(P) 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-63
<PAGE> 1
EXHIBIT 2.1
FIRST AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS FIRST AMENDMENT (the "Amendment") to the Agreement and Plan of Merger
and Reorganization (the "Merger Agreement;" capitalized terms used but not
defined herein shall have the meanings ascribed to them therein), dated as of
the 12th day of May, 1998, by and among WAXS INC., a Delaware corporation and a
direct wholly-owned subsidiary of World Access, Inc. ("New World Access"), WORLD
ACCESS, INC., a Delaware corporation ("World Access"), WA MERGER CORP., a
Delaware corporation and a direct wholly-owned subsidiary of New World Access
("Merger Sub"), and CHERRY COMMUNICATIONS INCORPORATED d/b/a RESURGENS
COMMUNICATIONS GROUP, an Illinois corporation ("RCG"), is made as of the 20th
day of July, 1998 by and among New World Access, World Access, Merger Sub and
RCG.
WITNESSETH:
WHEREAS, the Parties desire to amend the Merger Agreement as provided
herein,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein, the parties hereto do hereby agree as follows:
SECTION 1. Amendments to Merger Agreement. The Merger Agreement is hereby
amended as follows:
(a) Section 5.3 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 5.3. Payment of Claims. In accordance with the terms and
provisions of the Plan and unless otherwise provided therein, the
Disbursing Agent under the Disbursement Agreement shall issue to each
holder of an Allowed Claim and an Administrative Expense Claim (including
the Administrative Expense Claim of WNSI arising in connection with the DIP
Financing), its pro-rata share of Disbursed Stock based upon the amount of
such claim. The Disbursing Agent will return to New World Access shares of
Disbursed Stock having a value that equals the dollar amount of Cash (as
defined in the Plan) that the Reorganized Debtor (as defined in the Plan)
or the Surviving Corporation must pay to holders of Allowed Priority Claims
(including the principal amount of Priority Tax Claims) pursuant to the
terms of the Plan where the value of such shares is based on $32.00 per
share."
(b) Article 5 of the Merger Agreement is hereby amended by adding the
following additional Section 5.6 thereto which reads in its entirety as
follows:
"Section 5.6 Fractional Shares. For purposes of distributions under the
Plan, the number of shares of Disbursed Stock and Contingent Payment Stock
shall, if necessary, be rounded to the next greater or lower whole number
of shares as follows: (1) fractions of 1/2 or greater shall be rounded to
the next greater whole number, and (2) fractions of less than 1/2 shall be
rounded to the next lower whole number; provided, however, that to the
extent that there are interim distributions, the numbers of shares of
Disbursed Stock or Contingent Payment Stock shall be rounded to the next
lower whole number for purposes of such distribution, and in the final
distribution shall be rounded in accordance with the preceding clause based
on the applicable aggregate number of shares of Disbursed Stock or
Continent Payment stock distributed to each holder in all distributions.
The total number of shares of Disbursed Stock or Contingent Payment stock
shall be adjusted as necessary to account for the rounding provided hereby.
No consideration shall be payment in lieu of the fractions shares that are
rounded down."
(c) Section 6.4 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 6.4. Transfer Restrictions. Notwithstanding anything to the
contrary contained herein, (a) no holder of Disbursed Stock may, until the
365th day following the Closing Date, without the prior written consent of
New World Access, offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, any shares of Disbursed Stock or security
convertible into or exchangeable or exercisable therefor, either publicly
or privately, (b) no holder of Contingent Payment Stock upon its release
pursuant to Section 6.1
<PAGE> 2
above may, until the 180th day following the release date thereof, without
the prior written consent of New World Access, offer, sell, contract to
sell or otherwise dispose of, directly or indirectly, any shares of the
Contingent Payment Stock so released or any security convertible into or
exchangeable or exercisable therefor, either publicly or privately, and (c)
until the third anniversary of the Closing Date, no holder of Disbursed
Stock or Contingent Payment Stock may engage in any short-sale or similar
type of transaction with respect to any shares of World Access Stock,
including any shares of Disbursed Stock or Contingent Payment Stock,
without the prior written consent of New World Access; provided, however,
that holders of Claims (as defined in the Plan) may buy and sell to each
other their respective shares of Disbursed Stock or Contingent Payment
Stock, subject to applicable securities laws."
(d) The Merger Agreement is hereby amended by adding a new Section 6.5
thereto which shall read in its entirety as follows:
"Section 6.5. Waiver of Restrictions. New World Access agrees that if it
waives any of the transfer restrictions set forth in Section 6.4 with
respect to any holder of Disbursed Stock or Contingent Payment Stock,
including WNSI, or in Section 4.4 of the U.K. Acquisition Agreement with
respect to the Shareholder (as defined in the U.K. Acquisition Agreement),
then New World Access will give notice of such waiver within five (5) days
to all other holders of Disbursed Stock or Contingent Payment Stock (and
such other persons as the Plan may specify) and transfer restrictions with
respect to all such holders shall be deemed immediately waived (without any
further action) as to such other holders in the same pro rata amount as
such waiver affirmatively granted by New World Access in respect of the
holder or the Shareholder (as the case may be); provided, however, the
provisions of this Section 6.5 shall not apply with respect to any
transfers by the Shareholder or its partners to charitable institutions or
for estate planning purposes, provided that the transferee agrees to be
bound by the transfer restrictions set forth in Section 4.4 of the U.K.
Acquisition Agreement. New World Access agrees to promptly instruct its
transfer agent to reissue certificates for, or remove any stop transfer
instructions with respect to, any shares of Disbursed Stock or Contingent
Payment Stock as to which the transfer restrictions have been deemed waived
in accordance with this Section 6.5.
SECTION 2. Effect on Merger Agreement. Except as otherwise specifically
provided herein, the Merger Agreement shall not be amended but shall remain in
full force and effect.
SECTION 3. Headings. The Section headings contained in this Amendment are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Amendment.
SECTION 4. Counterparts. This Amendment may be executed simultaneously in
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
2
<PAGE> 3
IN WITNESS WHEREOF, each of the Parties has caused this Amendment to be
executed and delivered by their respective officers thereunto duly authorized,
all as of the day and year above written.
WAXS INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WORLD ACCESS, INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WA MERGER CORP.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
CHERRY COMMUNICATIONS
INCORPORATED d/b/a RESURGENS
COMMUNICATIONS GROUP
By: /s/ W. TOD CHMAR
------------------------------------
Its: Executive Vice President
------------------------------------
3
<PAGE> 1
EXHIBIT 2.2
SECOND AMENDMENT TO THE
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS SECOND AMENDMENT (the "Second Amendment") to the Agreement and Plan of
Merger and Reorganization, dated as of the 12th day of May, 1998, as amended by
the First Amendment thereto dated as of July 20, 1998 (as so amended, the
"Merger Agreement;" capitalized terms used but not defined herein shall have the
meanings ascribed to them therein), by and among WAXS INC., a Delaware
corporation and a direct wholly-owned subsidiary of World Access, Inc. ("New
World Access"), WORLD ACCESS, INC., a Delaware corporation ("World Access"), WA
MERGER CORP., a Delaware corporation and a direct wholly-owned subsidiary of New
World Access ("Merger Sub"), and CHERRY COMMUNICATIONS INCORPORATED d/b/a
RESURGENS COMMUNICATIONS GROUP, an Illinois corporation ("RCG"), is made as of
the 2nd day of September, 1998, by and among New World Access, World Access,
Merger Sub and RCG.
WITNESSETH:
WHEREAS, the Parties desire to amend the Merger Agreement as provided
herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein, the parties hereto do hereby agree as follows:
SECTION 1. Amendments to Merger Agreement. The Merger Agreement is hereby
amended as follows:
(a) Article 1 of the Merger Agreement is hereby amended by adding a
new Section 1.24 thereto and renumbering current Sections 1.24 through
1.112 as 1.25 through 1.113, respectively:
"Section 1.24. "Creditor Shares" has the meaning set forth in Section
5.1 hereof."
(b) Section 3.1 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 3.1 Conversion of Merger Sub Stock and RCG Stock. Subject
to the terms and conditions of this Agreement, as of the Effective Time
and by virtue of the Merger and without any further action on the part
of the holder of any Merger Sub Stock or RCG Stock:
(a) all shares of RCG Stock which are held by RCG as treasury
stock, if any, shall be canceled and retired, and no consideration
shall be paid or delivered in exchange therefor;
(b) each of the Creditor Shares outstanding immediately prior to
the Effective Time (being all the outstanding shares of RCG Stock at
such time as a result of the cancellation of all other shares of RCG
Stock by the Bankruptcy Court pursuant to the Plan immediately prior
to the Effective Time, as provided in Section 5.1 hereof) shall be
canceled and retired and will cease to exist and shall be converted
into the right to receive the Disbursed Stock and the Contingent
Payment Stock in accordance with the terms of this Agreement and the
Plan; and
(c) each share of Merger Sub Stock issued and outstanding
immediately prior to the Effective Time shall be converted into one
fully paid and nonassessable share of common stock without par value
of the Surviving Corporation."
(c) Article 5 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"ARTICLE 5.
PLAN OF REORGANIZATION AND PAYMENT OF CLAIMS
Section 5.1 Plan of Reorganization. RCG shall file and use its
best efforts to obtain the Bankruptcy Court's confirmation of the Plan,
which shall provide, inter alia, for the consummation of the Merger in
accordance with the terms and conditions of this Agreement. RCG shall
also file and use its best efforts to obtain the Bankruptcy Court's
approval of RCG's Disclosure Statement with respect to the Plan (the
"Plan Disclosure Statement"). Both the Plan and the Plan Disclosure
<PAGE> 2
Statement, as filed and as confirmed and approved by the Bankruptcy
Court, must in form and substance be acceptable to New World Access and
RCG. World Access and its Affiliates shall cooperate in connection with
preparing, filing and obtaining the approval of the Plan and the Plan
Disclosure Statement. The Plan shall provide, inter alia, for (a) the
cancellation of all outstanding shares of RCG Stock other than Creditor
Shares without the payment of any consideration therefor; (b) the
issuance of 3,125,000 shares of RCG Stock (collectively, the "Creditor
Shares") to holders of, and in full satisfaction of, Allowed Claims and
Administrative Expense Claims (including the Administrative Expense
Claim of WNSI arising in connection with the DIP Financing); (c) the
approval of this Agreement; (d) except as otherwise provided in the
Plan, the discharge of all other indebtedness of and claims against RCG
arising before confirmation of the Plan; (e) immediately following the
last to occur of such items (a) through (d), the consummation of the
Merger and the resulting pro-rata distribution of Disbursed Stock and
the right to receive (if released pursuant to Article 6 hereof) the
Contingent Payment Stock in exchange for all outstanding Creditor
Shares; and (f) certain transfer restrictions on the shares of New World
Access Stock to be issued pursuant to this Agreement as set forth in
Section 6.4 hereof. RCG estimates that the aggregate amount of Allowed
Claims will be approximately $300,000,000 to $350,000,000.
Section 5.2 Deposit of New World Access Stock. At the Closing, New
World Access and the Person appointed by the Bankruptcy Court pursuant
to the Plan and the Order to act as "Disbursing Agent" under the Plan
(the "Disbursing Agent") shall each execute a Disbursement Agreement
reasonably acceptable to the Parties hereto and, in accordance
therewith, New World Access shall deposit with the Disbursing Agent,
immediately following the Effective Time, an aggregate of 9,375,000
shares of New World Access Stock, of which 3,125,000 shares shall be
issued pursuant to Section 5.3 hereof (the "Disbursed Stock") and
6,250,000 shares shall be released pursuant to the terms of Article 6
hereof (the "Contingent Payment Stock").
Section 5.3 Payment of Claims. In accordance with the terms and
provisions of the Plan and unless otherwise provided therein, (a) RCG
shall be deemed to have issued to each holder of an Allowed Claim and an
Administrative Expense Claim (including the Administrative Expense Claim
of WNSI arising in connection with the DIP Financing) its pro-rata share
of the Creditor Shares based upon the amount of each such claim in
exchange for the surrender of such claims, and (b) immediately after the
cancellation of all other outstanding RCG Stock and the issuance of the
Creditor Shares, the Disbursing Agent under the Disbursement Agreement
shall issue to each holder of Creditor Shares its pro-rata share of
Disbursed Stock based upon the number of Creditor Shares held by each
such holder. The Disbursing Agent will return to New World Access shares
of Disbursed Stock equal to (x) the dollar amount of all Cash (as
defined in the Plan) that the Reorganized Debtor (as defined in the
Plan) or the Surviving Corporation must pay to holders of Allowed
Priority Claims (including the principal amount of Priority Tax Claims)
pursuant to the terms of the Plan, divided by (y) $32.00.
Section 5.4 Contingent Payment of Claims. The Disbursing Agent
shall release to holders of Creditor Shares their pro-rata share of
Contingent Payment Stock, if, as, when and to the extent that the
Contingent Payment Stock (or any portion thereof) is released pursuant
to the terms of Article 6 hereof in accordance with the terms and
provisions of the Plan.
Section 5.5 Fractional Shares. For purposes of distributions under
the Plan, the number of shares of Disbursed Stock and Contingent Payment
Stock shall, if necessary, be rounded to the next greater or lower whole
number of shares as follows: (a) fractions of 1/2 or greater shall be
rounded to the next greater whole number; and (b) fractions of less than
1/2 shall be rounded to the next lower whole number; provided, however,
that to the extent that there are interim distributions, the number of
shares of Disbursed Stock or Contingent Payment Stock shall be rounded
to the next lower whole number for purposes of such distribution and in
the final distribution shall be rounded in accordance with the
immediately preceding clause based on the applicable aggregate number of
shares of Disbursed Stock or Contingent Payment Stock distributed to
each holder in all distributions. The total number of shares of
Disbursed Stock or Contingent Payment Stock shall be adjusted
2
<PAGE> 3
as necessary to account for the rounding provided hereby. No
consideration shall be paid in lieu of fractional shares that are
rounded down."
(d) Section 9.4 of the Merger Agreement is hereby amended and restated
in its entirety as follows:
"Section 9.4 Approval of Stockholders of World Access. World
Access will take all steps necessary under applicable law and its
certificate of incorporation and bylaws to call, give notice of, convene
and hold a meeting of its stockholders for the purpose of approving this
Agreement and the Merger and for such other purposes consistent with the
complete performance of this Agreement as may be necessary or desirable.
Unless the Board of Directors of World Access determines in good faith,
based upon advice of its outside counsel, that such recommendation would
violate its fiduciary duties to its stockholders, the Board of Directors
of World Access will recommend to its stockholders the approval of this
Agreement, the Merger and the transactions contemplated hereby and will
use its best efforts to obtain the necessary approvals by its
stockholders of this Agreement, the Merger and the transactions
contemplated hereby. Notwithstanding anything herein to the contrary, it
is understood that the approval of this Agreement, the Merger and the
transactions contemplated hereby by the World Access stockholders is
intended to constitute the requisite approval of the New World Access
stockholders."
SECTION 2. Effect on Merger Agreement. Except as otherwise specifically
provided herein, the Merger Agreement shall not be amended but shall remain in
full force and effect.
SECTION 3. Headings. The Section headings contained in this Second
Amendment are for reference purposes only and will not affect in any way the
meaning or interpretation of this Second Amendment.
SECTION 4. Counterparts. This Second Amendment may be executed
simultaneously in counterparts, each of which will be deemed an original, but
all of which together will constitute one and the same instrument.
3
<PAGE> 4
IN WITNESS WHEREOF, each of the Parties has caused this Second Amendment to
be executed and delivered by its respective officer thereunto duly authorized,
all as of the day and year above written.
WAXS INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WORLD ACCESS, INC.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
WA MERGER CORP.
By: /s/ MARK A. GERGEL
------------------------------------
Its: Executive Vice President and
Chief Financial Officer
------------------------------------
CHERRY COMMUNICATIONS
INCORPORATED d/b/a RESURGENS
COMMUNICATIONS GROUP
By: /s/ W. TOD CHMAR
------------------------------------
Its: Executive Vice President
------------------------------------
4
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated June 5, 1998 with respect
to the combined financial statements of Cherry Communications Incorporated
(d/b/a Resurgens Communications Group) and Cherry Communications U.K. Limited
for the year ended December 31, 1997, in the Form 8-K/A Amendment No. 1 filed by
World Access, Inc. on September 4, 1998 and to the incorporation by reference of
such report in the Registration Statements on Form S-8 (Nos. 33-77918, 33-47752,
333-17741 and 333-59347) and Form S-3 (Nos. 333-43497 and 333-51199) of World
Access, Inc.
Ernst & Young LLP
Atlanta, Georgia
September 4, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated July 11, 1997, except for Notes 2 and 10 as
to which the date is July 24, 1997, accompanying the combined financial
statements of Cherry Communications Incorporated and Cherry Communications U.K.
Limited contained in the World Access, Inc. Form 8-K/A, Amendment No. 1, dated
September 4, 1998. We consent to use of the aforementioned report in this Form
8-K/A, Amendment No. 1, dated September 4, 1998. We also hereby consent to the
incorporation by reference of said report in the Registration Statements of
World Access, Inc. on Forms S-3 (File No. 333-43497 and File No. 333-51199) and
on Forms S-8 (File No. 333-59347, File No. 333-17741, File No. 33-377918, and
File No. 33-47752).
Grant Thornton LLP
Chicago, Illinois
September 4, 1998
<PAGE> 1
EXHIBIT 99.1
NEWS RELEASE
WORLD ACCESS, INC.
SUMMARY: U.S. BANKRUPTCY COURT CONFIRMS RESURGENS REORGANIZATION PLAN
FOR IMMEDIATE RELEASE
Atlanta, Georgia -- September 3, 1998 -- WORLD ACCESS, INC. (NASDAQ: WAXS)
announced today that the United States Bankruptcy Court of the Northern District
of Illinois, Eastern Division, has confirmed the Plan of Reorganization (the
"Plan") of Cherry Communications Incorporated, d/b/a Resurgens Communications
Group ("Resurgens"). The Plan incorporates the terms of the definitive agreement
entered into earlier this year by World Access to acquire Resurgens, a
facilities-based provider of international network access.
Steven A. Odom, Chairman and Chief Executive Officer, said "The confirmation of
the Plan satisfies a significant condition to the consummation of the Resurgens
acquisition, which is expected to occur in the near future. This acquisition
will uniquely position World Access to offer telecommunications service
providers a complete network solution, including proprietary equipment, planning
and engineering services and access to international long distance. The
international network access offered by Resurgens is a critical element of new
and expanded networks currently being planned or implemented by many of our
customers. World Access is beginning to realize significant synergies as a
result of the Resurgens acquisition, including equipment sales to Resurgens
customers, potential joint ventures with international PTTs and CLECs, and
carrier service revenues form World Access equipment customers."
John D. Phillips, Chairman and Chief Executive Officer of Resurgens, commented
"We are extremely pleased that Resurgens' creditors have embraced our plan of
reorganization, an integral part of which is the merger with World Access. We
have rebuilt Resurgens' operating network and implemented new, reliable billing
systems and a 24 hour-7 day Network Operations Center. Competitive, dedicated
bandwidth and transit agreements are now in place to carry traffic to all key
regions of the world and Resurgens is now carrying extensive international
traffic for WorldCom and numerous other long-distance companies."
World Access, Inc. develops, manufactures and markets wireline and wireless
switching, transport and access products for the global telecommunications
markets. The Company's products allow telecommunications service providers to
build and upgrade their central office and outside plant networks in order to
provide a wide array of voice, data and video services to their business and
residential customers. The Company offers digital switches, billing and network
telemanagement systems, cellular base stations, fixed wireless local loop
systems, intelligent multiplexers, microwave and millimeterwave radio systems
and other telecommunications network products. 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.
EXCEPT FOR ANY HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS PRESS RELEASE CONTAIN FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES WHICH ARE 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, THE COMPANY'S
QUARTERLY REPORTS ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND JUNE 30, 1998, AND THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-3 (NO. 333-43497).
COMPANY CONTACT: NANCY L. DE JONGE DIRECTOR OF INVESTOR RELATIONS
(404-231-2025)
