<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
(Amending Items 2 and 5)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 31, 1997
-------------------------------
WORLD ACCESS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-19998 65-0044209
- --------------------------------------------------------------------------------
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION
INCORPORATION) NUMBER)
945 E. PACES FERRY ROAD, SUITE 2240, ATLANTA, GEORGIA 30326
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 231-2025
-----------------------------
<PAGE> 2
Explanatory Note: This Amendment No. 1 on Form 8-K/A is being filed to disclose
the pending acquisition of a majority stake in NACT Telecommunications, Inc. in
response to Item 5 of Form 8-K instead of Item 2 as previously reported.
ITEM 5. OTHER EVENTS
On December 31, 1997, GST Telecommunications, Inc., a federally
chartered Canadian corporation ("GST"), GST USA, Inc., a Delaware corporation
("GST USA"), and World Access, Inc. ("World Access") entered into a Stock
Purchase Agreement (the "Purchase Agreement"), pursuant to which World Access
has agreed to purchase from GST USA (hereinafter referred to as the
"Acquisition") 5,113,712 shares of the common stock of NACT Telecommunications,
Inc. ("NACT") held by GST USA (hereinafter referred to as the "Shares"),
representing approximately 63% of the outstanding shares of NACT common stock,
$.01 par value per share (the "NACT Common Stock"). Pursuant to the Purchase
Agreement, World Access will (i) pay to GST USA at the Closing (as defined in
the Purchase Agreement) cash in the amount of $59,662,956 by wire transfer of
immediately available funds to a United States bank account designated by GST
USA, and (ii) deliver to GST USA at the Closing shares of the common stock, par
value $.01 per share, of World Access (the "World Access Common Stock") with a
Fair Market Value (as defined in the Purchase Agreement) equal to $29,827,004.
The foregoing summary of the Acquisition is qualified in its entirety by
reference to the terms of the Purchase Agreement and the exhibits thereto, which
are attached hereto as Exhibit 2.1.
On December 31, 1997, World Access also entered into a Stock Agreement
with GST USA, a copy of which is attached as Exhibit D to the Purchase Agreement
("Stock Agreement"), pursuant to which GST USA agreed to vote all voting
securities of NACT held by GST USA in favor of approval of the Purchase
Agreement and the Acquisition and against any merger, consolidation, sale of
assets, reorganization or recapitalization of NACT with any party other than
World Access and its affiliates and against any liquidation or winding up of
NACT.
The Closing will take place as soon as possible after satisfaction of
certain conditions thereto, which include, but are not limited to: (i) the
expiration or termination of the required waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (ii) the truth
and validity of certain representations and warranties of GST, GST USA and World
Access as of the Closing Date (as defined in the Purchase Agreement); and (iii)
the delivery of certain ancillary documents and agreements contemplated by the
Purchase Agreement. World Access expects to consummate the Acquisition in the
first quarter of 1998.
World Access currently expects to fund the Acquisition through its
working capital.
The following transactions could result in the acquisition by World
Access of additional shares of NACT Common Stock and a change in the present
board of directors of NACT:
(i) Following the Closing, World Access intends promptly to
propose a merger transaction with NACT pursuant to which all
of the outstanding shares of NACT Common Stock not owned by
World Access would be exchanged for shares of World Access
Common Stock and NACT would be merged with a wholly-owned
subsidiary of World Access.
(ii) GST USA has agreed to use its best efforts to obtain the
written resignation of all of the directors and officers of
NACT as World Access may specify not less than 10 days prior
to the Closing Date, such resignations to be effective as of
the Closing Date. GST USA has also agreed to take all action
necessary to cause the board of directors of NACT, at and
immediately after the Closing, to consist of those directors
specified by World Access.
1
<PAGE> 3
The consideration to be paid pursuant to the Purchase Agreement was
determined as a result of negotiations between World Access and GST and the
Acquisition was approved by the boards of directors of World Access, GST and
NACT. Prior to the Acquisition, neither World Access nor any of its affiliates,
directors or officers, nor any associate of any such director or officer, had
any relationship with GST, GST USA or NACT.
Between November 12, 1997 and December 9, 1997, World Access purchased
an aggregate of 350,000 shares of NACT Common Stock in open market purchase
transactions (the "Open Market Purchase"). Accordingly, upon completion of the
Acquisition, World Access will own approximately 68% of the outstanding NACT
Common Stock.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. Included in this Report
are the audited consolidated financial statements of NACT for the years ended
September 30, 1997, 1996 and 1995, which have been audited by the independent
accounting firm of KPMG Peat Marwick, LLP, whose opinion thereon is also
included herein, and the unaudited consolidated financial statements of NACT for
the three months ended December 31, 1997.
2
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
----
NACT TELECOMMUNICATIONS, INC.: PAGE
----
<S> <C> <C>
Independent Auditors' Report F-2
Balance Sheets - September 30, 1997 and 1996 F-3
Statements of Income Years Ended - September 30, 1997, 1996 and 1995 F-4
Statements of Stockholders' Equity Years Ended - September 30, 1997, F-5
1996 and 1995
Statements of Cash Flows Years Ended - September 30, 1997, 1996 and F-6
1995
Notes to Financial Statements Years Ended - September 30, 1997, 1996, F-8
and 1995
NACT TELECOMMUNICATIONS, INC.:
Balance Sheets - December 31, 1997 (Unaudited) and September 30, 1997 F-23
(audited)
Statements of Income Three Months Ended - December 31, 1997 and 1996 F-24
(Unaudited)
Statements of Cash Flows Three Months Ended - December 31, 1997 and F-25
1996 (Unaudited)
Notes to Financial Statements Three Months Ended - September 30, 1997 F-27
and 1996 (Unaudited)
</TABLE>
F-1
<PAGE> 5
Independent Auditors' Report
The Board of Directors and Stockholders
NACT Telecommunications, Inc.:
We have audited the accompanying balance sheets of NACT Telecommunications, Inc.
as listed in the accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NACT Telecommunications, Inc.
as of September 30, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended September 30,
1997, in conformity with generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Salt Lake City, Utah
December 4, 1997
F-2
<PAGE> 6
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Balance Sheets
September 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents (notes 11 and 12) $ 9,946,621 694,359
Marketable investment securities (note 3) 3,247,296 250,000
Trade accounts receivable, less allowance for doubtful accounts of
$380,819 in 1997 and $100,000 in 1996 6,840,958 3,171,180
Notes receivable, less allowance for doubtful notes of $250,000
in 1997 and $310,000 in 1996 (note 4) 3,252,170 561,396
Inventories (note 2) 2,780,467 2,406,399
Prepaid expenses and other 197,659 16,338
Deferred tax assets (note 8) 587,199 418,449
----------- -----------
Total current assets 26,852,370 7,518,121
----------- -----------
Property and equipment, net (note 5) 5,783,157 717,804
Notes receivable, less current installments (note 4) 966,868 1,179,750
Inventories-long term (note 2) 225,000 --
Intangibles, net (notes 4 and 6) 5,775,673 5,075,366
Other assets 152,043 193,709
----------- -----------
$39,755,111 14,684,750
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,432,922 2,251,800
Accrued expenses 963,034 266,451
Income taxes payable (note 8) 1,353,371 199,557
Deferred revenue 466,859 350,439
Current installments of obligation under capital lease -- 21,848
Payable to GST USA 1,446,891 183,176
----------- -----------
Total current liabilities 5,663,077 3,273,271
Obligation under capital lease, less current installments -- 58,221
Deferred compensation (note 13) 157,819 157,819
Deferred tax liabilities (note 8) 929,984 985,508
----------- -----------
Total long-term liabilities 1,087,803 1,201,548
----------- -----------
Commitments and contingencies (notes 9, 12 and 13)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000 shares; none
issued and outstanding in 1997 and 1996 -- --
Common stock, $.01 par value in 1997 and no par value in 1996
Authorized 25,000,000 and 10,000,000 shares in 1997 and 1996,
respectively; issued and outstanding 8,113,712 shares in 1997 and
6,113,712 shares 1996
81,137 9,244,847
Additional paid-in-capital 28,130,161 --
Retained earnings 4,780,760 965,255
Net unrealized gain (loss) on marketable investment
securities (note 3) 12,173 (171)
----------- -----------
Total stockholders' equity 33,004,231 10,209,931
----------- -----------
$39,755,111 14,684,750
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 7
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Statements of Income
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales $ 21,981,854 9,929,702 7,604,071
Network carrier sales 5,716,406 3,783,445 2,781,761
Wins (note 1(b)) -- 2,571,731 1,097,950
------------ ------------ ------------
Total revenues 27,698,260 16,284,878 11,483,782
------------ ------------ ------------
Cost of goods sold (note 6):
Products 7,140,914 3,941,529 2,645,646
Network carrier usage (note 13) 5,485,671 3,381,716 2,731,295
Wins (note 1(b)) -- 2,571,731 786,699
Amortization of acquired intangibles 362,424 362,428 442,734
------------ ------------ ------------
Total cost of goods sold 12,989,009 10,257,404 6,606,374
------------ ------------ ------------
Gross profit 14,709,251 6,027,474 4,877,408
Operating expenses (note 6):
Research and development 2,385,243 1,352,138 1,183,422
Selling and marketing 2,504,420 953,486 924,542
General and administrative 3,472,069 3,024,361 2,152,898
Amortization of acquired intangibles 573,060 573,058 519,780
------------ ------------ ------------
Total operating expenses 8,934,792 5,903,043 4,780,642
------------ ------------ ------------
Income from operations 5,774,459 124,431 96,766
------------ ------------ ------------
Other income (expense):
Interest income 543,410 127,043 155,949
Interest expense (30,456) (14,202) (1,514)
Miscellaneous income 4,439 34,670 34,635
------------ ------------ ------------
Total other income 517,393 147,511 189,070
------------ ------------ ------------
Income before income taxes 6,291,852 271,942 285,836
Income taxes (note 8) 2,476,347 78,184 205,517
------------ ------------ ------------
Net income $ 3,815,505 193,758 80,319
============ ============ ============
Earnings per common and common equivalent share:
Primary $ 0.52 $ 0.03 $ 0.01
Fully diluted $ 0.50 $ 0.03 $ 0.01
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 8
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Statements of Stockholders' Equity
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Net
unrealized
gain (loss) on
Common stock Additional marketable
-------------------------- paid-in Retained investment
Shares Amount capital earnings securities Total
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994 6,113,712 $ 6,277,572 -- 691,178 -- 6,968,750
Capital contribution by parent company
(note 1(l))
-- 414,981 -- -- -- 414,981
Addition to capital arising from
push down accounting -- 2,162,384 -- -- -- 2,162,384
Net unrealized gain on marketable
investment securities -- -- -- -- 3,605 3,605
Net income -- -- -- 80,319 -- 80,319
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 1995 6,113,712 8,854,937 -- 771,497 3,605 9,630,039
Capital contribution by parent company
(note 1(l))
-- 389,910 -- -- -- 389,910
Net unrealized loss on marketable
investment securities -- -- -- -- (3,776) (3,776)
Net income -- -- -- 193,758 -- 193,758
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30, 1996 6,113,712 9,244,847 -- 965,255 (171) 10,209,931
Capital contribution by parent company
(note 1(l))
-- -- 899,799 -- -- 899,799
Issuance of common stock for cash, net of
expenses of $1,933,348 2,000,000 20,000 18,046,652 -- -- 18,066,652
Net unrealized gain on marketable
investment securities -- -- -- -- 12,344 12,344
Reclass of common stock to additional paid-
in capital resulting from establishing a
par value on common stock -- (9,183,710) 9,183,710 -- -- --
Net income -- -- -- 3,815,505 -- 3,815,505
=========== =========== =========== =========== =========== ===========
Balances at September 30, 1997 8,113,712 $ 81,137 28,130,161 4,780,760 12,173 33,004,231
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 9
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Statements of Cash Flows
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,815,505 193,758 80,319
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,431,226 1,165,885 1,212,039
Provision for loss on accounts, notes receivable, and recourse obligation 1,385,734 942,785 229,342
Loss (gain) on sale of marketable investment securities and equipment 45,699 (4,399) (34,635)
Capital contribution by parent company 899,799 389,910 414,981
Provision for loss on inventories 111,000 -- --
Deferred taxes (224,274) (374,127) (271,762)
Decrease (increase) in operating assets:
Trade accounts and notes receivable (8,374,533) (1,980,342) (2,266,741)
Inventories (920,068) (2,019,310) 19,873
Prepaid expenses (181,321) 89,441 (94,484)
Other assets 41,666 58,360 (227,882)
Increase (decrease) in operating liabilities:
Accounts payable (818,878) 888,670 1,210,516
Accrued expenses 496,583 45,287 148,411
Income taxes payable 1,153,814 60,578 (208,468)
Deferred revenue and deferred compensation 116,420 193,475 180,844
Payable to GST USA 1,263,715 243,176 --
------------ ---------- ----------
Net cash provided by (used in)
operating activities 242,087 (106,853) 392,353
------------ ---------- ----------
Cash flows from investing activities:
Purchase of land, plant, and equipment (5,169,888) (304,614) (326,796)
Proceeds from sale of equipment -- -- 34,635
Proceeds from sale of available-for-sale securities 250,000 596,836 --
Purchase of available-for-sale securities (3,234,952) -- --
Capitalization of software development costs (821,568) (419,154) (162,025)
Cash included in transfer of Wins to parent (note 1) -- (173,718) --
------------ ---------- ----------
Net cash used in investing activities (8,976,408) (300,650) (454,186)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 18,066,652 -- --
Principal payments on capital lease obligations (80,069) (19,868) (2,271)
------------ ---------- ----------
Net cash provided by (used in)
financing activities 17,986,583 (19,868) (2,271)
------------ ---------- ----------
Net increase (decrease) in cash and cash equivalents 9,252,262 (427,371) (64,104)
Cash and cash equivalents at beginning of year 694,359 1,121,730 1,185,834
------------ ---------- ----------
Cash and cash equivalents at end of year $ 9,946,621 694,359 1,121,730
============ ========== ==========
</TABLE>
F-6
<PAGE> 10
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Statements of Cash Flows (continued)
Years ended September 30, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- -------- ---------
<S> <C> <C> <C>
Supplemental Schedule of Noncash Investing and Financing Activities
Reclass of common stock to additional paid-in capital resulting from
establishing a par value on common stock $ 9,183,170 -- --
Disposition of fully depreciated asset -- 132,270 --
Repossession of equipment in settlement of accounts and notes
receivable
76,922 45,000 128,936
Property purchased under capitalized leases -- -- 102,208
Transfer of inventory to property, plant, and equipment 210,000 -- --
Intangibles capitalized as a result of push down -- -- 2,162,384
Disposition of equipment -- 47,366 --
Sale of equipment to Wins on note receivable -- 60,000 --
Transfer of notes receivable to other assets (note 4) 964,207 -- --
Change in net unrealized gain (loss) on marketable
investment securities
12,344 (171) --
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest $ 30,457 17,707 1,145
Cash paid during the year for income taxes 638,287 -- 263,735
Supplemental Disclosure of the Assets and Liabilities
Transferred to GST (note 1(b))
Cash $ -- (173,718) --
Trade accounts receivable -- (68,705) --
Prepaid expenses -- (751) --
Property and equipment, net -- (46,020) --
Other assets -- (14,036) --
Accounts payable -- 150,898 --
Accrued expenses -- 152,332 --
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 11
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
September 30, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
(a) Organization and Description of Business
NACT Telecommunications, Inc. (the "Company") designs,
develops and manufactures advanced telecommunications
switching platforms with integrated applications software and
network telemanagement capabilities. The Company's customers
include long distance carriers, prepaid debit (calling) card
and prepaid cellular network operators, international call
back/reorigination providers and other specialty
telecommunications service providers.
From September 1993 through September 30, 1995, GST USA, Inc.
("GST USA") acquired all of the issued and outstanding common
stock of the Company. This acquisition was accomplished
through a series of purchases of newly issued shares and the
shares of principal stockholders of the Company. As a result
of these transactions, the Company became a wholly owned
subsidiary of GST USA. GST USA accounted for the acquisition
using the purchase method of accounting. The excess of the
purchase price over the fair value of the assets acquired
totaled $6,912,322 and was assigned by GST USA as product
support contracts, software development costs, and goodwill.
These amounts are included in the accompanying balance sheet
as intangible assets.
In February 1997, the Company closed an initial public
offering (IPO) of 3,000,000 shares of common stock with
2,000,000 sold by the Company and 1,000,000 sold by GST USA.
Upon completion of the offering, GST USA ownership was reduced
to approximately 63 percent of the outstanding common stock of
the Company and, as such, GST USA continues to control the
Company. In connection with the IPO, the Company established a
par value of $.01 for common stock, increased the number of
common shares authorized to 25,000,000, and authorized
10,000,000, $.01 par value preferred shares.
On September 30, 1997, GST USA announced that it had retained
Hambrecht and Quist LLC to explore alternatives for monetizing
its 63 percent interest in the Company, including a potential
sale of some or all of the Company's capital stock to one or
more strategic investors.
(b) Wasatch International Network Services
The 1995 financial statements include the accounts of the
Company and its wholly-owned subsidiary Wasatch International
Network Services, Inc. ("Wins"), which commenced operations in
fiscal 1995 and had total assets, revenues, and net loss of
$316,455, $1,097,950 and $2,361, respectively, as of and for
the year ended September 30, 1995. All significant
intercompany transactions and balances were eliminated in
consolidation. On October 1, 1995, the Company transferred
ownership and operations of Wins to GST USA in the form of a
dividend at historical cost. From October 1, 1995 through
September 30, 1996, the Company provided carrier services to
GST USA for the Wins operation for which it received
$2,571,731. GST USA began providing its own carrier services
for Wins on October 1, 1996.
F-8
<PAGE> 12
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(c) Cash and Cash Equivalents
The Company considers all highly liquid financial instruments
purchased with an original maturity to the Company of three
months or less to be cash equivalents. Cash equivalents
consist of money market accounts of $8,472,637 at September
30, 1997 and $125,785 at September 30, 1996.
(d) Inventories
Raw materials are valued at the lower of cost (first-in,
first-out) or market. Work-in-process and finished goods are
stated on the basis of accumulated manufacturing costs, but
not in excess of market (net realizable value). Refurbished
inventory is stated at the estimated selling price less
refurbishing costs, selling costs and a normal profit margin.
Management periodically reviews the selling price of the
refurbished inventory and records adjustments to the carrying
value, if any, in the period in which they occur.
Long-term inventory consists of component parts held in order
to provide support on existing customer equipment beyond one
year.
(e) Notes Receivable
Notes receivable are recorded at the principal amount
outstanding, net of an allowance for doubtful notes. The
allowance is an amount that management believes will be
adequate to absorb possible losses based on evaluations of
collectibility and prior loss experience. The evaluation takes
into consideration such factors specific problem loans, past
payment history, and current and anticipated economic
conditions that may affect the customers' ability to pay.
While management uses available information to recognize
losses on notes, changing economic conditions and the economic
prospects of the borrowers might necessitate future additions
to the allowance.
(f) Impaired Notes
Management, considers a note to be impaired when it is
probable that the Company will be unable to collect all
amounts due according to the contractual terms of the note
agreement. When a note is considered to be impaired, the
amount of the impairment is measured based on the present
value of expected future cash flows discounted at the note's
effective interest rate. Impairment losses are included in the
allowance for doubtful accounts through a charge to bad debt
expense. Cash receipts on impaired notes receivable are
applied to reduce the principal amount of such notes until the
principal has been recovered and are recognized as interest
income thereafter.
F-9
<PAGE> 13
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method for financial
reporting purposes. Depreciation is based upon the estimated
useful lives of individual classes of assets. The estimated
useful lives of the individual classes of assets are as
follows:
Building 35 years
Furniture and equipment 7-10 years
Computer equipment 3-7 years
Switch and testing equipment 3-7 years
(h) Intangibles
Intangibles include goodwill, software development costs,
customer lists, and product support contracts and are being
amortized on a straight-line basis over the estimated useful
lives of the respective assets.
(i) Software Development Costs
Software development costs are capitalized upon the
establishment of technological feasibility of the product.
Capitalization is discontinued when the product is available
for general release to customers. The Company capitalized
software development costs of $821,568, $419,154, and $162,025
in 1997, 1996, and 1995, respectively.
(j) Stock-Based Compensation
Effective October 1, 1996, the Company adopted the footnote
disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 encourages entities to adopt the fair
value based method of accounting for stock options or similar
equity instruments. However, it also allows an entity to
continue measuring compensation cost for stock-based
compensation using the intrinsic-value method of accounting
prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). The Company
has elected to continue to apply the provisions of APB 25 and
provide pro forma footnote disclosures required by SFAS 123.
(k) Revenue Recognition and Deferred Revenue
Revenue from product sales is recognized when the product is
shipped and the Company has no significant performance
obligations. Revenue from network carrier sales is recognized
as the related service is provided. Deferred revenue consists
of warranty payments billed or received in advance and
deposits related to future product sales. Warranty payments
are amortized over the period of the warranty agreement which
is typically one year.
F-10
<PAGE> 14
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(l) Income Taxes
Through February 26, 1997, the Company was a member of a
controlled group which elected for federal income tax purposes
to file a consolidated tax return with GST USA. In accordance
with the tax sharing arrangement with GST USA, the Company
recorded the estimated income tax expense as if the Company
filed a tax return on a separate company basis using the asset
and liability method. GST USA agreed to make a capital
contribution to the Company in an amount that approximates the
Company's current federal income tax expense through February
26, 1997 in lieu of an intercompany payment for such taxes.
Pursuant to the tax sharing arrangement between the Company
and GST USA, the adjustment recorded to reconcile the
intercompany and equity accounts with regard to differences
between the estimated tax determined at year-end and the final
tax amount are recognized in income tax expense in the period
determined.
The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method,
deferred tax assets and deferred liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and deferred liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled.
After the IPO on February 26, 1997, GST USA's ownership was
reduced to 63 percent. As a result, the entities no longer
meet the affiliated group test defined in Internal Revenue
Code Section 1504(a) and the Company will file stand-alone
returns for periods subsequent to February 26, 1997.
(m) Marketable Investment Securities
The Company classifies all of its marketable investment
securities as available-for-sale which are recorded at fair
market value. Unrealized holding gains and losses are excluded
from earnings and are reported, net of tax, as a separate
component of stockholders' equity until realized. A decline in
the market value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security. Dividend income is recognized when earned. Realized
gains and losses are included in earnings and are derived
using the specific-identification method for securities sold.
F-11
<PAGE> 15
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(n) Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share are computed
based on the weighted-average number of common shares and as
appropriate, dilutive common stock equivalents outstanding
during the period. Stock options are considered to be common
stock equivalents. The number of shares used to compute
primary earnings per common and common equivalent share were
7,350,623, 6,113,712, and 6,113,712, shares in 1997, 1996, and
1995, respectively. The number of shares used to compute
fully-diluted earnings per share reflect additional dilution
related to stock options and warrants using the market price
at the end of the period when higher than the average price
for the period. The number of shares used to compute
fully-diluted earnings per share were 7,602,156, 6,113,712,
and 6,113,712, shares in 1997, 1996, and 1995, respectively.
(o) Fair Value Disclosure
At September 30, 1997 and 1996, the book value of the
Company's financial instruments approximates fair value.
(p) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(2) Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $1,065,113 377,734
Work-in-process 498,525 346,273
Finished goods 302,829 317,392
Refurbished inventory held for sale 914,000 1,365,000
---------- ----------
$2,780,467 2,406,399
========== ==========
Inventory - long-term $ 225,000 --
========== ==========
</TABLE>
F-12
<PAGE> 16
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(3) Marketable Investment Securities
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for available-for-sale securities by
major security type and class of security at September 30, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized cost holding holding Fair
cost gains losses value
-------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At September 30, 1997:
U.S. government securities -
Maturing in one year or less $2,237,009 10,287 -- 2,247,296
Certificate of deposit -
Maturing in one year or less 998,114 1,886 -- 1,000,000
---------- ---------- ---------- ----------
$3,235,123 12,173 -- 3,247,296
========== ========== ========== ==========
At September 30, 1996:
U.S. government securities -
Maturing in one year or less $ 250,171 -- 171 250,000
---------- ---------- ---------- ----------
$ 250,171 -- 171 250,000
========== ========== ========== ==========
</TABLE>
(4) Notes Receivable
Notes receivable at September 30, 1997 and 1996 include amounts due
from product sales of approximately $4,065,638 and $1,047,500,
respectively. Interest rates on the notes range from 9 percent to 14
percent with lives ranging from six months to five years.
The Company's recorded investment in notes receivable for which an
impairment has been recognized was $137,032 and $928,210, and the
related allowance for doubtful accounts was $137,032 and $310,000 at
September 30, 1997 and 1996, respectively. The average recorded
investment in impaired notes receivable during 1997 and 1996, was
$532,261 and $548,331, respectively. There was no interest income
recognized on impaired notes receivable during 1997 and 1996.
F-13
<PAGE> 17
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(4) Notes Receivable (continued)
The Company has sold carrier services to Overseas Telecom (iOverseasi)
since 1994. Overseas is located in Brazil and provides international
call back/reorigination services to companies and individuals primarily
in Brazil and Eastern Europe. During the year ended September 30, 1996,
Overseas became delinquent on certain of its payments. In fiscal 1997,
the Company entered into a note receivable agreement with Overseas
which provided for the repayment of the noncurrent outstanding amount
(approximately $0.93 million) bearing interest at 12 percent. The note
was secured primarily by Overseasi customer lists. In the fourth
quarter of fiscal 1997, the Company exercised its call privileges under
the note and took possession of the underlying collateral - the
customer lists. There were two separate and distinct customer lists,
one from Brazil and one from Eastern Europe. The customer list related
to the Brazilian operations was sold to Intertoll Communications
Network Corp. (iICN"), an existing customer of the Company with
operations in Argentina and Brazil for $1,000,000 payable in 100
monthly payments of $10,000. The related payments have been discounted
at 20 percent with the unpaid amount of approximately $485,000
classified as notes receivable in the accompanying balance sheet as of
September 30, 1997.
The customer list related to the Eastern European operations was
recorded on the Companyis books at the lower of fair value or cost.
Fair value was estimated by an independent third party appraiser using
generally accepted valuation standards. Accordingly, a customer list of
approximately $964,000 has been recorded as an intangible asset and
will be amortized over a three-year period.
(5) Property and Equipment
Property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 563,309 --
Building 3,626,891 --
Furniture and equipment 279,908 212,525
Computer equipment 784,521 440,827
Switch and testing equipment 1,082,217 492,052
---------- ----------
6,336,846 1,145,404
Less accumulated depreciation and amortization 553,689 427,600
========== ==========
$5,783,157 717,804
========== ==========
</TABLE>
F-14
<PAGE> 18
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(6) Intangibles
Intangible assets are summarized as follows:
<TABLE>
<CAPTION>
Amortization
1997 1996 period
---------- ---------- ------------
<S> <C> <C> <C>
Goodwill $2,863,766 2,863,766 20 years
Software development costs 3,305,127 2,483,559 3-5 years
Product support contracts 2,146,176 2,146,176 5 years
Customer list 964,207 -- 3 years
---------- ----------
9,279,276 7,493,501
Less amortization 3,503,603 2,418,135
========== ==========
$5,775,673 5,075,366
========== ==========
</TABLE>
On an ongoing basis, management reviews the valuation and amortization
of intangible assets to determine possible impairment by comparing the
carrying value of the asset to its undiscounted estimated future cash
flows.
Amortization expense relating to these assets was $1,085,468, $978,813,
and $962,514 for 1997, 1996, and 1995, respectively. Of these amounts,
$512,409, $405,755, and $442,734, for 1997, 1996, and 1995,
respectively, was recorded as a component of cost of goods sold.
(7) Stock Options
In November 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan") which was approved by the board of directors and GST USA. The
Company has reserved 1,250,000 shares for issuance under the 1996 Plan,
of which options to purchase 935,250 shares of common stock at an
exercise price of $9.35 per share were granted. All options granted
during the year expire on November 25, 2001. The Company may grant
incentive stock options and nonqualified stock options to employees,
officers, directors, independent contractors, and consultants. The
exercise price of options must be greater than or equal to the
estimated fair market value of the stock at the date of grant. The
board of directors or the compensation committee thereof determines
which eligible individuals are granted options, terms of the options,
exercise price, number of shares subject to the option, vesting and
exercisability. The 1996 Plan expires on November 25, 2006.
F-15
<PAGE> 19
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(7) Stock Options (continued)
A summary of activity follows:
<TABLE>
<CAPTION>
Year ended
September 30, 1997
---------------------------------------
Weighted-average
exercise
Number of shares price
---------------- ----------------
<S> <C> <C>
Options outstanding at beginning of year --
Plus options granted 935,250 $9.35
Less options exercised --
================
Options outstanding at end of year 935,250 $9.35
================
Options exercisable at end of year 289,688 $9.35
Weighted-average fair value of options granted
during the year $3.03
</TABLE>
The following table summarizes information about fixed stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------------- ---------------------------------
Number Weighted-average Number
Range of exercise outstanding at remaining Weighted-average exercisable at Weighted-average
prices September 30, contractual exercise September 30, exercise
1997 life price 1997 price
- ----------------- -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$9.35 935,250 4.15 9.35 289,688 9.35
</TABLE>
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per share would have been changed to the
following pro forma amount:
<TABLE>
<CAPTION>
1997
----------
<S> <C> <C>
Net income As reported $3,815,505
Pro Forma 2,784,147
Primary earnings per share: As reported $ 0.52
Pro Forma 0.38
Fully-diluted earnings per share As reported $ 0.50
Pro Forma 0.37
</TABLE>
Pro forma net earnings reflects only options granted in fiscal 1997.
Therefore, the effect that calculating compensation cost for
stock-based compensation under SFAS 123 has on the pro forma net
earnings as shown above may not be representative of the effects on
reported net earnings for future years.
F-16
<PAGE> 20
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(7) Stock Options (continued)
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 1997: risk-free
interest rate of 6.0 percent; expected dividend yield of 0 percent;
expected life of 3.4 years; and expected volatility of 82 percent.
(8) Income Taxes
Income tax expense consists of:
<TABLE>
<CAPTION>
Current Deferred Total
----------- ------------ -----------
<S> <C> <C> <C>
Year ended September 30, 1997:
U.S. federal $ 2,336,145 (194,210) 2,141,935
State 364,476 (30,064) 334,412
=========== =========== ===========
$ 2,700,621 (224,274) 2,476,347
=========== =========== ===========
Year ended September 30, 1996:
U.S. federal $ 389,910 (322,207) 67,703
State 60,358 (49,877) 10,481
----------- ----------- -----------
$ 450,268 (372,084) 78,184
=========== =========== ===========
Year ended September 30, 1995:
U.S. federal $ 414,981 (237,014) 177,967
State 64,239 (36,689) 27,550
----------- ----------- -----------
$ 479,220 (273,703) 205,517
=========== =========== ===========
</TABLE>
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to pretax income from
continuing operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense $2,139,230 92,460 97,184
Increase (reduction) in income taxes resulting from:
Amortization of goodwill 48,899 48,899 48,899
State and local income taxes, net of federal
income tax benefit 222,862 2,297 18,183
Meals and entertainment 5,796 3,631 4,060
Adjustment of tax provision to actual (1) -- (70,040) 36,214
Other, net 59,560 937 977
---------- ---------- ----------
$2,476,347 78,184 205,517
========== ========== ==========
</TABLE>
(1) Represents management's adjustment to the Company's income tax
liability based on a current assessment of its related obligations.
F-17
<PAGE> 21
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(8) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net current deferred tax assets:
Accounts and notes receivable principally due to allowance for doubtful
accounts $ 309,895 152,930
Unearned product warranty 125,422 47,074
Accrued vacation payable 55,386 37,327
Unearned sales deposits -- 83,640
Inventory principally due to uniform capitalization and reserves
96,496 97,478
--------- ---------
Total gross deferred tax assets 587,199 418,449
--------- ---------
Net long-term deferred tax liabilities:
Deferred compensation 58,866 58,866
Plant and equipment, principally due to differences in depreciation and
capitalized interest
(77,155) (87,588)
Capitalized software (450,716) (200,619)
Push down intangibles (460,979) (756,269)
Unrealized (gain) loss on investments -- 102
--------- ---------
Total gross deferred tax liabilities (929,984) (985,508)
--------- ---------
Net deferred tax liability $(342,785) (567,059)
========= =========
</TABLE>
Management believes that existing taxable temporary differences will
more likely than not reverse within the applicable carryforward periods
to allow future realization of existing deferred tax assets.
(9) Leases
The Company has operating leases for office furnishings, various office
equipment and two sales offices. Future minimum lease payments as of
September 30, 1997 are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1998 $194,378
1999 180,240
2000 180,240
2001 180,240
2002 160,454
========
Total minimum lease payments $895,552
========
</TABLE>
F-18
<PAGE> 22
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(9) Leases (continued)
These leases generally require the Company to pay all executory costs
such as maintenance and insurance. Rental expenses for all operating
leases for 1997, 1996, and 1995, were $123,462, $100,299, and $116,944,
respectively.
(10) Profit Sharing Plans
The Company sponsors a defined contribution 401(k) plan (the "Plan")
for employees who have completed one year of service and attained the
age of 21. Participants may defer up to 15 percent of eligible
compensation. The Company, at its discretion, may match 50 percent of
participant contributions up to 7.5 percent of participant
compensation. Employer contributions made to the Plan were $88,361,
$59,881, and $51,863, for the years ended September 30, 1997, 1996, and
1995, respectively.
Through September 30, 1996, the Company established a discretionary
profit sharing program for full time employees who had completed one
full year of employment. Under the plan, 10 percent of the increase in
profits based on the Company's previous highest retained earnings
balance were allocated among employees determined on length of
employment and salary level at the discretion of the board of
directors. Contributions to the program were $132,450 and $171,483 for
the years ended September 30, 1996 and 1995, respectively. The program
was terminated on September 30, 1996.
(11) Major Customers, Concentration of Credit Risk and Network Carrier Sales
Sales to individual customers exceeding 10 percent of total revenues or
total trade accounts and notes receivable as of and for the years ended
September 30, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
Percentage of total revenues
-------------------------------------------------
Customer 1997 1996 1995
--------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
J.D. Services, Inc. 8% -- --
Caribbean Telephone and Telegraph, Inc. -- -- 16%
Intertoll Communications Network Corp. 9 12% 8
Overseas Telecom 5 13 7
</TABLE>
<TABLE>
<CAPTION>
Percentage of total notes and accounts receivable
-------------------------------------------------
Customer 1997 1996 1995
--------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
J.D. Services, Inc. 15% -- --
Caribbean Telephone and Telegraph, Inc. -- -- 7%
Intertoll Communications Network Corp. 4 6% 7
Overseas Telecom 3 22 7
</TABLE>
F-19
<PAGE> 23
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(11) Major Customers, Concentration of Credit Risk and Network Carrier Sales
(continued)
The Company's customers consist of business entities geographically
dispersed primarily throughout the United States. However, the Company
also sells products and/or services to customers in the United Kingdom,
Bosnia, Serbia, Bulgaria, Saudi Arabia, and Brazil. The Company
maintains a security interest in the telecommunications systems it
sells until the related account balances are paid in full.
The Company had deposits with financial institutions in excess of the
federally insured amount of $100,000 in the amount of $9,691,380 and
$467,737 for the years ended September 30, 1997 and 1996, respectively.
Network carrier sales originating from countries outside the United
States aggregated approximately $3,180,000 and $2,105,000 for the years
ended September 30, 1997 and 1996, respectively. These sales are
payable in U.S. dollars.
(12) Commitments and Contingencies
The Company acted as a guarantor for financing transactions executed
under repurchase agreements with a financial institution for $3,482,182
and $1,035,032 at September 30, 1997 and 1996, respectively. This
results from the financial institution providing lease financing to the
Company's customers to enable them to purchase product from the
Company. At September 30, 1997, the Company had established a reserve
of $200,000 for its estimated obligation under the recourse provisions
and maintains a security interest in the equipment financed under the
repurchase agreement. No such reserve was recorded as of September 30,
1996. In addition to other covenants, the repurchase agreement requires
the Company to maintain an unrestricted cash account of $6,000,000. The
Company has also established a $750,000 revolving line of credit with
this same financial institution. No balances were outstanding under
this line of credit at September 30, 1997.
On October 1, 1996, the Company entered into employment agreements with
various employees which specify the individual's salary, benefits, and
restrictions. All agreements expire on September 30, 2001.
F-20
<PAGE> 24
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(12) Commitments and Contingencies (continued)
On August 24, 1995, Aerotel, Ltd. and Aerotel U.S.A., Inc.,
(collectively, "Aerotel") filed a patent infringement suit against the
Company alleging that telephone systems manufactured and sold by the
Company incorporating prepaid calling features infringe upon a patent
which was issued to Aerotel in November 1987. The complaint further
alleges defamation and unfair competition by the Company and seeks
various damages. Aerotel seeks injunctive relief, damages of $18.7
million for willful infringement of its patent and an order requiring
the Company to publish a written apology to Aerotel. The Company has
filed an Answer and Counterclaim denying patent infringement,
defamation or unfair competition and seeking judgment that the Aerotel
patent is invalid and that Aerotel has misused its patent in violation
of antitrust laws. Based on information currently available, an
estimate of potential loss cannot be made. However, management is of
the opinion that there will be no material impact of the Company's
financial position, results of operations or liquidity as a result of
this suit. Accordingly, no provision for loss has been provided in the
accompanying financial statements. An unfavorable decision could have a
material adverse effect on the business, financial condition, and
results of operations of the Company.
In addition to the above, the Company has various legal claims and
other contingent matters, incurred in the normal course of business.
Although the final outcome of such matters cannot be predicted, the
Company believes the ultimate disposition of these matters will not
have a material adverse effect on the Company's financial condition,
liquidity, or results of operations.
As of September 30, 1997, the Company had capital expenditure purchase
commitments outstanding of approximately $900,000.
(13) Related Party Transactions
In June 1997, and under contract with the Company, GST Realco, Inc.
("GST Realco"), a subsidiary of GST USA, completed construction of a
40,000 square foot office building in Provo, Utah. The Company
purchased the land and a portion of the building construction from GST
Realco for $563,309 and $1,293,072, respectively, and currently
occupies the property as its corporate and manufacturing facility.
During the year ended September 30, 1996, GST USA borrowed $250,000
from the Company on short-term notes bearing interest at 11 percent.
The note was repaid by September 30, 1996. The Company recorded
interest income of $2,602 relating to this note during the year ended
September 30, 1996. There were no borrowings during fiscal 1997.
Also, during the years ended September 30, 1997 and 1996, respectively,
the Company sold $32,788 and $356,000 of application platform switching
products and $ -0- and $2,571,731 of wholesale carrier usage to GST USA
or subsidiaries and purchased $4,466,907 and $361,000 of wholesale
carrier usage from GST USA.
From April 1996 through May 1997 a member of the Company's board was
compensated by GST USA for services rendered to GST USA and its
subsidiaries.
F-21
<PAGE> 25
NACT TELECOMMUNICATIONS, INC.
(A Majority Owned Subsidiary of GST USA)
Notes to Financial Statements
(13) Related Party Transactions (continued)
The Company has entered into a Deferred Compensation Trust Agreement
(the Trust) with the chairman of the Company whereby the Company funded
the trust in the amount of $144,000. The principal and related interest
thereon are payable to the chairman based on a defined payment
schedule. The Company, at its sole discretion, may at any time make
additional contributions to the Trust. The Trust is subject to claims
of the Company's creditors in the event of the Company's insolvency.
(14) Accounting Standards Issued Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128). SFAS 128 establishes a different method of computing
earnings per share than is currently required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS 128, the Company
will be required to present both basic earnings per share and diluted
earnings per share. Basic and diluted earnings per share are expected
to be comparable to the currently presented earnings per share. SFAS
128 is effective for the consolidated financial statements for interim
and annual periods ending after December 15, 1997. Accordingly, the
Company plans to adopt SFAS 128 in the first quarter of its 1998 fiscal
year and at that time all historical earnings per share data presented
will be restated to conform with the provisions of SFAS 128.
In 1997, the FASB also issued Statement No. 130, Reporting
Comprehensive Income, and Statement No. 131, Disclosures About Segments
of an Enterprise and Related Information. These statements which are
effective for periods beginning after December 15, 1997, expand or
modify disclosures and accordingly, will have no impact on the
Company's reported financial position, results of operations or cash
flows.
F-22
<PAGE> 26
NACT TELECOMMUNICATIONS, INC.
Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
Dec. 31, 1997
(Unaudited) Sept. 30, 1997
--------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 5,252 $ 9,947
Marketable securities 7,246 3,247
Accounts receivable, less allowance for doubtful
accounts of $631 in Dec. and $381 in Sept. 9,496 6,841
Notes receivable, less allowance for doubtful
accounts of $295 in Dec. and $250 in Sept. 4,055 3,252
Inventories 2,814 2,780
Prepaid expenses and other assets 216 198
Deferred tax asset - current 817 587
------- -------
Total current assets $29,896 $26,852
Fixed Assets:
Property, plant, and equipment $ 6,577 $ 6,337
Less: Accumulated depreciation (698) (554)
------- -------
Net fixed assets $ 5,879 $ 5,783
Notes receivable-long term $ 785 $ 967
Inventory-long term $ 225 $ 225
Intangibles $ 5,598 $ 5,776
Other Assets $ 164 $ 152
------- -------
Total Assets $42,547 $39,755
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,889 $ 1,433
Accrued expenses 1,206 963
Current corporate tax liability 1,073 1,353
Deferred Revenue 790 467
Inter company payable 1,743 1,447
------- -------
Total current liabilities $ 6,701 $ 5,663
Long Term Liabilities:
Deferred compensation liability $ 158 $ 158
Deferred tax liability 1,252 930
------- -------
Total long-term liabilities $ 1,410 $ 1,088
Stockholders' Equity:
Common stock, $.01 par value $ 81 $81
Additional paid-in-capital 28,271 28,130
Retained earnings 6,055 4,781
Unrealized appreciation on marketable securities 29 12
------- -------
Total stockholders' equity $34,436 $33,004
------- -------
Total liabilities and stockholders' equity $42,547 $39,755
======= =======
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 27
NACT TELECOMMUNICATIONS, INC.
Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
(Unaudited)
--------------------------------
Dec 31, 1997 Dec 31, 1996
--------------------------------
<S> <C> <C>
Revenues:
Product sales $7,300 $4,780
Network carrier sales 1,387 1,610
------ ------
Total revenues $8,687 $6,390
Cost of goods sold:
Products $2,158 $1,730
Network carrier usage 1,387 1,558
Amortization of acquired intangibles 170 91
------ ------
Total cost of goods sold $3,715 $3,379
------ ------
Gross profit $4,972 $3,011
Operating expenses:
Research and development $ 799 $ 423
Sales and marketing 767 357
General and administrative 1,362 836
Amortization of acquired intangibles 143 143
------ ------
Total operating expenses $3,071 $1,759
------ ------
Income from operations $1,901 $1,252
Other Income, net $ 223 $ 25
------ ------
Income before income taxes $2,124 $1,277
Income taxes $ 850 $ 569
------ ------
Net income after taxes $1,274 $ 708
====== ======
Weighted average common and common
equivalent shares outstanding:
Basic 8,122 6,114
Diluted 8,443 6,114
Earnings per share:
Basic $ 0.16 $ 0.12
Diluted $ 0.15 $ 0.12
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 28
NACT TELECOMMUNICATIONS, INC.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
(Unaudited) (Unaudited)
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,274 $ 708
Adjustments to reconcile net income to net cash
Provided by (used in)
operating activities:
Depreciation and amortization 498 322
Provision for loss on accounts and notes receivable 382 218
Provision for loss on inventory 228
Capital contribution by parent company 497
Deferred taxes 91 (10)
Decrease (increase) in operating assets:
Trade accounts and notes receivable (3,658) (2,717)
Inventories (262) (205)
Prepaid expenses and other assets (19) (167)
Increase (decrease) in operating liabilities:
Accounts payable 456 (1,088)
Accrued expenses 243 54
Income taxes payable (280) 71
Payable to GST USA 296 2,110
Deferred revenue and deferred compensation 324 4
------- -------
Net cash provided by (used in)
operating activities (427) (203)
Cash flows from investing activities:
Purchase of land, property, plant and equipment (240) (63)
Proceeds from sale of marketable securities 1,121 250
Purchase of marketable securities (5,103)
Capitalization of software development costs (187) (125)
------- -------
Net cash provided by (used in)
investing activities (4,409) (142)
Cash flows from financing activities:
Proceeds from issuance of common stock 141
Principle payments of capital lease obligations (1)
------- -------
Net cash provided by (used in)
Financing activities 141 (1)
Net (decrease) increase in cash (4,695) (142)
Cash at beginning of period 9,947 694
------- -------
Cash at end of period $ 5,252 $ 552
======= =======
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 29
NACT TELECOMMUNICATIONS, INC.
Statements of Cash Flows (continued)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ -0- $ 2
Income taxes $1,038 $ -0-
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 30
NACT TELECOMMUNICATIONS, INC.
Notes to financial statements
1. Basis of Presentation
The interim financial statements included herein have been prepared by NACT
Telecommunications, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such SEC rules and regulations. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's September 30, 1997 audited financial
statements filed on form 10K with the SEC in December 1997. In the opinion of
management, the condensed financial statements included herein reflect all
adjustments necessary to present fairly the financial position of the Company as
of December 31, 1997 and September 30, 1997, and the results of its operations
and cash flows for the three month periods ended December 31, 1997 and 1996. The
results of operations for the interim periods are not necessarily indicative of
the results of operations for the full year.
2. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS 128
established a different method of computing earnings per share than these same
computations under the provisions of Accounting Principles Board Opinion No. 15.
Under SFAS 128, the Company is required to present both basic earnings per share
and diluted earnings per share. SFAS 128 is effective for both interim and
annual periods ending after December 15, 1997. Accordingly, the Company has
adopted SFAS 128 in the first quarter of fiscal 1998.
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the three month periods ended December 31, 1997
and 1996. Diluted earnings per share for the three month periods ended December
31, 1997 and 1996 is computed considering the dilutive effect of stock options,
and is not materially different from the basic earnings per share calculations.
3. Stock Plan
The Company's 1996 Stock Option Plan (the "Stock Option Plan") was approved by
the Board of Directors and sole stockholder of the Company on November 26, 1996.
The purpose of the Stock Option Plan is to create additional incentives for the
Company's employees, directors and others who perform substantial services to
the Company by providing an opportunity to purchase shares of the Common Stock
pursuant to the exercise of options granted under the Stock Option Plan. The
Company may grant options that qualify as incentive stock options under Section
422 of the Internal Revenue Code, and non-qualified stock options. Incentive
stock options may be granted to employees (including officers and directors who
are employees). Non-qualified stock options may be granted to employees,
officers, directors, independent contractors and consultants of the Company. As
of December 31, 1997, 1,250,000 shares were reserved for issuance under the
Stock Option Plan and options to purchase 1,039,065 shares of Common Stock were
outstanding.
Options become exercisable at such times and in such installments as the Board
of Directors or Compensation Committee provides. The Stock Option Plan will
terminate on November 25, 2006, unless earlier terminated by the Board of
Directors.
F-27
<PAGE> 31
4. Inventories
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Raw materials $1,577 $1,065
Work-in-process 587 498
Finished goods 189 303
Refurbished inventory held for sale 461 914
------ ------
$2,814 $2,780
====== ======
Inventory-long term $ 225 $ 225
====== ======
</TABLE>
5. Property and Equipment
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Furniture and equipment $ 311 $ 280
Computer equipment 900 785
Switch and testing equipment 1,165 1,082
Land 563 563
Building 3,638 3,627
------ ------
6,577 6,337
Less accumulated depreciation and amortization 698 554
------ ------
$5,879 $5,783
====== ======
</TABLE>
F-28
<PAGE> 32
(b) Pro Forma Financial Information. The Acquisition and Open Market
Purchase has been accounted for using the purchase method of accounting. In
connection with the Acquisition, World Access expects to record a charge of
approximately $43.5 million, representing the portion of the purchase price
allocated to in-process research and development. The following unaudited pro
forma consolidated balance sheet as of September 30, 1997 reflects the
Acquisition (together with the Open Market Purchase) as if it had been completed
on September 30, 1997. The following unaudited pro forma consolidated statement
of operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997 reflect the Acquisition (together with the Open Market
Purchase) as if it had been completed as of January 1, 1996.
The pro forma data does not purport to be indicative of the results
which would actually have been reported if the Acquisition (together with the
Open Market Purchase) had occurred on such dates or which may be reported in the
future. The pro forma data should be read in conjunction with the historical
consolidated financial statements of World Access, the historical consolidated
financial statements of NACT, and the related notes thereto.
<PAGE> 33
WORLD ACCESS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
(A) (B)
PRO FORMA PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
------------ -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $127,357 $ 9,947 (64,665)(C) $ 72,639
Marketable investment securities 3,247 -- 3,247
Accounts receivable 22,446 6,841 29,287
Inventories 18,899 2,780 (1,300)(C) 20,379
Other current assets 7,050 4,037 (300)(C) 10,787
-------- -------- -------- --------
Total Current Assets 175,752 26,852 (66,265) 136,339
Property and equipment 4,287 5,783 -- 10,070
Intangible assets 29,370 5,776 (3,676)(C) 66,929
35,459 (C)
Technology licenses 904 -- -- 904
Debt issuance costs 4,091 -- -- 4,091
Other assets 2,035 1,344 -- 3,379
-------- -------- -------- --------
Total Assets $216,439 $ 39,755 $(34,482) $221,712
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term debt $ 66 $ -- $ -- $ 66
Accounts payable 6,902 1,433 -- 8,335
Accrued payroll and benefits 3,073 -- -- 3,073
CIS purchase price payable 3,500 -- -- 3,500
Other accrued liabilities 1,550 4,231 300 (C) 6,481
400 (C)
-------- -------- -------- --------
Total Current Liabilities 15,091 5,664 700 21,455
Long-term debt 115,301 -- -- 115,301
Other long-term liabilities -- 1,087 -- 1,087
-------- -------- -------- --------
Total Liabilities 130,392 6,751 700 137,843
-------- -------- -------- --------
Minority interest in subsidiary 10,560 (C) 10,560
Stockholders' Equity
Common and preferred stock 192 81 (81)(D) 206
14 (C)
Capital in excess of par value 81,178 28,130 (28,130)(D) 111,914
30,736 (C)
Retained earnings (deficit) 4,677 4,781 (4,781)(D) (38,823)
(43,500)(E)
Net unrealized gain on marketable investment securities 12 12
-------- -------- -------- --------
Total Stockholders' Equity 86,047 33,004 (45,742) 73,309
-------- -------- -------- --------
Total Liabilities and Stockholders' Equity $216,439 $ 39,755 $(34,482) $221,712
======== ======== ======== ========
</TABLE>
3
<PAGE> 34
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the pro forma balance sheet for World Access, Inc. as presented
in the Report on Form 10Q for the Three Months Ended September 30, 1997. The
pro forma balance sheet presented above includes the effects of the sale of
$115 million 4.5% convertible subordinated notes which was completed in
October 1997.
(B) Represents the historical balance sheet of NACT Telecommunications, Inc. as
of September 30, 1997.
(C) The Acquisition 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 in-process
research and development projects of NACT will be expensed at the
consumation of the Acquisition. The amount of the one-time non-recurring
charge is expected to be approximately $43.5 million. Since this charge is
directly related to the Acquisition and will not recurr, the pro forma
statements of operations have been prepared excluding this charge. The
Company has not yet determined the final allocation of the purchase price,
and accordingly, the amount shown below may differ from the amounts
ultimately determined.
The unallocated excess of purchase price over net assets acquired is
determined as follows (in thousands):
<TABLE>
<S> <C> <C>
Purchase price of 68% interest in NACT:
Cash purchase of GST shares 59,663
Open market purchase of NACT shares 5,002
------
Total cash 64,665
Restricted stock issued in exchange for GST's shares 20,900
"In the money" value of WAXS options issued in exchange
for NACT options 9,850
------
Total stock 30,750
Fees and expenses related to the Merger 300
-------
Total purchase price 95,715
-------
Allocation:
Historical stockholders' equity (32,992)
Minority interest in subsidiary 10,560
Adjust assets and liabilities:
Inventories 1,300
Intangibles 3,676
In process R&D costs (43,500)
Notes receivable 300
Reserve for recourse leases 400
-------
(60,256)
-------
Unallocated excess of purchase price over net assets acquired 35,459
=======
</TABLE>
(D) Eliminate existing stockholders' equity.
(E) Represents retained earnings adjustment for nonrecurring charge related to
write-off of in-process R&D expenses acquired.
4
<PAGE> 35
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
------------ ------- ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales of products $56,099 $17,202 $ -- $73,301
Service revenues 15,622 4,106 -- 19,728
------- ------- ------- -------
Total Sales 71,721 21,308 0 93,029
Cost of products sold 33,811 5,411 -- 39,222
Cost of services 12,832 4,199 (175)(A) 16,856
------- ------- ------- -------
Total Cost of Sales 46,643 9,610 (175) 56,078
------- ------- ------- -------
Gross Profit 25,078 11,698 175 36,951
Engineering and development 1,350 1,962 -- 3,312
Selling, general and administrative 6,860 4,784 -- 11,644
Amortization of goodwill 1,210 430 (275)(A) 3,165
1,800 (B)
------- ------- ------- -------
Operating Income 15,658 4,522 (1,350) 18,830
Interest and other income 835 523 -- 1,358
Interest and other expense (95) (30) (125)
Minority interest in net income of subsidiary (1,085)(C) (1,085)
------- ------- ------- -------
Income Before Income Taxes 16,398 5,015 (2,435) 18,978
Income taxes 5,986 1,907 170 (D) 8,063
------- ------- ------- -------
Net Income $10,412 $ 3,108 $(2,605) $10,915
======= ======= ======= =======
Net Income Per Common Share: $ .55 $ .52 (E)
======= =======
Weighted Average Shares Outstanding: 19,076 21,063 (E)
======= =======
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(A) Eliminate amortization of certain previously acquired intangibiles of NACT.
(B) Amortization of unallocated excess purchase price over net assets acquired
over 15 years.
(C) Record the 32% minority interest in net income of NACT including applicable
pro forma adjustments.
(D) Adjust tax provision for the pro forma adjustments.
(E) Represents fully diluted earnings per share, including shares of Company
common stock issued to GST and common stock equivalents related to stock
options issued in exchange for NACT options.
5
<PAGE> 36
WORLD ACCESS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 1996
DECEMBER 31, 1996 SEPTEMBER 30, 1996 PRO FORMA PRO FORMA
WORLD ACCESS NACT ADJUSTMENTS COMBINED
----------------- ------------------ ----------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales of products $ 34,411 $ 9,930 $ -- $ 44,341
Service revenues 16,589 6,355 (2,572)(A) 20,372
-------- -------- -------- --------
Total Sales 51,000 16,285 (2,572) 64,713
Cost of products sold 21,485 3,942 -- 25,427
Cost of services 14,520 6,316 (230)(B) 18,034
(2,572)(A)
-------- -------- -------- --------
Total Cost of Sales 36,005 10,258 (2,802) 43,461
-------- -------- -------- --------
Gross Profit 14,995 6,027 230 21,252
Engineering and development 892 1,352 -- 2,244
Selling, general and administrative 6,211 3,978 -- 10,189
Amortization of goodwill 534 573 (365)(B) 3,142
2,400 (C)
-------- -------- -------- --------
Operating Income 7,358 124 (1,805) 5,677
Interest and other income 485 162 -- 647
Interest and other expense (319) (14) (333)
Minority interest in net income of subsidiary (252)(D) (252)
-------- -------- -------- --------
Income Before Income Taxes 7,524 272 (2,057) 5,739
Income taxes 745 78 175 (E) 998
-------- -------- -------- --------
Net Income $ 6,779 $ 194 $ (2,232) $ 4,741
======== ======== ======== ========
Net Income Per Common Share: $ .46 $ .30 (F)
======== ========
Weighted Average Shares Outstanding: 14,424 15,854 (F)
======== ========
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR 1996
(A) Eliminate nonrecurring NACT Wins revenue and associated cost of sales. See
note 1(b) to the audited financial statements.
(B) Eliminate amortization of certain acquired intangibles.
(C) Amortization of unallocated excess purchase price over net assets acquired
over 15 years.
(D) Record the 32% minority interest in net income of NACT including applicable
pro forma adjustments.
(E) Adjust tax provision for the pro forma adjustments.
(F) Represents fully diluted earnings per share, including shares of Company
common stock issued to GST.
6
<PAGE> 37
(c) Exhibits. The following exhibits are filed herewith by direct
transmission via "edgar."
2.1 Stock Purchase Agreement among World Access, Inc. GST USA,
Inc. and GST Telecommunications, Inc. dated December 31, 1997,
with exhibits thereto.*
23.1 Consent of KPMG Peat Marwick LLP.*
99.1 Press Release issued on January 2, 1998.*
- ----------
* Previously filed.
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 February 25, 1998
7
