-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CC9D9hEbVTw6/2qlDl0HpCxKxEIuopXS3ZDR30u1D0Hl+1ojoFjkk2NoNdIzVhHs TB/+D8XCpNQbR715c1HUtw== /in/edgar/work/0000950144-00-012014/0000950144-00-012014.txt : 20001011 0000950144-00-012014.hdr.sgml : 20001011 ACCESSION NUMBER: 0000950144-00-012014 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20001010 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLD ACCESS INC /NEW/ CENTRAL INDEX KEY: 0001071645 STANDARD INDUSTRIAL CLASSIFICATION: [3669 ] IRS NUMBER: 582398004 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-37750 FILM NUMBER: 736549 BUSINESS ADDRESS: STREET 1: 945 EAST PACES FERRY ROAD STREET 2: SUITE 2200 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 4042312025 MAIL ADDRESS: STREET 1: 945 EAST PACES FERRY ROAD STREET 2: SUITE 2200 CITY: ATLANTA STATE: GA ZIP: 30326 FORMER COMPANY: FORMER CONFORMED NAME: WAXS INC DATE OF NAME CHANGE: 19981006 S-4/A 1 g60284a3s-4a.txt WORLD ACCESS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 2000 REGISTRATION NO. 333-37750 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ WORLD ACCESS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 3669 58-2398004 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
945 E. PACES FERRY ROAD SUITE 2200 ATLANTA, GEORGIA 30326 (404) 231-2025 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) BRYAN D. YOKLEY EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER WORLD ACCESS, INC. 945 E. PACES FERRY ROAD SUITE 2200 ATLANTA, GEORGIA 30326 (404) 231-2025 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES OF COMMUNICATIONS TO: LEONARD A. SILVERSTEIN, ESQ. LONG ALDRIDGE & NORMAN LLP 5300 ONE PEACHTREE CENTER 303 PEACHTREE STREET ATLANTA, GEORGIA 30308-3201 (404) 527-4000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon consummation of the merger between STI Merger Co., a wholly-owned subsidiary of World Access, and STAR Telecommunications, Inc. and/or upon consummation of the merger between WorldxChange Communications, Inc. f/k/a CTI Merger Co., a wholly-owned subsidiary of World Access, and Communication TeleSystems International d/b/a WorldxChange Communications described herein. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 [World Access Logo] [STAR Logo] SPECIAL MEETING OF STOCKHOLDERS MERGERS PROPOSED -- YOUR VOTE IS VERY IMPORTANT The boards of directors of World Access, Inc. and STAR Telecommunications, Inc. have agreed on a merger that will combine the businesses of World Access and STAR. The STAR merger agreement also provides for the sale of PT-1 Communications, Inc., STAR's subsidiary, to a third party. As a result of the STAR merger, World Access will issue a total of approximately 22.7 million shares of World Access common stock assuming World Access chooses to pay all of the consideration in stock. Each outstanding share of STAR common stock will be converted into the right to receive, at the election of World Access: - 0.386595 shares of World Access common stock, subject to adjustment as described in the accompanying joint proxy statement/prospectus; or - a combination of shares of World Access common stock and cash. The board of directors of World Access has also agreed on a merger that will combine the businesses of World Access and Communication TeleSystems International, which does business as WorldxChange Communications. As a result of the WorldxChange merger, World Access will issue a total of approximately 29.8 million shares of World Access common stock. Each outstanding share of WorldxChange common stock, including shares of preferred stock deemed to be automatically converted into shares of common stock immediately before completion of the WorldxChange merger, will be converted into the right to receive 0.6583 shares of World Access common stock. The World Access common stock is traded on the Nasdaq National Market under the symbol "WAXS." The closing price for the World Access common stock on October 5, 2000 was $5.25 per share. FOR A DISCUSSION OF RISK FACTORS YOU SHOULD CONSIDER IN EVALUATING THE MERGERS, SEE "RISK FACTORS" BEGINNING ON PAGE 24. STAR cannot complete the STAR merger without the approval of its stockholders, and World Access cannot complete the STAR merger or the WorldxChange merger without the approval of its stockholders. STAR and World Access have scheduled special meetings to vote on these transactions and other important proposals. A joint proxy statement/prospectus accompanies this letter and provides detailed information about the special meetings, the STAR merger and the WorldxChange merger. In addition, you may obtain information about our companies from documents that we have filed with the Securities and Exchange Commission. We urge you to read the joint proxy statement/prospectus document carefully. The dates, times and places of the special meetings are as follows: For World Access stockholders: For STAR stockholders: , 2000 , 2000 11:00 a.m., local time 11:00 a.m., local time 945 E. Paces Ferry Road 223 East De La Guerra Atlanta, Georgia 30326 Santa Barbara, California 93101
The World Access board of directors recommends that you vote to approve the STAR merger and the WorldxChange merger. The STAR board of directors recommends that you vote to approve the STAR merger. Whether or not you plan to attend the special meeting in person, please complete, sign and date the accompanying proxy card and return it in the enclosed prepaid envelope. Your prompt cooperation will be greatly appreciated. /s/ John D. Phillips /s/ Mary A. Casey John D. Phillips Mary A. Casey Chairman and Chief Executive Officer President and Secretary World Access, Inc. STAR Telecommunications, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Joint proxy statement/prospectus dated , 2000 and first mailed to stockholders on or about , 2000. 3 WHERE YOU CAN FIND MORE INFORMATION ABOUT WORLD ACCESS AND STAR Federal securities laws require World Access and STAR to file information with the Securities and Exchange Commission concerning our business and operations. Accordingly, World Access and STAR file annual, quarterly and special reports, proxy statements and other information with the SEC. You can read and copy this information at the following SEC locations: Public Reference Room New York Regional Office Chicago Regional Office 450 Fifth Street, N.W. Seven World Trade Center Northwest Atrium Center Room 1024 Suite 1300 500 West Madison Street Washington, D.C. 20549 New York, New York 10048 Suite 1400 Chicago, Illinois 60661
You can get additional information about the operation of the SEC's public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site (http://www.sec.gov) that contains World Access' and STAR's filings and the reports, proxy and information statements and other information regarding World Access and STAR. You can also inspect information about World Access and STAR at the offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006. This prospectus is a part of a registration statement that World Access filed with the SEC and omits certain information contained in the registration statement as permitted by the SEC. Additional information about World Access and its common stock is contained in the registration statement on Form S-4 of which this joint proxy statement/prospectus forms a part, including the exhibits and schedules. You can obtain a copy of the registration statement from the SEC at the address or Internet site listed above. INCORPORATION OF DOCUMENTS FILED WITH THE SEC BY REFERENCE The SEC allows World Access and STAR to "incorporate by reference" the information each company files with the SEC, which means that World Access and STAR can disclose information to you by referring to those documents. The information incorporated by reference is considered part of this prospectus, and later information that World Access and STAR file with the SEC from the date of this joint proxy statement/prospectus until the date of: - the World Access special meeting, with respect to the World Access stockholders; - the STAR special meeting, with respect to the STAR stockholders; and - the completing of the WorldxChange merger, with respect to the WorldxChange shareholders, will automatically update and supersede this information. World Access and STAR incorporate by reference documents listed below and any future filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the date of the completion of the mergers: World Access SEC Filings (Commission File No. 0-29782): - Current Report on Form 8-K filed on June 26, 2000 (event date: June 14, 2000); - Current Report on Form 8-K filed on June 26, 2000 (event date: June 7, 2000); - Current Report on Form 8-K filed on April 18, 2000 (event date: April 10, 2000); - Current Report on Form 8-K filed on March 1, 2000 (event date: February 11, 2000); - Current Report on Form 8-K filed on March 1, 2000 (event date: February 11, 2000); - Current Report on Form 8-K filed on February 28, 2000 (event date: February 11, 2000), as amended by Forms 8-K/A filed on April 26, 2000 and August 4, 2000; - Current Report on Form 8-K filed on December 22, 1999 (event date: December 7, 1999), as amended by Forms 8-K/A filed on February 22, 2000, August 4, 2000 and September 11, 2000; - Current Report on Form 8-K filed on February 9, 2000 (event date: February 2, 2000); 4 - Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as amended by Form 10-Q/A filed on September 11, 2000 and October 6, 2000; - Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as amended by Form 10-Q/A filed on August 4, 2000, September 11, 2000 and October 6, 2000; and - Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as amended by Form 10-K/A filed on August 4, 2000, September 11, 2000, and October 6, 2000 STAR SEC filings (Commission File No. 000-22581): - Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as amended by Form 10-Q/A filed on October 10, 2000; - Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as amended by Form 10-Q/A filed on October 10, 2000; and - Annual Report on Form 10-K for fiscal year ended December 31, 1999, as amended by Form 10-K/A filed on September 11, 2000. WORLD ACCESS AND STAR ANNUAL REPORTS TO STOCKHOLDERS Copies of the World Access and STAR Annual Reports on Form 10-K for the fiscal year ended December 31, 1999, as amended, are included with this joint proxy statement/prospectus. Additional copies of documents incorporated by reference and listed above may be obtained without charge by writing to the appropriate company. To obtain copies from World Access, write to: Investor Relations, World Access, Inc., 945 E. Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326, or by telephone request to (404) 231-2025. To obtain copies from STAR, write to: Investor Relations, STAR Telecommunications, Inc., 223 East De La Guerra Street, Santa Barbara, California 93101, or by telephone request to (805) 899-1962. IN ORDER TO OBTAIN THE DOCUMENTS IN TIME FOR THE WORLD ACCESS SPECIAL MEETING, YOU MUST REQUEST THE DOCUMENTS BY , 2000, WHICH IS FIVE BUSINESS DAYS PRIOR TO THE DATE OF THE WORLD ACCESS SPECIAL MEETING. IN ORDER TO OBTAIN THE DOCUMENTS IN TIME FOR THE STAR SPECIAL MEETING, YOU MUST REQUEST THE DOCUMENTS BY , 2000, WHICH IS FIVE BUSINESS DAYS PRIOR TO THE DATE OF THE STAR SPECIAL MEETING. 5 WORLD ACCESS, INC. 945 E. PACES FERRY ROAD, SUITE 2200 ATLANTA, GEORGIA 30326 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 2000 To the Stockholders of World Access, Inc.: We have agreed to merge with STAR Telecommunications, Inc. and also with Communication TeleSystems International, which does business as WorldxChange Communications. World Access will be the surviving company in both mergers. We have scheduled a special meeting in lieu of an annual meeting of the stockholders of World Access, Inc. at the principal executive offices of World Access located at 945 E. Paces Ferry Road, Atlanta, Georgia 30326 on , 2000 at 11:00 a.m., local time, for the purposes described below. The purposes of the special meeting are as follows: Proposal 1. To consider and vote upon a proposal to approve the adoption of an Agreement and Plan of Merger among World Access, STI Merger Co., a subsidiary of World Access, and STAR and the transactions contemplated by the STAR merger agreement. The STAR merger agreement provides for STAR becoming a subsidiary of World Access. Under the STAR merger agreement, each outstanding share of STAR common stock will be converted into the right to receive, at the election of World Access: - 0.386595 shares of World Access common stock, subject to adjustment as described in the enclosed joint proxy statement/prospectus; or - a combination of shares of World Access common stock and cash. Proposal 2. To consider and vote upon a proposal to approve the adoption of an Agreement and Plan of Merger among World Access, WorldxChange Communications, Inc., a subsidiary of World Access, and WorldxChange and the transactions contemplated by the WorldxChange merger agreement. The WorldxChange merger agreement provides for WorldxChange becoming a subsidiary of World Access. Under the WorldxChange merger agreement, each outstanding share of WorldxChange common stock, including shares of preferred stock will be converted into the right to receive 0.6583 shares of World Access common stock. Proposal 3. To consider and vote upon a proposal to approve an amendment to Article IV of our amended certificate of incorporation to increase the number of shares of common stock that we are authorized to issue from 150,000,000 shares to 290,000,000 shares. Proposal 4. To consider and vote upon a proposal to approve an amendment to Article IX of our amended certificate of incorporation to increase the maximum number of authorized directors from 12 to 15. Proposal 5. To consider and vote upon a proposal to approve an amendment to Article IX of our amended certificate of incorporation to end the division of our board of directors into three classes so that all directors will serve terms of one year and until their successors are duly elected and qualified or until their earlier resignation or removal. Proposal 6. To consider and vote upon a proposal to approve an amendment to our Directors' Warrant Incentive Plan to increase the number of warrants issuable under the plan from 600,000 warrants to 1,200,000 warrants. Proposal 7. To consider and vote upon a proposal to approve an amendment to our Directors' Warrant Incentive Plan to modify the performance criteria of World Access common stock under the plan. 6 Proposal 8. To elect as directors the nominees named in this joint proxy statement/prospectus to serve: - if Proposal 5 is approved, for a term of one year and until their successors are duly elected and qualified or until their earlier resignation or removal; or - if Proposal 5 is not approved, for a term of three years and until their successors are elected and qualified or until their earlier resignation or removal. At the special meeting, we will also transact any other business as may properly come before the special meeting or any adjournments or postponements of the special meeting. Copies of the STAR merger agreement and the WorldxChange merger agreement are attached as Annex A and Annex B, respectively, to the accompanying joint proxy statement/prospectus. Only holders of record of World Access common stock, World Access 4.25% cumulative senior perpetual convertible preferred stock, Series A, World Access convertible preferred stock, Series C, World Access convertible preferred stock, Series D, and World Access convertible preferred stock, Series E, on , 2000 are entitled to notice of and to vote at the special meeting and any adjournments or postponements of the special meeting. All stockholders are cordially invited to attend the special meeting. However, to ensure your representation at the special meeting, you are urged to complete, sign and date the accompanying proxy card and return it in the enclosed prepaid envelope. You may revoke your proxy at any time before the vote. If you attend the special meeting in person, you may vote your shares personally on all matters even if you have previously returned a proxy card. If your shares are held in "street name" by your broker or other nominee, only that holder can vote your shares. You should follow the directions provided by your broker or nominee regarding how to instruct them to vote your shares. BY ORDER OF THE BOARD OF DIRECTORS /S/ W. TOD CHMAR W. Tod Chmar Executive Vice President and Secretary 7 [STAR LOGO] STAR TELECOMMUNICATIONS, INC. NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 2000 To the Stockholders of STAR Telecommunications, Inc.: We have agreed to merge STAR with a subsidiary of World Access, Inc. We also have agreed with World Access to sell the assets of PT-1 Communications, Inc., our subsidiary, to a third party. The STAR merger and the sale of the assets of PT-1 require your approval. We have scheduled a separate special meeting for you to consider and vote upon the PT-1 asset sale. If the STAR merger agreement is approved by our stockholders and the STAR merger is completed, World Access can choose to have each outstanding share of STAR common stock converted into the right to receive: - 0.386595 shares of World Access common stock, subject to adjustment as described in the enclosed joint proxy statement/prospectus; or - a combination of shares of World Access common stock and cash. World Access does not have to complete the STAR merger if: - STAR does not sell the assets of PT-1 prior to the completion of the STAR merger; - STAR does not receive net cash proceeds of at least $120.0 million from the sale of the assets of PT-1 to Counsel Communications LLC; or - STAR does not receive net cash proceeds of at least $150.0 million from the sale of PT-1 to another purchaser. We will hold a special meeting of stockholders on , , 2000 at , local time, at , to approve the Agreement and Plan of Merger, dated as of February 11, 2000, as amended June 7, 2000, among World Access, STI Merger Co. and STAR, which will result in STAR becoming a wholly-owned subsidiary of World Access. At the special meeting, we will also transact any other business that is properly brought before the special meeting, or any adjournment or postponement of the special meeting. The enclosed joint proxy statement/prospectus describes the amended STAR merger agreement in detail. The STAR merger agreement and the amendment to the STAR merger agreement are attached as Annex A to the joint proxy statement/prospectus. Only holders of record of STAR common stock on the close of business on , 2000 are entitled to notice of and to vote at the special meeting. A list of stockholders entitled to vote at the meeting will be available for inspection at the meeting and for ten days prior to the meeting during regular business hours at STAR's corporate headquarters in Santa Barbara, California. You may have appraisal rights under Delaware law in connection with the STAR merger. The enclosed joint proxy statement/prospectus discusses your possible appraisal rights. 8 We urge you to vote on the matters in the enclosed joint proxy statement/prospectus and to sign, date and promptly return the enclosed proxy in the envelope provided. It is important for you to be represented at the meeting. You can revoke your proxy at any time before the vote. If you execute and return your proxy, you can still vote in person if you are present at the meeting. If your shares are held in "street name" by your broker or other nominee, only that holder can vote your shares. You should follow the directions provided by your broker or nominee regarding how to instruct them to vote your shares. By Order of the Board of Directors /s/ Mary A. Casey Mary A. Casey President and Secretary , 2000 Santa Barbara, California Requests for additional copies of proxy materials should be addressed to Mary A. Casey, Secretary, at STAR's offices located at 223 East De La Guerra Street, Santa Barbara, California 93101. 9 TABLE OF CONTENTS
PAGE ---- QUESTIONS AND ANSWERS ABOUT THE STAR MERGER................. 1 QUESTIONS AND ANSWERS ABOUT THE WORLDXCHANGE MERGER......... 3 SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS............. 5 THE COMPANIES............................................... 5 SUMMARY OF THE STAR MERGER.................................. 7 SUMMARY OF THE WORLDXCHANGE MERGER.......................... 11 SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION..... 14 COMPARATIVE PER SHARE DATA.................................. 22 RISK FACTORS................................................ 24 Risk factors relating to the mergers...................... 24 Risk factors concerning the combined company's business operations............................................. 27 Risk factors concerning the companies' financial condition.............................................. 29 Risk factors concerning the companies' industry........... 32 Risk factors concerning the combined company's common stock.................................................. 35 FORWARD-LOOKING STATEMENTS.................................. 36 THE WORLD ACCESS SPECIAL MEETING............................ 36 THE STAR SPECIAL MEETING.................................... 39 PROPOSAL 1 -- THE MERGER BETWEEN WORLD ACCESS AND STAR...... 40 Background of the STAR merger............................. 40 World Access' reasons for the STAR merger................. 44 The World Access board of directors' recommendation that stockholders approve the STAR merger................... 46 STAR's reasons for the STAR merger........................ 46 The STAR board of directors' recommendation that stockholders approve the STAR merger................... 48 Opinion of World Access' financial advisor regarding the STAR merger............................................ 48 Summary of financial analyses performed by Donaldson, Lufkin & Jenrette...................................... 50 Engagement letter...................................... 53 Other relationships.................................... 54 Opinion of STAR's financial advisor regarding the STAR merger................................................. 54 Consideration that STAR stockholders will receive in the STAR merger............................................ 62 Completion of the STAR merger............................. 64 Material federal income tax consequences of the STAR merger................................................. 64 The STAR merger........................................ 65 Tax considerations for World Access stockholders....... 66 Tax considerations for STAR stockholders............... 66 Tax considerations for the corporate parties........... 69 Exchange of STAR stock certificates for World Access stock certificates........................................... 70 Restrictions on sales of shares by affiliates of World Access and STAR........................................ 70 Accounting treatment of the STAR merger................... 70 Regulatory filings and approvals required to complete the STAR merger............................................ 70 Rights of dissenting STAR stockholders.................... 71 Interests of directors, officers and stockholders in the STAR merger............................................ 73 Description of the STAR merger agreement.................. 74 Description of the STAR merger consideration........... 75 Representations and warranties contained in the STAR merger agreement...................................... 75 STAR's conduct of business before completion of the STAR merger........................................... 75 No other negotiations involving potential acquirors of STAR.................................................. 76 Description of the management services between World Access and STAR....................................... 77 Board of directors of World Access..................... 77 Conditions to completion of the STAR merger............ 77 Termination of the STAR merger agreement............... 78
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PAGE ---- Payment of termination fee if the STAR merger agreement is terminated......................................... 79 Extension, waiver and amendment of the STAR merger agreement............................................. 79 STAR voting agreements and credit agreements........... 79 Edgecomb voting agreement.............................. 79 Tawfik voting agreement................................ 80 STAR credit agreements................................. 81 Information regarding STAR................................ 81 STAR litigation........................................... 81 Comparison of rights of holders of World Access common stock and STAR common stock............................ 82 Comparison of authorized and outstanding capital stock................................................. 82 Comparison of classes of common stock.................. 82 Comparison of requirements for special meeting of stockholders.......................................... 83 Comparison of requirements for action by written consent in lieu of a stockholders' meeting............ 83 Comparison of record date for determining stockholders.......................................... 83 Comparison of procedures to nominate directors......... 83 Comparison of number of directors...................... 84 Comparison of classified board of directors............ 84 Comparison of procedures for the removal of directors............................................. 84 Comparison of board of directors vacancies............. 84 Comparison of notice requirements of special meetings of the board of directors............................. 84 Comparison of procedures for an amendment of certificate of incorporation and bylaws............... 84 STAR selected consolidated financial data................. 86 PROPOSAL 2 -- THE MERGER BETWEEN WORLD ACCESS AND WORLDXCHANGE.............................................. 88 Background of the WorldxChange merger..................... 88 World Access' reasons for the WorldxChange merger......... 90 The World Access board of directors' recommendation that stockholders approve the WorldxChange merger........... 91 WorldxChange's reasons for the WorldxChange merger........ 91 Opinion of World Access' financial advisor regarding the WorldxChange merger.................................... 92 Summary of financial analyses performed by Donaldson, Lufkin & Jenrette...................................... 94 Engagement letter...................................... 97 Other relationships.................................... 98 Consideration that WorldxChange shareholders will receive in the WorldxChange merger............................. 98 Completion of the WorldxChange merger..................... 98 Material federal income tax consequences of the WorldxChange merger.................................... 98 The WorldxChange merger................................ 99 Tax considerations for WorldxChange shareholders....... 100 Tax considerations for the corporate parties........... 102 Exchange of WorldxChange stock certificates for World Access stock certificates.............................. 104 Restrictions on sales of shares by affiliates of World Access and WorldxChange................................ 104 Accounting treatment of the WorldxChange merger........... 104 Regulatory filings and approvals required to complete the WorldxChange merger.................................... 105 Rights of dissenting WorldxChange shareholders............ 106 Interests of WorldxChange's directors, officers and shareholders in the WorldxChange merger................ 108 Principal shareholders of WorldxChange.................... 110 Description of the WorldxChange merger agreement.......... 111 Description of the WorldxChange merger consideration... 111 Representations and warranties contained in the WorldxChange merger agreement......................... 111 WorldxChange's conduct of business before completion of the WorldxChange merger............................... 112 No other negotiations involving WorldxChange........... 112 Treatment of WorldxChange stock options and warrants... 112 Board of directors and officers of World Access........ 112 Conditions to completion of the WorldxChange merger.... 113 Termination of the WorldxChange merger agreement....... 113 Extension, waiver and amendment of the WorldxChange merger agreement...................................... 114 Post-closing indemnification; escrowed shares.......... 114
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PAGE ---- WorldxChange services, voting and participation agreements............................................. 115 World Access voting agreement.......................... 115 WorldxChange voting agreements......................... 116 Executive management services agreement with WorldxChange.......................................... 116 Foothill Capital Corporation participation agreement... 117 Information regarding WorldxChange........................ 118 Services............................................... 118 The WorldxChange network............................... 119 Termination arrangements............................... 122 Sales and marketing.................................... 122 Worldwide operations................................... 124 Employees.............................................. 125 Properties............................................. 125 Legal proceedings...................................... 125 WorldxChange management's discussion and analysis of financial condition and results of operations.......... 127 Overview............................................... 127 Results of operations.................................. 129 Liquidity and capital resources........................ 133 Market risk............................................ 137 Foreign currency exposure.............................. 137 Euro conversion........................................ 137 Seasonality............................................ 138 Recent accounting pronouncements....................... 138 WorldxChange selected consolidated financial data......... 139 Comparison of the rights of holders of World Access common stock and WorldxChange common stock.................... 141 Comparison of authorized and outstanding capital stock................................................. 141 Comparison of classes of common stock.................. 141 Comparison of requirements for special meeting of shareholders.......................................... 141 Comparisons of requirements for action by written consent in lieu of shareholders' meeting.............. 142 Comparison of record date for determining shareholders.......................................... 142 Comparison of procedures to nominate directors......... 142 Comparison of number of directors...................... 143 Comparison of classified board of directors............ 143 Comparison of procedures for the removal of directors............................................. 144 Comparison of board of directors vacancies............. 144 Comparison of notice requirements of special meetings of the board of directors............................. 144 Comparison of procedures for an amendment of certificate of incorporation and bylaws............... 145 Comparison of notice requirements of stockholder's meetings.............................................. 145 Comparison of stockholder approval of business combinations.......................................... 146 Comparison of inspection of shareholder list........... 146 Comparison of dividends and repurchases of shares...... 147 Comparison of dissolution rights....................... 147 COMPARATIVE PER SHARE MARKET PRICE DATA FOR WORLD ACCESS, STAR AND WORLDXCHANGE..................................... 148 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................ 150 MANAGEMENT OF THE COMBINED COMPANY.......................... 201 Executive officers........................................ 201 Board of directors........................................ 201 DESCRIPTION OF WORLD ACCESS' BUSINESS AND STRATEGY.......... 201 World Access' proposed acquisition of TelDaFax AG......... 204 World Access' third quarter special charges and financial projections............................................ 204 PROPOSAL 3 -- AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK THAT WORLD ACCESS IS ENTITLED TO ISSUE FROM 150,000,000 SHARES TO 290,000,000 SHARES....... 205
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PAGE ---- PROPOSAL 4 -- AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED DIRECTORS FROM 12 TO 15........................ 207 PROPOSAL 5 -- AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO END THE CLASSIFICATION OF THE WORLD ACCESS BOARD OF DIRECTORS SO THAT ALL DIRECTORS WILL SERVE TERMS OF ONE YEAR AND UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED............................ 208 PROPOSAL 6 -- AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN TO INCREASE THE NUMBER OF WARRANTS ISSUABLE UNDER THE PLAN FROM 600,000 WARRANTS TO 1,200,000 WARRANTS.................................................. 209 Description of proposed amendment......................... 209 Brief summary of the warrant plan......................... 209 Vote required............................................. 211 PROPOSAL 7 -- AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN TO CHANGE THE PERFORMANCE CRITERIA UNDER THE PLAN............................................ 211 Vote required............................................. 212 PROPOSAL 8 -- ELECTION OF WORLD ACCESS DIRECTORS............ 212 Information regarding nominees and directors.............. 213 World Access nominees for director........................ 213 World Access directors continuing in office until the 2002 annual meeting......................................... 213 World Access directors continuing in office until the 2001 annual meeting......................................... 214 World Access directors not divided into classes........... 214 Meetings and committees of the World Access board......... 215 World Access director compensation........................ 215 DESCRIPTION OF WORLD ACCESS' CAPITAL STOCK.................. 216 World Access common stock................................. 216 World Access preferred stock.............................. 217 PRINCIPAL STOCKHOLDERS OF WORLD ACCESS...................... 221 EXECUTIVE OFFICERS OF WORLD ACCESS.......................... 226 Information regarding executive officers of World Access................................................. 226 World Access' Executive compensation...................... 226 WORLD ACCESS' SUMMARY COMPENSATION TABLE.................... 226 WORLD ACCESS OPTION GRANTS IN LAST FISCAL YEAR.............. 227 WORLD ACCESS' AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES........ 228 World Access' executive employment agreements............. 228 World Access' compensation committee report............... 231 World Access' compensation committee interlocks and insider participation in compensation decisions........ 233 WORLD ACCESS STOCK PRICE PERFORMANCE GRAPH.................. 234 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..... 234 RELATIONSHIPS AND RELATED TRANSACTIONS WITH WORLD ACCESS' DIRECTORS, OFFICERS AND STOCKHOLDERS...................... 235 ACCOUNTANTS................................................. 235 EXPERTS..................................................... 236 WORLD ACCESS STOCKHOLDER PROPOSALS.......................... 236 STAR STOCKHOLDER PROPOSALS.................................. 237 OTHER MATTERS THAT MAY COME BEFORE THE WORLD ACCESS SPECIAL MEETING................................................... 237 OTHER MATTERS THAT MAY COME BEFORE THE STAR SPECIAL MEETING................................................... 237 LEGAL MATTERS............................................... 237
ANNEX A THE STAR MERGER AGREEMENT ANNEX B THE WORLDXCHANGE MERGER AGREEMENT
iv 13 ANNEX C OPINION OF WORLD ACCESS FINANCIAL ADVISOR REGARDING THE STAR MERGER ANNEX D OPINION OF WORLD ACCESS FINANCIAL ADVISOR REGARDING THE WORLDXCHANGE MERGER ANNEX E OPINION OF STAR FINANCIAL ADVISOR REGARDING THE STAR MERGER ANNEX F DELAWARE GENERAL CORPORATION LAW SECTION 262 ANNEX G CALIFORNIA GENERAL CORPORATION LAW SECTIONS 1300 THROUGH 1312
v 14 QUESTIONS AND ANSWERS ABOUT THE STAR MERGER Q: WHAT IS THE STAR MERGER? A: The boards of directors of World Access and STAR have voted to combine the businesses of World Access and STAR, exclusive of STAR's PT-1 business unit. To combine the companies, STAR will become a subsidiary of World Access. Q: WHY IS PT-1 NOT A PART OF THE STAR MERGER? A: World Access did not believe that the U.S. prepaid calling card and dial around businesses of PT-1 fit the long-term strategy for the combined company, which is focused on market opportunities arising from the consolidation of the European telecommunications market. In addition, World Access did not feel it could complete the STAR merger with the current debt position of STAR. As a result of World Access' concerns, the completion of the STAR merger is conditioned on the sale of PT-1 by STAR for net cash proceeds in excess of (a) $120.0 million, if PT-1 is sold to Counsel Communications LLC under an Asset Purchase Agreement dated June 6, 2000, or (b) $150.0 million if PT-1 is sold to another party. World Access and STAR intend to use the cash generated from the sale of PT-1 to reduce the debt of the combined company. Q: WILL STAR STOCKHOLDERS VOTE ON THE PT-1 ASSET SALE? A: STAR has mailed a separate proxy statement for the PT-1 asset sale to all its stockholders. A meeting has been scheduled on , 2000 for the STAR stockholders to approve this sale. Q: WHAT IS THE WORLDXCHANGE MERGER? A: World Access has also agreed to a merger with WorldxChange. Each merger does not depend on the completion of the other merger. Consequently, there are three possible combinations that you should consider: - World Access and STAR; - World Access and WorldxChange; and - World Access, STAR and WorldxChange. Unless stated otherwise, information provided in this joint proxy statement/prospectus assumes completion of the STAR merger and the WorldxChange merger. Q: WHAT WILL STAR STOCKHOLDERS RECEIVE IN THE STAR MERGER? A: World Access has the option to pay STAR stockholders by using all stock, or part stock and part cash. Specifically, STAR stockholders will be entitled to receive for each share of STAR common stock owned either: - 0.386595 shares of World Access common stock, or - substantially the equivalent value of 0.386595 shares of World Access common stock as of the date of the STAR merger, with up to 40% of this value, based on the average closing price of World Access shares for 10 trading days before the closing date, paid in cash and the remainder in World Access common stock. The amount paid by World Access is subject to upward adjustment if STAR sells PT-1 prior to the completion of the STAR merger for net cash proceeds in excess of $150.0 million. World Access and STAR expect PT-1 to be sold to Counsel and accordingly, view any upward adjustment as unlikely. 1 15 Although World Access believes it has adequate cash reserves to support current working capital requirements and business plans for at least the next 12 months, as a result of the projected cash requirements of the combined company, World Access currently intends to pay 100% of the STAR consideration using its common stock. Under this assumption, for every 100 shares of STAR common stock owned, STAR stockholders will receive 38 shares of World Access common stock and a cash payment equal to the market value of the 0.6595 fractional share of World Access common stock as of the date of the STAR merger. The total value of this consideration will depend on the value of World Access common stock at that time, and is illustrated in the following table:
SHARES OF SHARES OF VALUE OF VALUE ASSUMED VALUE OF WORLD ACCESS STAR WORLD ACCESS WORLD ACCESS CASH TOTAL PER COMMON STOCK OWNED RECEIVED STOCK RECEIVED VALUE STAR SHARE - ----------------------------- --------- ------------ ------------ -------- ------- ---------- $ 4.00 100 38 $152.00 $2.64 $154.64 $1.55 5.00 100 38 190.00 3.30 193.30 1.93 6.00 100 38 228.00 3.96 231.96 2.32 7.00 100 38 266.00 4.62 270.62 2.71 8.00 100 38 304.00 5.28 309.28 3.09 9.00 100 38 342.00 5.94 347.94 3.48
If World Access elects to pay the STAR consideration using part stock and part cash, the STAR stockholders will receive substantially the same total value and value per STAR share as noted above. Q: WHAT HAPPENS IF STAR DOES NOT SELL PT-1 PRIOR TO THE COMPLETION OF THE STAR MERGER? A: If STAR does not sell PT-1 prior to the completion of the STAR merger, then World Access does not have to complete the STAR merger. Q: WHAT HAPPENS IF STAR SELLS PT-1 FOR LESS THAN NET CASH PROCEEDS OF AT LEAST $150.0 MILLION? A: If STAR sells PT-1 to a buyer other than Counsel and does not receive net cash proceeds of at least $150.0 million from that sale, then World Access does not have to complete the STAR merger. However, the STAR merger agreement provides that the condition to World Access' obligations under the STAR merger agreement relating to the sale of PT-1 will be deemed satisfied if STAR sells the assets of PT-1 to Counsel for net cash proceeds of at least $120.0 million under the PT-1 asset sale agreement. Q: WHAT DO I NEED TO DO NOW? A: Mail your signed proxy card in the enclosed return envelope as soon as possible so that your shares will be represented at your meeting. If you do not include instructions on how to vote your properly signed proxy, your shares will be voted for approval of the proposals on which you are able to vote. Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE? A: If you want to change your vote, send the secretary of your company a later-dated, signed proxy card before your special meeting or attend the meeting in person. You may also revoke your proxy by sending written notice to the secretary of your company before the meeting. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME? A: Your broker will vote your shares only if you provide instructions on how to vote by following the information provided to you by your broker. Q: SHOULD I SEND IN MY STAR STOCK CERTIFICATES NOW? A: No. The completion of the STAR merger is not assured and is subject to conditions described in this document, including stockholder approval. If the STAR merger is completed, World Access will send STAR stockholders written instructions for exchanging their STAR stock certificates. Q: WHEN DO YOU EXPECT THE STAR MERGER TO BE COMPLETED? A: World Access and STAR are working toward completing the STAR merger as quickly as possible. However, the completion of the STAR merger is subject to conditions described in this document, including stockholder approval. World Access and STAR hope to complete the STAR merger in the fourth calendar quarter of 2000. 2 16 QUESTIONS AND ANSWERS ABOUT THE WORLDXCHANGE MERGER Q: WHAT IS THE WORLDXCHANGE MERGER? A: The boards of directors of World Access and WorldxChange have voted to combine the businesses of World Access and WorldxChange. To combine the companies, WorldxChange will become a subsidiary of World Access. Q: WHAT IS THE STAR MERGER? A: This joint proxy statement/prospectus contains information regarding an additional merger, the STAR merger. The completion of each merger does not depend on the completion of the other merger. Consequently, there are three possible combinations that you should consider: - World Access and WorldxChange; - World Access and STAR; and - World Access, STAR, and WorldxChange. Q: WHAT WILL WORLDXCHANGE SHAREHOLDERS RECEIVE IN THE WORLDXCHANGE MERGER? A: When the WorldxChange merger is completed, WorldxChange shareholders will receive 0.6583 shares of World Access common stock in exchange for each share of WorldxChange common stock, including each share of WorldxChange common stock into which shares of WorldxChange preferred stock are deemed converted immediately prior to the completion of the WorldxChange merger. For every 100 shares of WorldxChange common stock owned, WorldxChange stockholders will receive 65 shares of World Access common stock and a cash payment equal to the market value of the 0.83 fractional share of World Access common stock as of the date of the merger. The total value of this consideration will depend on the value of World Access common stock at that time and is summarized in the following table:
SHARES OF SHARES OF VALUE OF VALUE VALUE OF WORLD ACCESS WXC WORLD ACCESS WORLD ACCESS CASH TOTAL PER COMMON STOCK OWNED RECEIVED STOCK RECEIVED VALUE WXC SHARE - --------------------- --------- ------------ ------------ -------- ------- --------- $ 4.00 100 65 $260.00 $3.32 $263.32 $2.64 5.00 100 65 325.00 4.15 329.15 3.29 6.00 100 65 390.00 4.98 394.98 3.95 7.00 100 65 455.00 5.81 460.81 4.61 8.00 100 65 520.00 6.64 526.64 5.27 9.00 100 65 585.00 7.47 592.47 5.92
Q: WHAT DO I NEED TO DO NOW? A: If you are a World Access stockholder, you should mail your signed proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the World Access meeting. If you do not include instructions on how to vote your properly signed proxy, your shares will be voted for approval of the proposals with regard to which you are entitled to vote. Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE? A: If you are a World Access stockholder and you want to change your vote, send the secretary of World Access a later-dated, signed proxy card before the meeting or attend the meeting in person. You may also revoke your proxy by sending written notice to the secretary of World Access before the meeting. Q: SHOULD I SEND IN MY WORLDXCHANGE STOCK CERTIFICATES NOW? A: No. The completion of the WorldxChange merger is not assured and is subject to conditions described in this document, including stockholder approval. If the WorldxChange merger is completed, World Access will send WorldxChange shareholders written instructions for exchanging their WorldxChange stock certificates for World Access stock certificates. 3 17 Q: WHEN DO YOU EXPECT THE WORLDXCHANGE MERGER TO BE COMPLETED? A: World Access and WorldxChange are working toward completing the WorldxChange merger as quickly as possible. However, the completion of the WorldxChange merger is subject to conditions described in this document, including stockholder approval. World Access and WorldxChange hope to complete the WorldxChange merger in the fourth calendar quarter of 2000. 4 18 SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS This summary highlights selected information from this document. To understand the proposed mergers fully and for a more complete description of the terms of the mergers, you should read carefully this entire document and the documents to which we have referred you. THE COMPANIES World Access, Inc. 945 E. Paces Ferry Road Suite 2200 Atlanta, Georgia 30326 (404) 231-2025 World Access transports international long distance voice, data and Internet traffic primarily for long distance carriers and local phone companies operating in the United States and Europe. These services are provided through a combination of its own network facilities and agreements with other carriers to terminate traffic in regions of the world where World Access does not have its own network. Through the acquisition of FaciliCom International in December 1999 and NETnet International in February 2000, World Access has expanded its service offerings to include the sale of bundled voice, data and Internet services directly to small and medium sized businesses located throughout Western Europe. STAR Telecommunications, Inc. 223 East De La Guerra Street Santa Barbara, California 93101 (805) 899-1962 STAR provides telecommunications services on a world-wide basis to the public, long distance carriers, corporations and Internet service providers. STAR also provides international and national long distance calling services, international private telephone lines, prepaid calling cards, long distance services accessible through a dialed prefix and international toll free services. Following the completion of the PT-1 asset sale, STAR will no longer provide long distance service to individual consumers and businesses through prepaid calling cards, long distance services accessible through a dialed prefix and presubscribed domestic and international long distance services. WorldxChange Communications 9999 Willow Creek Road San Diego, California 92131 (858) 530-8116 WorldxChange is a global telecommunications company that specializes in providing high-quality, low-cost services to customers in the United States, Australia, Belgium, Canada, France, Germany, Guatemala, The Netherlands, New Zealand and the United Kingdom. WorldxChange operates 43 switches which route traffic and are connected with a network of owned and leased undersea and land-based fiber optic cables, providing customers with affordable communications services worldwide. WORLD ACCESS' PURCHASE OF TELDAFAX SHARES AND FINANCIAL PROJECTIONS The World Access board of directors has approved an agreement under which World Access has agreed to acquire shares of TelDaFax AG stock in five separate transactions. TelDaFax provides telecommunications services to business and residential customers in Germany. On September 21, 2000, World Access completed the first of these transactions with its purchase of all of the TelDaFax shares owned by the Apax Funds, which represents approximately 33% of the outstanding shares of TelDaFax. In this transaction, World Access purchased 11,178,176 shares of TelDaFax in exchange for 11,457,631 shares 5 19 of World Access common stock. The TelDaFax transactions are more fully described on page 203 of this joint proxy statement/prospectus. World Access' third quarter special charges and financial projections On September 19, 2000, World Access announced that in the third quarter of 2000 it will be recording a $30.0 to $50.0 million restructuring charge and a $35.0 million special charge to selling, general and administrative expenses. The restructuring charge relates to the integration of WorldxChange which will be consolidated into World Access' financial statements effective August 1, 2000. The special charge relates to a significant increase in reserves for doubtful accounts, due to World Access' recent decision to discontinue or significantly curtail services provided to certain customers for credit reasons, and costs associated with migration of billing systems and re-branding of retail activities. World Access also announced its financial projections for the remainder of 2000 and for 2001 based on a recently developed business model. These special charges and financial projections are more fully described on page 204 of this joint proxy statement/prospectus. 6 20 SUMMARY OF THE STAR MERGER THE STAR MERGER As a result of the STAR merger, STAR will become a subsidiary of World Access. In the STAR merger World Access expects to issue approximately 22.7 million shares of its common stock to STAR stockholders. Assuming a value of $6.00 per share of World Access common stock, the total consideration to be paid by World Access will be approximately $136.0 million. In addition, after applying the anticipated net cash proceeds of $120.0 million from the sale of PT-1, World Access expects to assume approximately $75.0 million of net STAR debt. World Access has also agreed to a merger with WorldxChange. The percentage in voting power of the combined company that will be owned by the pre-merger stockholders will be as follows:
WORLD ACCESS STAR WORLDXCHANGE ------ ---- ------------ World Access, STAR and WorldxChange 100% World Access stock................................... 67% 14% 19% 60% World Access stock/40% cash........................... 71 9 20 World Access and STAR only 100% World Access stock................................... 83 17 -- 60% World Access stock/40% cash........................... 89 11 -- World Access and WorldxChange only.......................... 78 -- 22
CONDITIONS TO COMPLETION OF THE STAR MERGER (SEE PAGE 77) The conditions that must be satisfied or waived before World Access is obligated to complete the STAR merger include the following: - no material adverse effect may occur with respect to STAR; - holders of fewer than 1% of the shares of STAR common stock shall have exercised dissenters' rights of appraisal under Delaware law; and - STAR must complete the PT-1 asset sale to Counsel for net cash proceeds of at least $120.0 million or complete the sale of PT-1 to a party other than Counsel for net cash proceeds of at least $150.0 million pursuant to an agreement reasonably satisfactory to World Access. Any of the closing conditions can be waived by the party that is not obligated to complete the STAR merger if the condition is not satisfied. If either World Access or STAR waives any condition, World Access and STAR will each consider the facts and circumstances at that time and determine whether a resolicitation of proxies from stockholders is appropriate. The boards of directors of STAR and World Access will resolicit stockholder approval of the STAR merger if either company waives a material closing condition that the boards believe a reasonable investor would consider important when deciding to approve the STAR merger. The completion of the WorldxChange merger is not a condition to the completion of the STAR merger. VOTE REQUIRED FOR APPROVAL (SEE PAGES 37 AND 39) The holders of a majority of the outstanding shares of World Access common stock and preferred stock, voting together as a single class, must approve and adopt the STAR merger agreement and the STAR merger. The shares of World Access preferred stock are counted as if they have been converted to common stock. In this joint proxy statement/prospectus, we refer to the World Access common stock, the Series A preferred stock, the Series C preferred stock, the Series D preferred stock and the Series E preferred stock as the World Access voting stock. World Access stockholders are entitled to cast one vote per share of World Access common stock owned or to be received upon the conversion of shares of preferred stock owned as of [ ], 2000, the World Access record date. 7 21 The holders of a majority of the outstanding shares of STAR common stock must approve and adopt the STAR merger agreement and the STAR merger. STAR stockholders can cast one vote per share owned as of [ ], 2000, the STAR record date. World Access stockholders holding [ %] of the total voting power of World Access as of the World Access record date have agreed to vote in favor of the STAR merger. Directors and officers of World Access collectively beneficially owned approximately [ %] of the voting power of World Access as of the World Access record date. TERMINATION OF THE STAR MERGER AGREEMENT (SEE PAGE 78) The STAR merger agreement may be terminated under limited circumstances at any time before the completion of the STAR merger. The circumstances include: - by World Access or STAR, if the STAR merger is not completed on or before December 31, 2000; - by World Access or STAR, if the stockholders of World Access or STAR do not adopt the STAR merger agreement by the required vote; and - by World Access if there is a default under STAR's anticipated credit agreement with World Access. TERMINATION FEE (SEE PAGE 79) If the STAR merger agreement is terminated for specific reasons listed in the STAR merger agreement, STAR must pay World Access a termination fee of $14.0 million. STAR will be required to pay the termination fee if the STAR merger agreement is not approved by the required vote of the stockholders of STAR and STAR enters into a definitive agreement with respect to a business combination with another party within one year of the failed stockholder vote. STAR VOTING AGREEMENTS (SEE PAGE 79) STAR stockholders Christopher E. Edgecomb and Samer Tawfik entered into voting and stock transfer restriction agreements with World Access under which they have agreed to vote all of their shares of STAR common stock in favor of the approval and adoption of the STAR merger agreement and approval of the STAR merger. Mr. Edgecomb and Mr. Tawfik together owned approximately % of the outstanding shares of STAR's common stock as of the STAR record date. OPINIONS OF WORLD ACCESS' AND STAR'S FINANCIAL ADVISORS (SEE PAGES 48 AND 54) In deciding to approve the STAR merger, World Access' board of directors considered an opinion from its financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation, regarding the fairness to World Access, from a financial point of view, of the STAR merger consideration. STAR's board considered the opinion of its financial advisor, Deutsche Bank Securities, Inc., as to the fairness, from a financial point of view, of the merger consideration to the STAR stockholders. Donaldson, Lufkin & Jenrette delivered its fairness opinion to the World Access board on February 11, 2000, and the opinion relates to the fairness of the STAR merger as of that date. Deutsche Bank delivered its fairness opinion to the STAR board on February 7, 2000, and the opinion relates to the fairness of the STAR merger as of that date. Some of the assumptions relied upon by Donaldson, Lufkin & Jenrette and Deutsche Bank in preparing their analyses and in rendering their opinions have changed since they were asked to deliver their respective opinions. The following sets forth a summary of such changes: - Both Donaldson, Lufkin & Jenrette and Deutsche Bank assumed an exchange ratio of 0.3905 shares of World Access common stock for each share of STAR common stock based on net cash proceeds from the sale of PT-1 of $150.0 million as compared to a revised exchange ratio of 0.386595 and assumed net cash proceeds of $120.0 million. 8 22 - Assumptions used by Donaldson, Lufkin & Jenrette underlying the projections for World Access and STAR have been revised to reflect lower carrier revenues for both World Access and STAR due to a reduction in the number of carrier customers resulting from a strengthened credit policy implemented by World Access as well as lower organic growth in retail revenues for STAR due to a greater focus on World Access' European retail acquisition strategy, which seeks to increase retail revenues through acquisitions. Deutsche Bank has not independently analyzed World Access' most recent projections. - The market prices of shares of World Access common stock and STAR common stock have decreased significantly since Donaldson, Lufkin & Jenrette and Deutsche Bank rendered their respective opinions. - Deutsche Bank did not include the impact of the WorldxChange merger or the TelDaFax transactions in its evaluation of the STAR merger. Neither World Access nor STAR has asked, or intends to ask, Donaldson, Lufkin & Jenrette and Deutsche Bank, respectively, for a new or updated fairness opinion. Neither Donaldson, Lufkin & Jenrette nor Deutsche Bank has been asked to update its analyses, and neither is opining as to the fairness of the STAR merger as of any date subsequent to the date of its respective opinion. INTERESTS OF DIRECTORS, OFFICERS AND STOCKHOLDERS IN THE STAR MERGER (SEE PAGE 73) Some of the directors, officers and stockholders of STAR have interests in the STAR merger that are different from, or are in addition to, all other stockholders of STAR. MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE STAR MERGER (SEE PAGE 64) World Access has received an opinion from its legal counsel regarding the material federal income tax consequences of the STAR merger. STAR stockholders will not recognize gain or loss for federal income tax purposes, except with respect to cash received in lieu of fractional shares or cash received after the exercise of appraisal rights. If World Access elects to pay cash as part of the STAR merger consideration, STAR stockholders will recognize their gain realized for federal income tax purposes, but only up to the amount of cash received, and any recognized gain may be taxed as ordinary income. STAR stockholders are urged to consult their own tax advisors to determine their particular tax consequences. APPRAISAL RIGHTS (SEE PAGE 71) If you are a STAR stockholder, you may be entitled to appraisal rights under Delaware law with respect to the STAR merger. If you are a World Access stockholder, you are not entitled to appraisal rights under Delaware law. ANTITRUST AND DOMESTIC AND FOREIGN REGULATORY APPROVAL REQUIRED TO COMPLETE THE STAR MERGER (SEE PAGE 70) The STAR merger is subject to U.S. and German antitrust laws. The Department of Justice and the Federal Trade Commission granted an early termination of the required U.S. waiting period, effective March 16, 2000. On May 18, 2000, the German Cartel office approved the STAR merger. The STAR merger is also subject to state and federal telecommunications regulatory approvals. The Federal Communications Commission has approved the STAR merger. 9 23 COMPARATIVE MARKET PRICE INFORMATION Shares of World Access common stock and STAR common stock are listed on the Nasdaq National Market. On December 20, 1999, the last full trading day prior to the public announcement of the proposed STAR merger, the World Access common stock and STAR common stock closed at $20 1/2 per share and $8 7/8 per share, respectively. We urge you to obtain current market quotations. For a more complete understanding of the STAR merger, please read the documents attached to this joint proxy statement/prospectus, including the STAR merger agreement, which is attached as Annex A, the opinion of Donaldson, Lufkin & Jenrette Securities Corporation, which is attached as Annex C, and the opinion of Deutsche Bank Securities, Inc., which is attached as Annex E. 10 24 SUMMARY OF THE WORLDXCHANGE MERGER THE WORLDXCHANGE MERGER In the WorldxChange merger, WorldxChange will become a subsidiary of World Access. In the WorldxChange merger, World Access will issue a total of approximately 29.8 million shares of World Access common stock to the WorldxChange shareholders. Assuming a value of $6.00 per share of World Access common stock, the total consideration to be paid by World Access will be approximately $179.0 million. In addition, World Access will assume approximately $225.0 million of WorldxChange's debt. Please see page 7 for a description of the percentage in voting power of the combined company that will be owned by the pre-merger stockholders. CONDITIONS TO COMPLETION OF THE WORLDXCHANGE MERGER (SEE PAGE 113) The conditions that must be satisfied or waived before World Access is obligated to complete the WorldxChange merger include the following: - fewer than 1% of the shares of WorldxChange common stock shall have exercised dissenters' rights under California law; and - all shares of WorldxChange preferred stock must be voted in favor of the WorldxChange merger and deemed to be converted immediately prior to the completion of the WorldxChange merger into not more than 8,282,829 shares of WorldxChange common stock. All consents and approvals required of World Access to complete the WorldxChange merger must be obtained before WorldxChange is obligated to complete the WorldxChange merger. Any of the closing conditions can be waived by the party that is not obligated to complete the WorldxChange merger if the condition is not satisfied. If World Access waives any condition, World Access will consider the facts and circumstances at that time and determine whether a resolicitation of proxies from its stockholders is appropriate. The World Access board of directors will resolicit stockholder approval of the WorldxChange merger if either company waives a material closing condition that it believes a reasonable investor would consider important when deciding to approve the WorldxChange merger. The completion of the STAR merger is not a condition to the completion of the WorldxChange merger. VOTE OR CONSENT REQUIRED FOR APPROVAL (SEE PAGE 37) The holders of a majority of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock voting together as a single class, must approve and adopt the WorldxChange merger agreement. The shares of World Access preferred stock are counted on an as-converted to common stock basis. World Access stockholders are entitled to cast one vote per share of World Access common stock owned or to be received upon the conversion of shares of preferred stock owned as of [ ], 2000, the World Access record date. The holders of a majority of the outstanding shares of WorldxChange common stock and WorldxChange preferred stock, voting or consenting as separate classes, must approve and adopt the WorldxChange merger agreement. WorldxChange shareholders are entitled to cast one vote per share of common stock owned as of [ ], 2000, the WorldxChange record date. World Access stockholders holding [ %] of the voting power of World Access as of the World Access record date have agreed to vote in favor of the WorldxChange merger. WorldxChange shareholders holding [ %] of the voting power of WorldxChange as of the WorldxChange record date have agreed to vote in favor of the WorldxChange merger. 11 25 TERMINATION OF THE WORLDXCHANGE MERGER AGREEMENT (SEE PAGE 113) The WorldxChange merger agreement may be terminated under limited circumstances at any time before the completion of the WorldxChange merger. WORLD ACCESS AND WORLDXCHANGE VOTING AGREEMENTS (SEE PAGES 115 AND 116) World Access stockholders Armstrong International Telecommunications, Inc., WorldCom Network Services, Inc., The 1818 Fund III, L.P., John D. Phillips, W. Tod Chmar and Resurgens Partners, LLC have agreed to vote all shares of World Access capital stock owned by them in favor of the approval of the WorldxChange merger. In addition, these stockholders have agreed not to transfer or sell their shares of World Access common stock before to the completion of the WorldxChange merger. The World Access stockholders who entered into the voting and stock transfer restriction agreements collectively held approximately [ %] of the voting power of World Access as of the World Access record date. WorldxChange shareholders Atocha, L.P., Roger B. Abbott and Rosalind Abbott, whose shares are jointly owned, Gold & Appel Transfer S.A. and Edward S. Soren have agreed to vote all shares of WorldxChange capital stock beneficially owned by them in favor of the WorldxChange merger. These WorldxChange shareholders also have agreed to restrictions on the pre-closing transfer of their shares of WorldxChange common stock and post-closing transfer of shares of World Access common stock to be received by them in the WorldxChange merger. The WorldxChange shareholders who entered into the voting and stock transfer restriction agreements collectively held approximately [ %] of the voting power of WorldxChange capital stock as of the WorldxChange record date. OPINION OF WORLD ACCESS' FINANCIAL ADVISORS (SEE PAGE 92) In deciding to approve the WorldxChange merger, World Access' board of directors considered an opinion from its financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation, as to the fairness to World Access, from a financial point of view, of the consideration to be paid by World Access pursuant to the WorldxChange merger agreement. Donaldson, Lufkin & Jenrette's fairness opinion was delivered to the World Access board on February 11, 2000 and relates to the fairness of the WorldxChange merger as of that date. Some of the assumptions relied upon by Donaldson, Lufkin & Jenrette in preparing the analyses described above and in rendering its opinion have changed since Donaldson, Lufkin & Jenrette was asked to deliver its opinion. The assumptions underlying the projections for World Access and WorldxChange have been revised to reflect lower carrier revenues for both World Access and WorldxChange due to a reduction in the number of carrier customers resulting from a strengthened credit policy implemented by World Access as well as lower organic growth in retail revenues for WorldxChange due to a greater focus on World Access' European retail acquisition strategy, which seeks to increase retail revenues through acquisitions. In addition, the market price of shares of World Access common stock has decreased significantly since Donaldson, Lufkin & Jenrette rendered its opinion. World Access has not asked, and does not intend to ask, Donaldson, Lufkin & Jenrette for a new or updated fairness opinion, and Donaldson, Lufkin & Jenrette has not been asked to update its analyses and is not opining as to the fairness of the WorldxChange merger as of any date subsequent to the date of its opinion. INTERESTS OF DIRECTORS, OFFICERS AND SHAREHOLDERS IN THE WORLDXCHANGE MERGER (SEE PAGE 108) Some World Access and WorldxChange directors, officers and shareholders have interests in the WorldxChange merger that are different from, or are in addition to, all other stockholders of World Access and shareholders of WorldxChange. 12 26 MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE WORLDXCHANGE MERGER (SEE PAGE 98) Each of World Access and WorldxChange has received an opinion from its legal counsel regarding the material federal income tax consequences of the WorldxChange merger. WorldxChange shareholders will not recognize gain or loss for federal income tax purposes, except with respect to cash received in lieu of fractional shares or cash received after the exercise of dissenters' rights. Holders of WorldxChange preferred stock may have additional tax consequences upon payment of the accrued and unpaid dividends on the stock as part of the WorldxChange merger. WorldxChange shareholders are urged to consult their own tax advisors to determine their particular tax consequences. APPRAISAL OR DISSENTERS' RIGHTS (SEE PAGE 106) If you are a WorldxChange shareholder, you may be entitled to dissenters' rights under California law with respect to the WorldxChange merger. If you are a World Access stockholder, you are not entitled to appraisal rights under Delaware law. ANTITRUST AND DOMESTIC AND FOREIGN REGULATORY APPROVALS REQUIRED TO COMPLETE THE WORLDXCHANGE MERGER (SEE PAGE 105) The WorldxChange merger is subject to U.S. and German antitrust laws. The Department of Justice and the Federal Trade Commission granted an early termination of the required U.S. waiting period, effective April 6, 2000. On May 24, 2000,the German Cartel office approved the WorldxChange merger. The WorldxChange merger is also subject to state and federal telecommunications regulatory approvals. The Federal Communications Commission has approved the WorldxChange merger. COMPARATIVE MARKET PRICE INFORMATION Shares of World Access common stock are listed on the Nasdaq National Market. On February 11, 2000, the last full trading day prior to the public announcement of the proposed WorldxChange merger, the World Access common stock closed at $22 7/8 per share. We urge you to obtain current market quotations. The WorldxChange common stock is not publicly traded. Please read the documents attached to this joint proxy statement/prospectus, including the WorldxChange merger agreement, which is attached as Annex B and the opinion of Donaldson, Lufkin & Jenrette Securities Corporation, which is attached as Annex D. 13 27 SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) WORLD ACCESS SELECTED HISTORICAL FINANCIAL INFORMATION The selected financial information for each of the five years in the period ended December 31, 1999 set forth below has been derived from and should be read in conjunction with the audited consolidated financial statements of World Access. The financial information for the six month periods ended June 30, 1999 and 2000 have been derived from unaudited consolidated financial statements of World Access, which, in the opinion of World Access' management, include all the significant normal and recurring adjustments necessary for fair presentation of the financial position and results of operations for such unaudited periods.
AS OF AND FOR THE AS OF AND FOR THE SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------------- --------------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- -------- -------- -------- -------- ---------- (UNAUDITED) STATEMENT OF CONTINUING OPERATIONS DATA(1): Carrier service revenue............. $ -- $ -- $ -- $ 10,787 $ 501,081 $198,014 $ 561,600 Cost of services (exclusive of depreciation and amortization).... -- -- -- 10,137 448,305 182,804 490,330 Depreciation and amortization....... 30 71 115 416 13,541 4,597 36,512 Restructuring charge (credit)....... -- -- -- -- 37,800 -- (3,995) Operating income (loss)............. (880) (1,011) (1,550) (4,383) (26,998) 1,939 (12,585) Loss from continuing operations..... (1,292) (588) (460) (5,437) (27,098) (1,728) (29,577) Loss from continuing operations per share............................. $ (0.14) $ (0.05) $ (0.03) $ (0.25) $ (0.78) $ (0.06) $ (0.53) Weighted average shares outstanding....................... 9,083 13,044 17,242 22,073 37,423 36,232 57,658 BALANCE SHEET DATA: Cash and equivalents................ $ 1,887 $22,480 $118,065 $ 55,176 $ 147,432 $ 98,996 $ 329,279 Short-term investments.............. -- -- -- -- -- -- 160,211 Working capital..................... 17,884 52,149 206,769 350,816 289,844 180,061 410,422 Total assets........................ 23,604 52,512 207,294 544,649 1,629,804 693,146 2,176,810 Long-term debt...................... 3,750 -- 115,264 137,523 408,338 140,728 417,946 Total liabilities................... 9,270 138 115,539 184,066 732,505 267,354 883,079 Stockholders' equity................ 14,334 52,374 91,755 360,583 897,299 425,792 1,293,731 OTHER FINANCIAL DATA: EBITDA from continuing operations before restructuring(2)........... $ (850) $ (940) $ (1,435) $ (3,967) $ 24,343 $ 6,536 $ 19,932 Capital expenditures................ 280 1,176 3,591 12,216 7,198 4,163 12,951 Cash flows from (used by) operating activities........................ (6,445) 1,995 (1,602) (13,038) 18,515 4,288 (83,053) Cash flows (used by) investing activities........................ (2,432) (1,792) (18,240) (66,527) (32,186) (4,102) 176,567 Cash flows from financing activities........................ 10,010 20,391 115,427 16,676 105,927 43,634 88,333
- --------------- (1) Includes the results of operations for the following businesses from their respective dates of acquisition: Cherry U.S. and Cherry U.K. -- December 1998; Comm/Net -- May 1999; FaciliCom -- December 1999; and NETnet -- February 2000. (2) EBITDA from continuing operations as used in this proxy statement/prospectus is earnings (loss) before net interest expense (income), income taxes, foreign exchange gains or losses, depreciation and amortization and is presented because World Access believes that such information is commonly used in the telecommunications industry as one measure of a company's operating performance and historical ability to service debt. EBITDA from continuing operations is not determined in accordance 14 28 with generally accepted accounting principles, is not indicative of cash provided by operating activities, should not be used as a measure of operating income and cash flows from operations as determined under generally accepted accounting principles and should not be considered in isolation, or as an alternative to, or to be more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. EBITDA, as calculated by World Access, may not be comparable to similarly titled measures reported by other companies and could be misleading unless all companies and analysts calculated EBITDA in the same manner. The following table reconciles World Access' loss from continuing operations to EBITDA from continuing operations and EBITDA from continuing operations before restructuring charges and credits:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ---------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 ------- ----- ------- ------- -------- ------- -------- (UNAUDITED) Loss from continuing operations... $(1,292) $(588) $ (460) $(5,437) $(27,098) $(1,728) $(29,577) Net interest expense (income)..... 412 (85) (838) 4,355 9,606 3,443 19,318 Income taxes benefit.............. -- (338) (252) (3,301) (10,126) 224 (2,115) Foreign exchange (gain) loss...... -- -- -- -- 620 -- (211) Depreciation and amortization..... 30 71 115 416 13,541 4,597 36,512 ------- ----- ------- ------- -------- ------- -------- EBITDA from continuing operations...................... (850) (940) (1,435) (3,967) (13,457) 6,536 23,927 Restructuring charge (credit)..... -- -- -- -- 37,800 -- (3,995) ------- ----- ------- ------- -------- ------- -------- EBITDA from continuing operations before restructuring............ $ (850) $(940) $(1,435) $(3,967) $ 24,343 $ 6,536 $ 19,932 ======= ===== ======= ======= ======== ======= ========
STAR SELECTED HISTORICAL FINANCIAL INFORMATION The selected financial information for each of the five years in the period ended December 31, 1999 set forth below has been derived from and should be read in conjunction with the audited consolidated financial statements of STAR. The financial information for the six month periods ended June 30, 1999 and 2000 have been derived from unaudited consolidated financial statements of STAR, which, in the opinion of STAR's management, include all the significant normal and recurring adjustments necessary for fair presentation of the financial position and results of operations for the unaudited periods.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- ---------- -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues........................... $66,964 $283,450 $434,086 $619,220 $1,061,774 $500,478 $497,400 Operating expenses: Cost of services (exclusive of depreciation and amortization).................. 50,300 244,153 374,504 523,621 925,206 441,503 433,657 Selling, general and administrative................. 13,356 41,804 48,906 66,140 160,067 77,053 61,555 Depreciation and amortization.... 952 2,343 5,650 15,054 44,236 19,640 26,539 Loss on impairment of goodwill... -- -- -- 2,604 -- -- -- Merger expense................... -- -- 286 1,026 1,878 1,872 -- ------- -------- -------- -------- ---------- -------- -------- Total operating expenses......... 64,608 288,300 429,346 608,445 1,131,387 540,068 521,751 ------- -------- -------- -------- ---------- -------- -------- Income (loss) from operations.... 2,356 (4,850) 4,740 10,775 (69,613) (39,590) (24,351) Other income (expenses): Interest income.................. 65 138 464 4,469 2,192 1,675 265 Interest expense................. (214) (1,270) (2,617) (3,386) (9,895) (3,532) (7,742) Legal settlements and expense.... -- (100) (1,653) -- -- -- -- Other............................ (97) 186 208 (304) 1,373 (1,923) 7,554 ------- -------- -------- -------- ---------- -------- --------
15 29
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- ---------- -------- -------- (UNAUDITED) Income (loss) before provision for income taxes............... 2,110 (5,896) 1,142 11,554 (75,943) (43,370) (24,274) Provision (benefit) for income taxes............................ 66 577 2,905 9,923 (12,096) (7,886) (5,706) ------- -------- -------- -------- ---------- -------- -------- Net income (loss).................. $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847) $(35,484) $(18,568) ======= ======== ======== ======== ========== ======== ======== Pro forma net income (loss) (unaudited)(1)................... $ 478 $ (7,416) $ (1,958) ======= ======== ======== Income (loss) per common share(2) Basic and Diluted................ $ 0.10 $ (0.27) $ (0.06) $ 0.04 $ (1.12) $ (0.64) $ (0.32) ======= ======== ======== ======== ========== ======== ======== Pro forma income (loss) per common share (unaudited)(2) Basic and Diluted................ $ 0.02 $ (0.31) $ (0.06) ======= ======== ======== Weighted average number of common shares outstanding -- basic(2) Basic............................ 19,916 24,076 31,101 40,833 57,036 55,541 58,609 Diluted.......................... 19,916 24,076 31,101 42,434 57,036 55,541 58,609
AS OF DECEMBER 31, AS OF JUNE 30, -------------------------------------------------------- ------------------------ 1995 1996 1997 1998 1999 1999 2000 ------- -------- --------- ---------- ---------- ---------- ----------- (UNAUDITED) BALANCE SHEET DATA: Working capital (deficit).... $(1,065) $(10,913) $ 4,692 $ 46,698 $ (197,921) $ (85,773) $ (151,862) Total assets................. 37,169 76,250 130,382 374,651 807,754 638,674 729,789 Total long-term liabilities, net of current portion..... 2,980 8,834 14,800 33,048 96,693 38,691 93,037 Accumulated deficit.......... (6,294) (12,077) (13,737) (12,106) (75,953) (19,657) (93,736) Stockholders' equity......... 6,614 9,986 40,615 195,591 278,054 336,207 258,569 OTHER FINANCIAL DATA: EBITDA from continuing operations(3).............. $ 3,308 $ (2,507) $ 10,390 $ 25,829 $ (25,377) $ (19,950) $ (2,562) Cash flows (used in) provided by operating activities.... 2,076 (2,847) 11,476 (12,379) 40,138 13,365 11,357 Cash flows (used in) provided by investing activities.... (1,123) (10,403) (31,157) (100,986) (58,297) (63,331) 8,326 Cash flows (used in) provided by financing activities.... (839) 14,721 19,174 158,526 (991) 11,860 (28,728) Capital expenditures(4)...... 2,922 14,810 26,584 147,236 150,588 56,015 5,678 North American wholesale billed minutes of use(5)... 38,106 479,681 1,034,187 1,657,523 2,129,296 1,102,804 921,885 North American wholesale revenue per billed minute of use(6).................. $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084 $ 0.2256 $ 0.1657
- --------------- (1) The pro forma net income or loss per share assumes that STAR and CEO Telecommunications, Inc., which STAR acquired in a pooling of interests transaction on November 30, 1997, were C-corporations for all periods presented. (2) See Note 2 of Notes to Consolidated Financial Statements set forth in STAR's annual report on Form 10-K for the fiscal year ended December 31, 1999, as amended by Form 10-K/A filed on September 11, 2000, and incorporated by reference herein, for an explanation of the method used to determine the number of shares used in computing basic and diluted income (loss) per common share and pro form basic and diluted income (loss) per common share. 16 30 (3) EBITDA from continuing operations as used in this joint proxy statement/prospectus is earnings (loss) before net interest expense (income), income taxes, foreign exchange gains or losses, depreciation and amortization and is presented because STAR believes that the information is commonly used in the telecommunications industry as one measure of a company's operating performance and historical ability to service debt. EBITDA from continuing operations is not determined in accordance with generally accepted accounting principles, is not indicative of cash provided by operating activities, should not be used as a measure of operating income and cash flows from operations as determined under generally accepted accounting principles and should not be considered in isolation or as an alternative to, or to be more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. EBITDA, as calculated by STAR, may not be comparable to similarly titled measures reported by other companies and could be misleading unless all companies and analysts calculate EBITDA in the same manner. The following table reconciles STAR's income (loss) from continuing operations to EBITDA from continuing operations (in thousands):
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------- ------- ------- -------- -------- -------- (UNAUDITED) Income (loss) from continuing operations.................. $2,044 $(6,473) $(1,763) $ 1,631 $(63,847) $(35,484) $(18,568) Net interest expense (income).................... 149 1,132 2,153 (1,083) 7,703 1,857 7,477 Income tax expense (benefit)................... 66 577 2,905 9,923 (12,096) (7,886) (5,706) Other......................... 97 (86) 1,445 304 (1,373) 1,923 (7,554) Depreciation and amortization................ 952 2,343 5,650 15,054 44,236 19,640 26,539 ------ ------- ------- ------- -------- -------- -------- EBITDA from continuing operations.................. $3,308 $(2,507) $10,390 $25,829 $(25,377) $(19,950) $ 2,188 ====== ======= ======= ======= ======== ======== ========
(4) Includes assets financed with capital leases, notes and vendor financing arrangements. (5) Does not include wholesale billed minutes of use from T-One Corporation, a former subsidiary of STAR, prior to the year ended December 31, 1997. Includes wholesale billed minutes of use attributable to ALLSTAR Telecom, formerly know as United Digital Network, Inc., a subsidiary of STAR, for all years presented. (6) Represents wholesale gross call usage revenue per billed minute. Amounts exclude other revenue related items such as finance charges. This data does not include wholesale billed minutes of use from T-One prior to the year ended December 31, 1997. 17 31 WORLDXCHANGE SELECTED HISTORICAL FINANCIAL INFORMATION The following table summarizes WorldxChange's financial data. The data presented in this table are derived from the "WorldxChange Selected Consolidated Financial Data" and the consolidated financial statements and notes which are included elsewhere in this joint proxy statement/prospectus. You should read those sections for a further explanation of the financial data summarized here.
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues.................................... $331,660 $398,867 $421,580 $304,324 $423,913 Cost of services (exclusive of depreciation and amortization)......................... 235,027 287,312 328,334 238,599 337,814 -------- -------- -------- -------- -------- Gross profit................................ 96,633 111,555 93,246 65,725 86,099 Selling, general and administrative......... 113,459 114,897 124,112 88,431 124,014 Depreciation and amortization............... 8,677 12,332 17,705 12,394 35,131 -------- -------- -------- -------- -------- Operating loss.............................. (25,503) (15,674) (48,571) (35,100) (73,046) Interest expense............................ 8,682 11,947 16,883 12,448 22,694 Other expense, net.......................... 3,366 1,378 648 222 822 Minority interest........................... (473) (1,546) (2,251) (1,782) -- -------- -------- -------- -------- -------- Net loss.................................... $(37,078) $(27,453) $(63,851) $(45,988) $(96,562) ======== ======== ======== ======== ========
AS OF AS OF SEPTEMBER 30, JUNE 30, ---------------------------------------------------- ----------- 1995 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents......... $ 1,400 $ 3,400 $ 4,326 $ 20,917 $ 38,030 $ 6,913 Working capital (deficit)......... (15,100) (35,400) (50,428) (37,035) (37,173) (307,333) Total assets...................... 55,200 62,800 103,745 120,129 235,002 430,412 Short-term debt and capital lease obligations..................... 13,500 15,700 9,456 20,272 20,381 201,825 Long-term debt, net of current portion......................... 24,900 24,700 49,204 99,313 129,719 70,829 Minority interest................. -- 300 8,815 7,269 -- -- Total shareholders' deficit....... (8,600) (32,000) (68,880) (89,593) (35,053) (95,948)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) OTHER FINANCIAL DATA: EBITDA(1)................................... $(16,826) $ (3,342) $(30,866) $(22,706) $(37,915) Cash provided by (used in) operating activities................................ (7,206) (31,735) (31,549) (4,506) (37,876) Cash used in investing activities........... (10,871) (11,990) (27,633) (25,125) (60,908) Cash provided by financing activities....... 18,783 60,535 76,284 46,864 67,667 Capital expenditures........................ 19,404 22,411 81,024 57,763 32,549 GEOGRAPHIC DATA: Revenues: North America............................. $291,633 $321,763 $337,457 $238,013 $246,063 Pacific Rim............................... 24,437 58,382 55,619 42,975 38,178 Europe.................................... 15,590 18,722 28,504 23,336 139,672 -------- -------- -------- -------- -------- Total............................. $331,660 $398,867 $421,580 $304,324 $423,913 ======== ======== ======== ======== ========
18 32 - --------------- (1) EBITDA as used in this joint proxy statement/prospectus is operating loss plus depreciation and amortization expense and is presented because WorldxChange believes that the information is commonly used in the telecommunications industry as one measure of a company's operating performance and historical ability to service debt. EBITDA from continuing operations is not determined in accordance with generally accepted accounting principles, is not indicative of cash provided by operating activities, should not be used as a measure of operating income and cash flows from operations as determined under generally accepted accounting principles and should not be considered in isolation or as an alternative to, or to be more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. EBITDA, as calculated by WorldxChange, may not be comparable to similarly titled measures reported by other companies and could be misleading unless all companies and analysts calculate EBITDA in the same manner. The following table reconciles WorldxChange's net loss to EBITDA:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- Net loss............................ $(37,078) $(27,453) $(63,851) $(45,988) $(96,562) Net interest expense................ 8,682 11,947 16,883 12,448 22,694 Other expense, net.................. 3,366 1,378 648 222 822 Minority interest................... (473) (1,546) (2,251) (1,782) -- Depreciation and amortization....... 8,677 12,332 17,705 12,394 35,131 -------- -------- -------- -------- -------- EBITDA.............................. $(16,826) $ (3,342) $(30,866) $(22,706) $(37,915) ======== ======== ======== ======== ========
UNAUDITED SELECTED PRO FORMA FINANCIAL INFORMATION The unaudited selected pro forma balance sheet of World Access as of June 30, 2000 set forth below gives effect to the STAR merger, including the related PT-1 asset sale, the WorldxChange merger and the TelDaFax acquisition. The unaudited selected pro forma statement of operations data of World Access for the six months ended June 30, 2000 set forth below gives effect to the transactions reflected above and transactions that World Access has completed in 1999, as if consummated at the beginning of 1999. The selected pro forma information set forth below is qualified in its entirety by, and should be read in conjunction with, the Unaudited Pro Forma Condensed Combined Financial Statements included herein and the historical financial information of World Access, FaciliCom, Comm/Net, Long Distance International (LDI), STAR, WorldxChange and TelDaFax, which, in the case of WorldxChange and TelDaFax, are included in this document and, in the case of World Access, FaciliCom, Comm/Net, LDI and STAR, are incorporated herein by reference. The selected pro forma financial information is presented for informational purposes only and is not necessarily indicative of the financial position or operating results that would have occurred if the transactions given retroactive effect in the pro forma information had been consummated as of the dates indicated, nor is it necessarily indicative of future financial conditions or operating results. See "Unaudited Pro Forma Condensed Combined Financial Statements." 19 33
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1999 JUNE 30, 2000 ----------------- ------------------ UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS DATA: Service revenue............................................. $2,554,632 $1,189,884 Operating expenses: Cost of services (exclusive of depreciation and amortization)............................................. 2,170,883 1,013,297 Selling, general and administrative......................... 496,305 207,313 Depreciation and amortization............................... 208,608 113,446 Merger expense.............................................. 1,867 -- Restructuring and other special charges..................... 44,187 (3,995) ---------- ---------- Total operating expenses.......................... 2,921,850 1,330,061 ---------- ---------- Operating loss.................................... (367,218) (140,177) Interest and other income................................... 19,992 21,568 Interest and other expense.................................. (93,148) (52,703) Foreign exchange gain (loss)................................ (5,840) 117 ---------- ---------- Loss from continuing operations before income taxes and minority interests.................... (446,214) (171,195) Provision (benefit) for income taxes........................ (18,250) (12,277) ---------- ---------- Loss from continuing operations before minority interest.......................................... (427,964) (158,918) Minority interest........................................... 2,388 851 ---------- ---------- Loss from continuing operations................... (425,576) (158,067) Preferred stock dividends................................... (3,245) (2,763) ---------- ---------- Loss from continuing operations available to common stockholders............................... $ (428,821) $ (160,830) ========== ========== Loss per common share from continuing operations(1)....... $ (2.90) $ (1.04) ========== ========== Weighted average shares outstanding(1).................... 147,824 154,858 ========== ==========
- --------------- (1) Loss per share and weighted average shares outstanding are presented on a diluted basis.
AT JUNE 30, 2000 ----------- UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA: Cash and equivalents........................................ $ 337,684 Short-term investments...................................... 161,967 Restricted cash............................................. 31,095 Accounts receivable......................................... 507,886 Other current assets........................................ 123,705 Net assets held for sale.................................... 41,465 ---------- Total Current Assets.............................. 1,203,802 ---------- Property and equipment, net................................. 497,264 Goodwill and other intangibles.............................. 2,270,762 Other assets................................................ 62,892 ---------- Total Assets...................................... $4,034,720 ==========
20 34
AT JUNE 30, 2000 ----------- Short-term debt............................................. $ 253,507 Accounts payable............................................ 425,732 Other accrued liabilities................................... 502,898 ---------- Total Current Liabilities......................... 1,182,137 Long-term debt.............................................. 391,897 Other long-term liabilities................................. 48,974 ---------- Total Liabilities................................. 1,623,008 ---------- Minority Interests.......................................... 888 Stockholders' Equity Preferred stock............................................. 6 Common stock................................................ 1,571 Additional paid in capital.................................. 2,584,065 Accumulated other comprehensive loss........................ (12,239) Accumulated deficit......................................... (162,579) ---------- Total Stockholders' Equity........................ 2,410,824 ---------- Total Liabilities and Stockholders' Equity........ $4,034,720 ==========
21 35 COMPARATIVE PER SHARE DATA (UNAUDITED) Set forth below are historical loss per share from continuing operations and book value per common share data of World Access, STAR and WorldxChange and the loss per share from continuing operations and book value per common share data of World Access on a pro forma basis to give effect to the acquisition of Comm/Net in May 1999, the acquisition of FaciliCom in December 1999, the acquisition of LDI in February 2000 and the proposed mergers with STAR and WorldxChange. In accordance with the STAR merger agreement, World Access, at its option, may pay up to 40% of the purchase price in the form of cash. Currently, World Access has no intention of paying any portion of the STAR purchase price with cash other than an immaterial amount to be paid for fractional shares and any cash to be paid for Dissenters' Shares. As a result, comparative per share data giving effect to World Access' option to reduce the number of shares it issues is not included. However, should World Access decide to pay 40% of the STAR purchase price in cash, assuming a value of $6.00 per share of World Access common stock, World Access would be required to pay STAR shareholders approximately $54.4 million in cash and issue approximately 13.6 million shares of World Access Common Stock having an approximate value of $81.6 million in connection with the merger. Since the option to pay a portion of the STAR purchase price in cash is solely at the option of the World Access and World Access has no intention of paying any portion of the STAR purchase price with the cash option, the pro forma balance sheets have been prepared excluding the cash option. No common stock dividends were paid by World Access during the periods presented below.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1999 JUNE 30, 2000 ----------------- ------------- World Access -- Historical: Loss per share from continuing operations: Basic.................................................. $(0.78) $(0.53) Diluted................................................ (0.78) (0.53) Book value per common share(1)............................ 17.15 20.81 World Access -- Pro Forma(4): Loss per share from continuing operations(2): Basic.................................................. $(3.63) $(1.22) Diluted................................................ (3.63) (1.22) Book value per common share(3)............................ 17.85 World Access -- Pro Forma(5): Net loss per share: Basic.................................................. $(3.33) $(0.75) Diluted................................................ (3.33) (0.75) Book value per common share............................... 20.18 World Access -- Pro Forma(6): Net loss per share: Basic.................................................. $(4.33) $(1.43) Diluted................................................ (4.33) (1.43) Book value per common share............................... 20.02 STAR -- Historical: Net loss per share: Basic.................................................. $(1.12) $(0.32) Diluted................................................ (1.12) (0.32) Book value per common share(1)............................ 4.75 4.41
22 36
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1999 JUNE 30, 2000 ----------------- ------------- STAR -- Equivalent Pro Forma(7): Net loss per share: Basic.................................................. $(1.40) $(0.47) Diluted................................................ (1.40) (0.47) Book value per common share............................... 6.90 STAR -- Equivalent Pro Forma(8): Net loss per share: Basic.................................................. $(1.29) $(0.29) Diluted................................................ (1.29) (0.29) Book value per common share............................... 7.80
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, 1999 JUNE 30, 2000 ------------------ ------------- WorldxChange -- Historical: Net loss per share: Basic.................................................. $(1.91) $(1.73) Diluted................................................ (1.91) (1.73) Book value per common share(1)............................ (0.95) (2.25)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, 1999 JUNE 30, 2000 ----------------- ------------- WorldxChange -- Equivalent Pro Forma(7): Net loss per share Basic.................................................. $(2.39) $(0.80) Diluted................................................ (2.39) (0.80) Book value per common share............................... 11.75 WorldxChange -- Equivalent Pro Forma(9): Net loss per share: Basic.................................................. $(2.85) $(0.94) Diluted................................................ (2.85) (0.94) Book value per common share............................... 13.18
- --------------- (1) Calculated by dividing historical stockholders' equity by the number of outstanding common shares. The outstanding common shares do not include shares issuable upon exercise of stock options, stock warrants, conversion of outstanding convertible securities, or outstanding shares which have been placed in escrow in connection with previous acquisitions. (2) Pro forma loss per share from continuing operations is presented on a basic and diluted basis computed as pro forma loss from continuing operations divided by the weighted average number of shares outstanding, assuming shares issued in each of the transactions were outstanding since the beginning of each period presented. The outstanding common shares do not include shares issuable upon exercise of stock options, stock warrants, or conversion of outstanding convertible securities. (3) Calculated by dividing pro forma stockholders' equity by the number of outstanding shares of World Access Common Stock expected to be outstanding as of the consummation of the Mergers, and does not include shares issuable upon the exercise of stock options, stock warrants, the conversion of outstanding convertible securities, or outstanding shares which have been placed in escrow in connection with previous acquisitions. (4) Pro forma information assumes World Access acquires both STAR and WorldxChange. (5) Pro forma information assumes World Access acquires STAR but not WorldxChange. (6) Pro forma information assumes World Access acquires WorldxChange but not STAR. (7) Equivalent pro forma information assumes World Access acquires both STAR and WorldxChange. (8) Equivalent pro forma information assumes World Access acquires STAR but not WorldxChange. (9) Equivalent pro forma information assumes World Access acquires WorldxChange but not STAR. 23 37 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING WHETHER TO VOTE FOR OR EXERCISE DISSENTERS' RIGHTS WITH RESPECT TO THE MERGERS. RISK FACTORS RELATING TO THE MERGERS INTEGRATING THE COMPANIES WILL BE A COMPLEX, TIME CONSUMING AND EXPENSIVE PROCESS THAT MAY DECREASE REVENUES, DAMAGE RELATIONSHIPS WITH KEY CUSTOMERS AND EMPLOYEES, AND CAUSE THE COMBINED COMPANY'S STOCK PRICE TO DROP. The combined company may encounter difficulties when it attempts to merge the operations of World Access, STAR, and WorldxChange. World Access, STAR and WorldxChange anticipate that the merger process will be complex, time consuming and expensive. The integration of the STAR and WorldxChange networks into the World Access network may disrupt the combined company's business, decrease revenues and damage relationships with key customers. The combined company may also incur significant merger-related expenses and suffer extended network downtime during this period. In addition, the integration of the World Access, STAR and WorldxChange operations and accounting, personnel, administrative, legal and other functions involves the risk that key employees, who cannot easily be replaced, may leave even when offered continuing employment. To the extent that management's attention is diverted by these difficulties from the day-to-day operation of the combined company's business, the combined company's revenues may decrease and the combined company may lose key customers and employees. The occurrence of any of the events described above could cause the combined company's stock price to drop. THE COMBINED COMPANY MAY NOT REALIZE THE COST SAVINGS, OPERATING EFFICIENCIES AND SYNERGIES EXPECTED FROM THE MERGERS. World Access expects to realize cost savings, operating efficiencies and synergies in excess of $110.0 million as a result of the mergers. However, the combined company may not achieve these cost savings, operating efficiencies and synergies as rapidly as expected or at all. For example, the combined company's ability to consolidate its purchasing and obtain more favorable prices from suppliers may be limited by changes in the purchasing power or practices of its competitors and other market dynamics. EACH COMPANY HAS SIGNIFICANT LOSSES AND MAY NEVER ACHIEVE PROFITABILITY AS A COMBINED COMPANY, WHICH MAY CAUSE THE COMBINED COMPANY'S STOCK PRICE TO DROP. After giving effect to the mergers and the TelDaFax transactions, the combined company would have had total losses of approximately $ million from continuing operations for the six months ended June 30, 2000 and $ per diluted share as compared to the $ loss per diluted share from continuing operations of World Access for the same period on a stand alone basis. These losses could cause the combined company's stock price to drop and prohibit the combined company from achieving profitability. World Access does not anticipate that the combined company will generate profits in the near future. STAR AND WORLDXCHANGE STOCKHOLDERS MAY RECEIVE LESS CONSIDERATION THAN THEIR BOARDS OF DIRECTORS ORIGINALLY ANTICIPATED. FURTHER, THE MERGER AGREEMENTS DO NOT ALLOW STAR OR WORLDXCHANGE TO TERMINATE THEIR RESPECTIVE MERGER IF THE VALUE OF THE CONSIDERATION TO BE RECEIVED BY THEIR STOCKHOLDERS FALLS SIGNIFICANTLY. Neither STAR nor WorldxChange has the right under their respective merger agreements to decline to close the merger if World Access's stock price falls below any particular level. This could result in WorldxChange and STAR stockholders receiving World Access shares worth substantially less than these shares were worth at the time the merger agreements were entered into or at the time of the special meetings. 24 38 The value of the World Access stock on February 11, 2000, which is the original date the exchange ratios were agreed upon, was $22.875. As of October 5, 2000, World Access' stock price closed at $5.25 per share. This is a decrease of approximately 77.0% as compared to the stock price on February 11, 2000. Therefore, the value of the consideration to be received in the mergers has been greatly reduced. Since each merger contemplates a fixed exchange ratio, no adjustment will be made to account for the decrease in World Access' stock price. As an example of World Access' stock price volatility, the following table sets forth the high and low closing sale prices per share of World Access common stock on the Nasdaq National Market during the indicated months.
CLOSING SALE PRICES PER SHARE OF WORLD ACCESS COMMON STOCK ------------------- MONTH HIGH LOW - ----- -------- -------- October 2000 (through October 5)........................... $ 5.690 $ 5.190 September 2000............................................. 9.375 5.344 August 2000................................................ 10.063 8.000 July 2000.................................................. 11.375 8.625 June 2000.................................................. 13.000 10.375 May 2000................................................... 17.000 9.250 April 2000................................................. 20.000 14.125 March 2000................................................. 26.875 19.000 February 2000.............................................. 24.375 17.375 January 2000............................................... 20.688 17.250 December 1999.............................................. 22.000 15.313 November 1999.............................................. 17.125 12.375
THE COMBINED COMPANY'S HIGH LEVEL OF DEBT MAY LIMIT ITS ABILITY TO OBTAIN ADDITIONAL FINANCING, REDUCE THE AMOUNT OF CASH FLOW AVAILABLE FOR OPERATIONS, AND MAKE IT MORE DIFFICULT TO MEET DEBT SERVICE REQUIREMENTS. Immediately after the completion of the mergers, the combined company will have a higher degree of financial leverage than prior to the mergers. At June 30, 2000, World Access had a current assets to current liabilities ratio of 1.9-to-1, $417.9 million of long-term debt and a total liabilities to equity ratio of approximately 68.3%. The pro forma balance sheet of World Access at June 30, 2000, reflecting the combination of World Access, STAR, WorldxChange and TelDaFax, had a current assets to current liabilities ratio of , long-term debt of $ million and a total liabilities to equity ratio of %. The combined company's indebtedness could have serious negative consequences. For example, it could: - limit the combined company's ability to obtain additional financing for working capital, capital expenditures or other purposes or make it difficult to obtain such financing on favorable terms; - require the combined company to dedicate a substantial portion of its cash flow from operations to service payments on its debt, which will reduce the funds that would otherwise be available for operations and future business opportunities; and - make it difficult for the combined company to meet its debt service requirements or force the combined company to modify its operations if there is a substantial decrease in operating income and cash flows or an increase in expenses. World Access anticipates that the combined company's debt service payments will be approximately $203.0 million for the second half of 2000 and $155.0 million for 2001, exclusive of any obligation to redeem its outstanding debt securities. If the combined company is unable to extend the maturities of certain debt instruments and/or generate sufficient cash flow or otherwise obtain funds necessary to meet its obligations, or if the combined company does not comply with the various covenants under its indebtedness, the combined company will be in default under the terms of that debt. If the combined 25 39 company defaults, the holders of indebtedness can accelerate the maturity of the indebtedness that is owed to them, which could cause defaults under the combined company's other indebtedness. DECREASED CASH FLOW MAY LIMIT THE COMBINED COMPANY'S ABILITY TO CONTINUE TO MAKE CAPITAL EXPENDITURES FOR THE ACQUISITION AND DEVELOPMENT OF ITS INTERNATIONAL TELECOMMUNICATIONS NETWORK, WHICH IS NECESSARY TO BE COMPETITIVE IN THIS INDUSTRY. The combined company will need to enhance and expand its network and build out its telecommunications network infrastructure in order to maintain a competitive position and to meet the increasing demands for service quality, capacity and competitive pricing. If the combined company's available cash flow substantially decreases as a result of lower telecommunications prices or for other reasons, the combined company may have limited ability to continue to make capital expenditures for the acquisition and development of its international telecommunications network. If cash flow from operations is not sufficient to satisfy the combined company's capital expenditure requirements, the combined company will need to raise additional capital from equity or debt sources. Additional debt or equity financing or other sources of capital may not be available to meet the combined company's requirements. IF THE MERGERS ARE APPROVED, CURRENT WORLD ACCESS STOCKHOLDERS WILL SUFFER SUBSTANTIAL DILUTION AND HAVE LESS VOTING POWER IN THE FUTURE DIRECTION OF THE COMBINED COMPANY DUE TO THE ISSUANCE OF WORLD ACCESS COMMON STOCK TO STAR AND WORLDXCHANGE STOCKHOLDERS. The completion of the STAR merger and WorldxChange merger will result in a substantial dilution of the voting and equity interests of current World Access stockholders. The current World Access stockholders will have less control over the future direction of the combined company due to the issuance of World Access common stock to STAR and WorldxChange stockholders. For more information regarding percentages of stock ownership after the mergers, see page 7. IF THE SALE OF PT-1 IS NOT COMPLETED, WORLD ACCESS DOES NOT HAVE TO COMPLETE THE STAR MERGER. ADDITIONALLY, STAR MAY INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE FAILED PT-1 ASSET SALE, INCLUDING A TERMINATION FEE OF $5.85 MILLION, AND WILL NEED TO OBTAIN ADDITIONAL CAPITAL. If STAR sells the assets of PT-1 to Counsel for net cash proceeds of less than $120.0 million, or to a purchaser other than Counsel for net cash proceeds of less than $150.0 million, then World Access does not have to complete the STAR merger. In the event that the STAR merger is not completed, STAR may face significant costs associated with the failed STAR merger, including a termination fee of $14.0 million, and will need to obtain additional capital. STAR is not certain that it will be able to raise additional capital on favorable terms or at all. If the PT-1 asset sale agreement is terminated, STAR may face significant costs associated with the failed PT-1 asset sale, including a termination fee of $5.85 million and will need to obtain additional capital. In addition, PT-1 will be required to pay the termination fee if the PT-1 asset sale agreement is not approved by the required vote of the stockholders of STAR and STAR sells the assets of PT-1 to another party within one year of the failed stockholder vote. IF THE WORLD ACCESS STOCKHOLDERS DO NOT APPROVE AN INCREASE IN WORLD ACCESS' AUTHORIZED SHARES OF COMMON STOCK, WORLD ACCESS CANNOT COMPLETE BOTH MERGERS. Currently, World Access does not have a sufficient number of shares of common stock authorized for issuance to complete both the STAR merger and the WorldxChange merger. If the World Access stockholders do not approve an increase in the authorized shares at the World Access special meeting, World Access' management will determine with which merger World Access will proceed or if an alternative structure for one of the mergers is feasible. A lack of approval by the stockholders may result in a significant delay in completing one of the mergers and may deny the stockholders the benefits that may otherwise have been achieved from the failed merger. 26 40 THE IRS MAY CHALLENGE THE TAX-FREE NATURE OF THE MERGERS IN WHICH CASE ANY GAIN REALIZED BY STAR OR WORLDXCHANGE STOCKHOLDERS UPON RECEIPT OF WORLD ACCESS COMMON STOCK IN THE MERGERS MAY BE IMMEDIATELY SUBJECT TO TAX. STAR and World Access intend the STAR merger to be tax-free to STAR stockholders for federal income tax purposes to the extent that they receive shares of World Access common stock in the merger. Similarly, WorldxChange and World Access intend the WorldxChange merger to be tax-free to WorldxChange shareholders for federal income tax purposes to the extent that they receive shares of World Access common stock in that merger. If the applicable merger in which STAR or WorldxChange stockholders receive World Access common stock is not tax-free, however, the gain realized by the STAR or WorldxChange stockholders upon receipt of World Access common stock may be immediately subject to tax. Neither STAR nor World Access has requested a ruling from the Internal Revenue Service as to the status of the STAR merger as a reorganization under Section 368(a) of the Internal Revenue Code. Similarly, neither WorldxChange nor World Access has requested a ruling from the Internal Revenue Service as to the status of the WorldxChange merger as a reorganization under Section 368(a) of the Internal Revenue Code. Although World Access has received an opinion from its counsel to the effect that the STAR merger will qualify as a reorganization and WorldxChange and World Access have received opinions from their respective counsel to the effect that the WorldxChange merger will qualify as a reorganization, these opinions are conditioned upon various assumptions and, in any event, such opinions are not binding on the IRS or the courts. If any of those assumptions are not accurate or if either the IRS or the courts successfully challenges the status of either or both of the mergers as reorganizations, any merger that fails to qualify as a reorganization would be a taxable event to STAR and/or WorldxChange and to the STAR and/or WorldxChange stockholders, as the case may be. ASSUMING THAT THE STAR MERGER QUALIFIES AS A REORGANIZATION, THE FEDERAL INCOME TAX CONSEQUENCES OF THE STAR MERGER TO STAR STOCKHOLDERS THAT RECEIVE A COMBINATION OF CASH AND WORLD ACCESS STOCK IN THE MERGER IS SUBJECT TO UNCERTAINTIES. If the STAR merger qualifies as a reorganization, the federal income tax consequences of the merger to a STAR stockholder will vary depending on whether the stockholder receives cash, stock, or a combination of cash and stock. Neither World Access nor STAR can assure you, and counsel to World Access has expressed no opinion, as to whether the gain recognized by STAR stockholders who receive a combination of cash and World Access common stock in the STAR merger will be treated as capital gain or ordinary income. The character of the gain as ordinary income or capital gain will depend on the particular facts and circumstances of each STAR stockholder. The gain may be treated as ordinary income, rather than capital, if the STAR stockholder owns, either actually or constructively, any shares of World Access common stock, other than shares of World Access common stock that are received in the STAR merger. Each STAR stockholder who receives a combination of cash and World Access common stock in the STAR merger should consult a tax advisor as to the character of the gain recognized in the STAR merger. RISK FACTORS CONCERNING THE COMBINED COMPANY'S BUSINESS OPERATIONS THE COMBINED COMPANY MAY NOT BE ABLE TO OBTAIN TRANSMISSION CAPACITY AT HISTORICAL RATES, WHICH MAY DECREASE THE COMBINED COMPANY'S PROFITABILITY AND CAUSE A LOSS OF CUSTOMERS. The combined company's future profitability will be based in part upon its ability to transmit long distance telephone calls over transmission facilities, also referred to in the industry as network facilities, leased from others on a cost-effective basis. Also, a substantial portion of the combined company's transmission capacity will be obtained on a variable, per minute and short-term basis, subjecting the combined company to the possibility of unanticipated price increases and service cancellations. Since the combined company will not generally have long-term arrangements for the purchase or resale of international long distance services, and since rates fluctuate significantly over short periods of time, the combined company's gross margins are subject to significant fluctuations. Decreased gross margins and 27 41 competitive pricing pressures for these facilities may decrease the combined company's profitability and cause a loss of customers. THE COMBINED COMPANY MAY INCUR SIGNIFICANT EXPENSES, LOSS OF CUSTOMERS, AND ULTIMATELY BE UNSUCCESSFUL IN EXPANDING ITS DATA TRANSMISSION BUSINESS, IN WHICH THE COMBINED COMPANY HAS LIMITED EXPERIENCE. The combined company's experience in providing data transmission services to date has been limited and, consequently, the combined company may not be successful in the data transmission business. The combined company's ability to successfully enter the data transmission business will depend upon, among other things, its ability to: - select new equipment and software and integrate these into its network; - hire and train qualified personnel; and - enhance its billing, back-office and information systems to accommodate data transmission services and customer acceptance of its service offerings. In providing data transmission services, the combined company will be dependent upon vendors for assistance in the planning and deployment of its data product offerings, as well as ongoing training and support. If the combined company is not successful at entering the data transmission business, it may suffer a loss of customers and incur significant expenses without any increase in income to offset such expenses. TECHNICAL DIFFICULTIES WITH OR FAILURES IN THE COMBINED COMPANY'S TELECOMMUNICATIONS NETWORK COULD RESULT IN DISSATISFIED CUSTOMERS AND LOST REVENUE. In Europe, there are a number of different protocols for data transmission. The combined company's network will need to be able to handle all of these protocols, which will pose technical difficulties. Technical difficulties with or failures in the combined company's telecommunications network could result in dissatisfied customers and lost revenue. For example, a failure in a portion of the combined company's network could prevent the combined company from delivering telephone calls initiated by its customers. Additionally, technical difficulties with the network could cause the loss of call detail record information, which is the basis for the combined company's ability to process and substantiate customer billings. Components of each companies' networks have failed in the past, which have resulted in lower billing collections. The combined company can provide no assurance that similar or other failures or technical difficulties will not occur in the future, which could result in the loss of customers and revenue. THE COMBINED COMPANY MAY SUFFER DECREASED REVENUES AND LOSS OF CUSTOMERS IF IT IS UNABLE TO INCREASE ITS NETWORK CAPACITY TO MEET CUSTOMER DEMANDS. World Access is currently in the process of expanding its network and will continue the expansion whether or not the mergers are completed. As it expands its network and the volume of its network traffic, its cost of revenues will increasingly consist of fixed costs arising from the ownership and maintenance of switches and fiber optic cables. These costs may increase, and its operating margins may decrease. If its traffic volume were to decrease, or fail to increase to the extent expected or necessary to make efficient use of its network, its costs as a percentage of revenues would increase significantly, which could significantly decrease the revenues of its business operations. In addition, the combined company's business will depend in part on its ability to obtain transmission facilities on a cost-effective basis. The combined company may not be able to obtain sufficient transmission facilities or access to undersea fiber optic cable on economically viable terms. The combined company's failure to obtain telecommunications facilities that are sufficient to support its network traffic in a manner that ensures the reliability and quality of its telecommunications services could increase the combined company's operational costs, as well as cause a loss of customers due to poor quality or unreliable service. 28 42 ANY SYSTEM OR NETWORK FAILURE THAT INTERRUPTS THE COMBINED COMPANY'S OPERATIONS COULD CAUSE THE LOSS OF CUSTOMERS, A REDUCTION IN REVENUES OR A DECREASE IN THE COMBINED COMPANY'S STOCK PRICE. The combined company's operations are dependent on its ability to successfully expand its network and integrate new and emerging technologies and equipment into its network, which are likely to increase the risk of system failure and to cause strain upon the networks. The combined company's operations also depend on its ability to protect its hardware and other equipment from damage from natural disasters such as fires, floods, hurricanes and earthquakes, other catastrophic events such as civil unrest, terrorism and war and other sources of power loss and telecommunications failures. The combined company cannot be certain that its switches will not become disabled in the event of an earthquake, power outage or otherwise. A network failure or a significant decrease in telephone traffic as a result of a natural or man-made disaster could damage the combined company's relationships with its customers and decrease its revenues and operating results. THE COMBINED COMPANY MAY BE UNABLE TO MANAGE EFFECTIVELY WORLD ACCESS' RECENT RAPID GROWTH AND THE RAPID GROWTH PLANNED FOR THE COMBINED COMPANY, WHICH MAY REDUCE THE QUALITY OF THE COMBINED COMPANY'S PRODUCTS AND SERVICES AND ITS ABILITY TO RETAIN KEY PERSONNEL. World Access' rapid growth from recent acquisitions and the expansion of its operations has placed significant demands on its resources. In addition, World Access expects that its expansion into foreign countries will lead to increased financial and administrative demands, such as: - increased operational complexity associated with expanded network facilities; - administrative burdens associated with managing an increasing number of foreign subsidiaries and relationships with foreign partners; and - expanded treasury functions to manage foreign currency risks. If World Access, and the combined company after the mergers, is unable to manage its growth effectively, the quality of its products and services and its ability to retain key personnel could be damaged. RISK FACTORS CONCERNING THE COMPANIES' FINANCIAL CONDITION IF WORLD ACCESS LOSES OR SETTLES A STOCKHOLDER LAWSUIT, WORLD ACCESS WILL OWE DAMAGES THAT MAY CAUSE A REDUCTION IN AVAILABLE CASH, A DECREASE IN EARNINGS, DROP IN STOCK PRICE AND NEGATIVE PUBLICITY. Following World Access' announcement in January 1999 regarding earnings expectations for the quarter and year ended December 31, 1998 and the subsequent decline in the price of World Access common stock, a number of stockholders filed class action complaints against World Access. The plaintiffs allege violations of the federal securities laws and have requested an unspecified amount of damages in their complaints and have not quantified their claim at the time this joint proxy statement/prospectus was printed. If World Access loses or settles these or any future stockholder lawsuits, World Access will owe damages that may cause a reduction in available cash, a decrease in earnings, drop in stock price and negative publicity. IF STAR'S LENDERS DO NOT EXTEND THE DUE DATE FOR CERTAIN DEBT, OR IF THEY SUE TO COLLECT CERTAIN DEBTS PRIOR TO COMPLETING THE PT-1 ASSET SALE, STAR COULD BECOME INSOLVENT OR BE FORCED TO FILE FOR BANKRUPTCY. STAR is subject to certain restrictions under its financing arrangements, including its financing arrangement with WorldCom Network Services, Inc. If STAR violates any restrictions under its financing arrangements, STAR's lenders may accelerate payment of the amounts STAR owes them. If STAR's lenders do not extend the due date for STAR's debt or if STAR's lenders sue to collect on any of STAR's debt, it could force STAR to file for bankruptcy or reorganize its business. If STAR violates any restrictions under its receivables sale agreement with RFC, RFC may declare an event of default and no longer purchase receivables from STAR. If RFC does not continue to purchase 29 43 STAR's receivables, STAR may be deprived of needed liquidity. RFC can refrain from purchasing additional receivables from STAR if STAR is in default under any other financing arrangement. STAR has entered into promissory notes with WorldCom Network Services in the amounts of $56.0 and up to $30.0 million, both of which are currently due on the earlier of termination of the STAR merger agreement, the consummation of the STAR merger or October 31, 2000. In addition, STAR and certain of its subsidiaries owe Nortel Networks, Inc. approximately $35 million. STAR intends to obtain payment terms from Nortel. If STAR is unable to obtain an extension from WorldCom Network Services and WorldCom Network Services seeks to collect its debt, or if Nortel seeks to collect the sum STAR and its subsidiaries owes to it, STAR and certain of its subsidiaries may need to seek the protection of the federal bankruptcy laws to continue operating its business, unless the sale of PT-1 is completed before these debts are sought to be collected. IF WORLDXCHANGE'S LENDERS ACCELERATE PAYMENT OF THE AMOUNTS WORLDXCHANGE OWES THEM, WORLDXCHANGE COULD BECOME INSOLVENT OR BE FORCED TO FILE FOR BANKRUPTCY. WorldxChange is subject to certain restrictions under its financing arrangements, including its financing arrangement with Foothill Capital Corporation. If WorldxChange violates any restrictions under its financing arrangements, its lenders may accelerate payment of the amounts it owes them. If the lenders accelerate payment on any of WorldxChange's debt, it could force WorldxChange to file for bankruptcy or reorganize its business. Under WorldxChange's financing arrangements, if WorldxChange commits a breach of the terms of these arrangements, WorldxChange's lenders can accelerate payment of their obligations. WorldxChange cannot predict what actions its lenders will take if it is out of compliance with any restrictions under any of its financing arrangements. WORLDXCHANGE WILL NOT HAVE SUFFICIENT CASH FLOW FROM ITS BUSINESS TO PAY ITS DEBT AND WILL NEED TO RAISE ADDITIONAL CAPITAL TO PAY, OR WILL NEED TO RESTRUCTURE, ITS DEBT OBLIGATIONS. The amount of WorldxChange's outstanding debt is large compared to its cash flow. As of June 30, 2000 WorldxChange had: - total consolidated debt of approximately $272.7 million; and - stockholders' deficit of approximately $95.9 million. Of WorldxChange's total consolidated debt, approximately $162.0 million is due over the next 12 months. The earliest of the maturity dates for this debt is October 1, 2000. WorldxChange will not generate enough cash from its operations to meet these obligations. If the WorldxChange merger is not completed by the earliest maturity of these obligations, WorldxChange will need to raise additional capital to pay, or will need to restructure, a substantial portion of these obligations. WorldxChange may not be able to raise the additional capital or restructure the debt obligations. DUE TO STAR'S LARGE AMOUNT OF DEBT PAYMENTS, STAR WILL NOT HAVE SUFFICIENT CASH FLOW FROM ITS INDEPENDENT BUSINESS OPERATIONS TO PAY ITS DEBT AND STAR MAY NEED TO RAISE ADDITIONAL CAPITAL TO PAY, OR WILL NEED TO RESTRUCTURE, ITS DEBT OBLIGATIONS IF THE PT-1 ASSET SALE IS NOT COMPLETED. The amount of STAR's outstanding debt is large compared to its cash flow and the net book value of its assets. STAR is required to make significant payments under its outstanding debt. As of June 30, 2000, STAR had: - total consolidated debt of approximately $178.1 million, including $23.9 million outstanding under its receivables sale arrangement with RFC and $57.7 million under its financing arrangement with WorldCom Network Services which is due October 31, 2000; and - stockholders' equity of approximately $258.6 million. 30 44 The following chart shows the interest and principal payments due on all of STAR's currently outstanding debt for each of the next five fiscal years, assuming STAR's lenders do not require early payment of the amounts due under its credit arrangements. Also, because the interest rates under some of its credit arrangements are based upon variable market rates, the amount of these interest payments could fluctuate in the future.
SCHEDULED PAYMENTS -------------------- INTEREST PRINCIPAL -------- --------- (IN THOUSANDS) For the year ending December 31: 2000...................................................... $10,012 $75,690 2001...................................................... 6,487 107,637 2002...................................................... 1,679 20,675 2003...................................................... 1,428 8,446 2004...................................................... 0 0
Due to the large amount of these principal and interest payments, STAR will not generate enough cash from its operations to meet these obligations. If the PT-1 asset sale is not completed, STAR will need to raise additional capital to pay its debts, or will need to restructure a substantial amount of these obligations. STAR may not be able to raise additional capital or restructure its debt obligations. WORLD ACCESS RELIES ON WORLDCOM, INC. FOR A SUBSTANTIAL AMOUNT OF ITS GROSS PROFITS, AND THE TERMINATION OF WORLD ACCESS' CARRIER SERVICE AGREEMENT WITH WORLDCOM COULD SIGNIFICANTLY DECREASE ITS REVENUES AND GROSS PROFITS. Under a Carrier Service Agreement, WorldCom is obligated to purchase from World Access at least $25.0 million a month of carrier services, provided the services are of acceptable quality and the rates quoted are at least equal to the rates WorldCom is obtaining from other third party providers. The service agreement is for a one-year term but automatically renews each month, subject to a one year termination notice. World Access recorded approximately $116.0 million of revenue and related gross profit of $45.6 million during the first six months of 2000. This represented approximately 20.7% and 64.0% of World Access' total revenue and gross profit, respectively. Termination of the service agreement, or any reduction in the services provided, could significantly decrease World Access' revenues and profits, particularly in the carrier services business. AS THE COMBINED COMPANY EXPANDS ITS FOCUS ON RETAIL CUSTOMERS AND EMERGING CARRIERS, ITS LEVEL OF UNCOLLECTIBLE DEBT MAY INCREASE. In the companies' experience, a greater percentage of the revenues generated by retail customers and from emerging carriers has been uncollectible as compared to revenues generated by sales to established wholesale carriers and large international carriers. Therefore, since the percentage of World Access' revenues after the mergers derived from retail operations and from sales to emerging carriers will increase as a result of the mergers, its level of uncollectible debt may increase, which would result in lower revenues and profits. In addition, the combined company may expend considerable resources to collect receivables from customers who fail to make timely payments. THE COMBINED COMPANY COULD BE FORCED TO PAY THE SUSPENDED $17.6 MILLION PORTION OF A REGULATORY FINE IMPOSED AGAINST WORLDXCHANGE, WHICH COULD HARM THE COMBINED COMPANY'S FINANCIAL CONDITION AND CAUSE THE WORLD ACCESS STOCK PRICE TO DROP. In May 1997, the California Public Utilities Commission issued an order revoking WorldxChange's authority to provide intrastate calling service in California and imposing other fines and penalties on WorldxChange, including a $19.6 million fine, based on the California Public Utilities Commission's finding that WorldxChange violated laws requiring prior consumer authorization before switching consumers' long distance carriers. WorldxChange has paid $2.0 million of the $19.6 million, with the 31 45 balance suspended so long as WorldxChange is not found to have committed any future violations of statutes or California Public Utilities Commission directives. The $17.6 million suspended fine would be binding on the combined company under the California Public Utilities Commission order. There can be no assurance that additional allegations of wrongdoing will not be made against the combined company after the merger. If the combined company were required to pay the suspended $17.6 million portion of the California Public Utilities Commission fine, the combined company's financial condition could be harmed and the World Access stock price could drop. RISK FACTORS CONCERNING THE COMPANIES' INDUSTRY THE COMPANIES' RELIANCE ON INTERNATIONAL SALES IS SIGNIFICANT AND COULD RESULT IN LOST REVENUE AND INCREASED COSTS BECAUSE OF INTERNATIONAL REGULATORY CHANGES, POLITICAL AND ECONOMIC INSTABILITY AND DIFFICULTY IN COLLECTION EFFORTS. In the year ended December 31, 1999, non-U.S. sales represented approximately 4.8% of World Access' total sales, approximately 11.7% of STAR's total sales and approximately 25.5% of WorldxChange's total sales. After the mergers, the combined company intends to increase its international sales. The companies' international sales are subject to inherent risks, including: - changes in regulatory requirements, tariffs or other barriers; - difficulties in staffing and managing foreign operations; - long payment cycles; - unstable political and economic environments; - potentially adverse tax consequences of international tax laws; and - fluctuations in foreign currency values. THE COMBINED COMPANY'S PLANNED ENTRY INTO THE INTERNET AND DATA BUSINESS IN EUROPE MAY BE UNSUCCESSFUL DUE TO THE LEVEL OF COMPETITION AND THE COMBINED COMPANY'S LACK OF EXPERIENCE IN THIS NEW MARKET. The market for Internet connectivity and related services is extremely competitive. The combined company's primary competitors will include other Internet service providers that have a significant national or international presence, but soon may also include competition from traditional telecommunications carriers that expand into the market for Internet services. Many of these carriers have substantially greater resources, capital and operational experience than the combined company will have. The combined company will require substantial additional capital to make investments in its Internet operations, and may not be able to obtain that capital on favorable terms or at all. Even if the combined company is able to establish and expand its Internet business, it will face numerous risks, including: - competition in the market for Internet services; - its ability to adapt and react to rapid changes in technology related to the Internet; - vulnerability to unauthorized access, computer viruses and other disruptive problems; - adverse regulatory developments; and - difficulties managing the growth of its Internet business, including the need to enter into agreements with other providers of infrastructure capacity and equipment and to acquire other Internet service providers and Internet-related businesses on acceptable terms. 32 46 DELAYS AND INCONSISTENCIES IN IMPLEMENTATION OF THE WORLD TRADE ORGANIZATION AGREEMENT AND OTHER COMPETITIVE DIRECTIVES MAY SLOW DOWN THE RATE OF THE COMBINED COMPANY'S EXPANSION IN SOME FOREIGN COUNTRIES Under the World Trade Organization Agreement, the U.S. and 68 other countries agreed to open their telecommunications markets to competition and foreign ownership effective February 5, 1998. These World Trade Organization member countries, which have increased to 72, represent approximately 90% of worldwide telecommunications traffic. Although the World Trade Organization Agreement has been implemented, to some degree, by most of the 72 signatory countries, some signatory countries have not yet fully implemented their World Trade Organization commitments. The combined company's ability to expand its operations internationally will be limited if any signatory country to the World Trade Organization Agreement fails to implement its obligations on a timely basis. The national governments of the European Union member states were required to pass legislation to liberalize the telecommunications markets within their countries to implement European Commission directives. Implementation has also been slow in certain member states as a result of their failure to dedicate the resources necessary to have a functioning regulatory body in place. The legislation and/or its implementation have, in certain circumstances, imposed significant obstacles on the ability of carriers to proceed with the licensing process. These barriers include requirements that carriers: - post significant bonds or make significant capital commitments to build infrastructure; - complete extensive application documentation; and - pay substantial license fees. These factors and slow implementation of legislation in connection with deregulation of telecommunications services could slow down the combined company's rate of expansion and increase the cost of such expansion. GOVERNMENT REGULATORY POLICIES AND INDUSTRY CONSOLIDATION IN EUROPE MAY DECREASE PROFIT MARGINS AND INCREASE PRICING PRESSURES IN THE COMBINED COMPANY'S INDUSTRY AND DECREASE DEMAND FOR SERVICES AND PRODUCTS. The companies expect that government regulatory policies, including the Telecommunications Act of 1996, are likely to continue to have a major impact on the pricing of both existing and new public network services and possibly accelerate the entrance of new competitors and consolidation of the industry. In addition, industry consolidation, especially in Europe, may decrease profit margins. These trends may decrease demand for the combined company's services and products that support these services. Lower prices may affect the cost effectiveness of the combined company's deployment of public network services. User uncertainty regarding future policies may also decrease demand for the combined company's telecommunications products and services. FOREIGN GOVERNMENTS MAY ATTEMPT TO PREVENT THE COMBINED COMPANY FROM CONDUCTING ITS BUSINESS AND FROM EXPANDING INTO THEIR RESPECTIVE COUNTRIES. Governments of many countries exercise substantial influence over various aspects of the telecommunications market. In some cases, the government owns or controls companies that are or may become the combined company's competitors or on which the combined company may depend for required interconnections to local telephone networks and other services. Accordingly, government actions in the future could block or impede the combined company's operation of its business. World Access desires to expand the combined company's foreign operations as these markets increasingly permit competition. The nature, extent and timing of the combined company's foreign operations, however, will be determined, in part, by the actions taken by foreign governments to permit competition and the response of incumbent carriers to these efforts. The regulatory authorities in these countries may not provide the combined company with practical opportunities to compete in the near 33 47 future, or at all, and the combined company may not be able to take advantage of any such liberalization in a timely manner. RECENT FEDERAL COMMUNICATIONS COMMISSION ACTIONS MAY DAMAGE THE COMBINED COMPANY'S OPERATIONS AND DECREASE REVENUES BY INCREASING COMPETITION, WHICH MAY INCREASE PRICING PRESSURES AND DECREASE DEMAND FOR THE COMBINED COMPANY'S SERVICES. Recent Federal Communications Commission rulemaking orders and other actions have lowered the entry barriers for new carriers and resale international carriers by streamlining the processing of new applications and by eliminating the international settlements policy for arrangements with foreign carriers that lack market power and on other selected routes. In addition, the Federal Communications Commission's rules implementing the World Trade Organization Basic Telecommunications Agreement presume that competition will be advanced by the U.S. entry of carriers and resale carriers from World Trade Organization member countries, thus further increasing the number of potential competitors in the U.S. market and the number of carriers which may also offer end-to-end services. Increased competition may increase pricing pressures, reduce the combined company's margins and decrease demand for the combined company's services. FEDERAL COMMUNICATIONS COMMISSION INTERVENTION REGARDING THE SETTLEMENT RATES CHARGED BY FOREIGN CARRIERS MAY DISRUPT THE COMBINED COMPANY'S TRANSMISSION ARRANGEMENTS TO CERTAIN COUNTRIES AND DECREASE THE COMBINED COMPANY'S REVENUES. The Federal Communications Commission recently has sought to reduce the foreign routing costs of U.S. international carriers by prescribing maximum or benchmark settlement rates which foreign carriers may charge U.S. carriers for routing telecommunications traffic. The Federal Communications Commission's benchmarks order was recently upheld by the U.S. Court of Appeals for the District of Columbia circuit. The Federal Communications Commission's action may reduce the combined company's settlement costs, although the costs of other U.S. international carriers also may be reduced in a similar fashion. The Federal Communications Commission has not stated how it will enforce the new settlement benchmarks if U.S. carriers are unsuccessful in negotiating settlement rates at or below the prescribed benchmarks. Any future Federal Communications Commission intervention could disrupt the combined company's transmission arrangements to certain countries or require the combined company to modify its existing arrangements, which could decrease the combined company's revenues. A RECENT FEDERAL COMMUNICATIONS COMMISSION ORDER DIRECTING ALL DOMESTIC INTERSTATE CARRIERS TO DE-TARIFF THEIR SERVICES MAY DECREASE THE COMBINED COMPANY'S ABILITY TO COMPETITIVELY PRICE ITS SERVICE OFFERINGS. The Telecommunications Act of 1996 permits the Federal Communications Commission to forbear enforcement of tariff provisions, which apply to all interstate and international carriers, and the U.S. Court of Appeals for the District of Columbia Circuit recently upheld the Federal Communications Commission's order directing all domestic interstate carriers to de-tariff their offerings. The Federal Communications Commission's order only applies to domestic services. However, the Federal Communications Commission may forbear its current tariff rules for U.S. international carriers such as the combined company, or order these carriers to de-tariff their services. Any such Federal Communications Commission action would likely afford non-dominant international carriers greater flexibility in pricing service offerings, which would increase the combined company's competition. The Federal Communications Commission routinely reviews the contribution rate for various levels of regulatory fees, including the rate for fees levied to support universal service, which fees may be increased in the future for various reasons, including the need to support the universal service programs mandated by the Telecommunications Act of 1996, the total costs for which are still under review by the Federal Communications Commission. 34 48 DELAYS AND COSTS INCURRED IN ACHIEVING COMPLIANCE WITH GOVERNMENT REGULATIONS AND EVOLVING INDUSTRY STANDARDS FOR THE COMBINED COMPANY'S PRODUCTS COULD DECREASE REVENUES. If the combined company's products fail to comply with the various existing and evolving regulations and industry standards or if the combined company experiences delays and incurs costs in achieving compliance with these regulations and standards, revenues could materially decrease as a result of the increased costs. The combined company's products must meet a significant number of voice and data communications regulations and standards, some of which are evolving as new technologies are deployed. In the United States, these products and services must comply with various regulations promulgated by the Federal Communications Commission, as well as with standards established by Bell Communications Research. Internationally, the combined company's products and services must comply with standards established by telecommunications authorities in various countries, as well as with recommendations of the International Telecommunications Union. Any failure to comply with these standards could result in a material reduction of revenue and a loss of customers for the combined company. RISK FACTORS CONCERNING THE COMBINED COMPANY'S COMMON STOCK SIGNIFICANT VARIANCE IN THE COMBINED COMPANY'S QUARTERLY OPERATING RESULTS COULD CAUSE THE PRICE OF THE COMBINED COMPANY'S COMMON STOCK TO DROP. In future quarters, the combined company's results of operations may fail to meet the expectations of market analysts and investors, which may cause the price of its common stock to drop. World Access' quarterly operating results have varied significantly in the past, and the combined company's quarterly operating results are expected to do so in the future. The combined company's revenues in any given period can vary due to factors such as: - call volume fluctuations, particularly in regions with relatively high per-minute rates; - the addition or loss of major customers, whether through competition or merger; and - technical difficulties with or failures of portions of its network that impact its ability to provide service to or bill customers. The combined company's cost of services and operating expenses in any given period can vary due to factors such as: - fluctuations in rates charged by carriers to terminate traffic; - the timing of capital expenditures, and other costs associated with acquiring or obtaining other rights to switching and other transmission facilities; and - costs associated with changes in staffing levels of sales, marketing, technical support and administrative personnel. In addition, the combined company's operating results can vary due to factors such as: - changes in routing due to variations in the quality of vendor transmission capability; - the amount of, and the accounting policy for, return traffic under operating agreements; and - the level, timing and pace of the combined company's expansion in international and retail markets. In response to competitive pressures or new product and service introductions, the combined company may take certain pricing or marketing actions that could damage its quarterly operating results. World Access currently bases its expense levels, in part, on its expectations of future sales. If future sales levels are below expectations, then the combined company may be unable to adjust spending sufficiently in a timely manner to compensate for the unexpected sales shortfall. Historically, World Access has generated a disproportionate amount of its operating revenues toward the end of each quarter, making precise prediction of revenues and earnings particularly difficult and resulting in risk of variance of actual results from those forecast at any time. 35 49 FORWARD-LOOKING STATEMENTS This joint proxy statement/prospectus and the documents incorporated by reference in this joint proxy statement/prospectus contain certain information regarding our financial projections, plans and strategies that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this joint proxy statement/ prospectus or in the documents incorporated by reference, the words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar terms and/or expressions are intended to identify forward-looking statements. These statements reflect the companies' assessment of a number of risks and uncertainties, and their actual results could differ materially from the results anticipated in these forward-looking statements. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation, actual future financial results differing materially from financial projections, potential inability to identify, complete and integrate acquisitions, difficulties in expanding into new business activities, delays in new service offerings, the potential termination of certain service agreements or the inability to enter into additional service agreements and the other issues discussed above in the Risk Factors section. The companies caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. THE WORLD ACCESS SPECIAL MEETING Date, time and place of the World Access special meeting. , 2000 11:00 a.m., local time 945 E. Paces Ferry Road, Suite 2200 Atlanta, Georgia 30326. World Access board of directors' recommendations. The board of directors of World Access unanimously approved the STAR merger agreement, the WorldxChange merger agreement and the transactions contemplated by each merger agreement and unanimously recommends that the stockholders of World Access vote for the approval and adoption of the STAR merger agreement and the WorldxChange merger agreement and the transactions contemplated by each merger agreement. In addition, the board of directors of World Access unanimously approved, recommended and declared advisable the amendments to the World Access amended certificate of incorporation, the amendments to the World Access Directors' Warrant Incentive Plan and a vote for the nominees for director named in this joint proxy statement/prospectus. Currently, World Access does not have a sufficient number of shares of common stock authorized for issuance under its amended certificate of incorporation to complete both the STAR merger and the WorldxChange merger. Approval of Proposal 3 by the World Access stockholders to increase the number of shares of common stock World Access is authorized to issue is required for World Access to have sufficient authorized shares to complete both mergers. World Access record date; stockholders entitled to vote. As of the close of business on , 2000, the World Access record date, shares of World Access common stock were outstanding, held by approximately holders of record. World Access stockholders are entitled to cast one vote per share of World Access common stock owned or to be received upon the conversion of shares of preferred stock owned as of the World Access record date. World Access also has shares of preferred stock issued and outstanding. Each share of World Access preferred stock is convertible at the option of the holder into World Access common stock in accordance with a conversion formula contained in the World Access amended certificate of incorporation. Other than the Series C preferred stock, the World Access preferred stock is entitled to vote on the approval and adoption of all of the proposals to be considered at the special meeting on an as converted basis with the 36 50 World Access common stock voting together as a single class. The Series C preferred stock may vote with the holders of World Access common stock on all of the proposals except the election of directors. The following table sets forth information regarding the World Access preferred stock:
COMMON STOCK SERIES SHARES OUTSTANDING HELD UPON CONVERSION - ------ ------------------ -------------------- Series A.......................................... 70,000 6,086,956 Series C.......................................... 350,260 17,186,451 Series D.......................................... 184,000 10,222,222 Series E.......................................... 9,645 443,448
Only holders of record of World Access voting stock as of the close of business on the World Access record date are entitled to notice of and to vote at the World Access special meeting and any adjournments or postponements of the special meeting. Quorum; vote required. A majority of the shares of World Access common stock entitled to vote at the World Access special meeting will constitute a quorum for the transaction of business at the World Access special meeting. The following table sets forth the vote required for approval of each of the proposals to be considered at the World Access special meeting.
- --------------------------------------------------------------------------------------- PROPOSAL VOTE REQUIRED - --------------------------------------------------------------------------------------- Proposals 1, 2, 6 and 7 - majority in voting power of the shares of World Access voting stock entitled to vote and voting as a single class. - --------------------------------------------------------------------------------------- Proposal 3 - majority in voting power of the shares of World Access voting stock entitled to vote and voting as a single class; and - majority of the shares of World Access common stock entitled to vote and voting as a single class. - --------------------------------------------------------------------------------------- Proposals 4 and 5 - 75% in voting power of the shares of World Access voting stock entitled to vote and voting as a single class. - --------------------------------------------------------------------------------------- Proposal 8 - plurality in voting power of the shares of World Access voting stock entitled to vote for the election of directors and voting as a single class. - ---------------------------------------------------------------------------------------
The total outstanding shares of World Access common stock for purposes of calculating the number of shares constituting a quorum and needed for approval includes the number of shares of World Access common stock issuable upon conversion of the Series A preferred stock, the Series C preferred stock, except with respect to the election of directors, the Series D preferred stock and the Series E preferred stock. Shares of World Access voting stock that are voted "for," "against" or "withheld" at the World Access special meeting will be treated as being present at such meeting for purposes of establishing a quorum and will also be treated as votes eligible to be cast by the World Access voting stock present in person or represented by proxy at the World Access special meeting and entitled to vote on the subject matter. Abstentions will be counted for purposes of determining both the presence or absence of a quorum for the transaction of business and the total number of votes cast with respect to a particular matter. Broker non-votes will be counted for purposes of determining the presence or absence of a quorum for the transaction of business but will not be counted for purposes of determining the number of votes cast with respect to the particular proposal on which the broker has expressly not voted. Because approval of the proposals described herein other than the election of nominees for director requires the affirmative vote of a majority in voting power of outstanding shares of World Access voting stock, abstentions and broker non-votes will have the same effect as negative votes with respect to these proposals. 37 51 Security ownership by beneficial owners and management. As of the close of business on the World Access record date, directors and executive officers of World Access and their respective affiliates may be deemed to be the beneficial owners of shares of World Access common stock representing approximately % of the outstanding voting power of World Access. Solicitation and revocability of proxies. This joint proxy statement/prospectus is being furnished to holders of World Access voting stock in connection with the solicitation of proxies by and on behalf of the board of directors of World Access for use at the World Access special meeting. All shares of World Access voting stock that are entitled to vote and are represented at the World Access special meeting, by properly executed proxies received prior to or at the meeting and not duly and timely revoked, will be voted at the meeting in accordance with the instructions indicated on the proxies. If no instructions are indicated, the proxies will be voted for the approval and adoption of the proposals described herein. If any other matters are properly presented for consideration at the World Access special meeting or any adjournments or postponements of the special meeting, including, among other things, consideration of a motion to adjourn or postpone the meeting to another time and/or place, including, without limitation, for the purpose of soliciting additional proxies, the persons named in the enclosed form of proxy and voting thereunder will have discretion to vote on the matters in accordance with their best judgment. Proxies voting against the proposals presented in this joint proxy statement/prospectus may not be voted for an adjournment or postponement of the World Access special meeting. Any proxy given pursuant to this solicitation may be revoked by the person giving it any time before it is voted. Proxies may be revoked by: - filing with the Secretary of World Access at or before the taking of the vote at the World Access special meeting a written notice of revocation bearing a later date than the proxy; - duly executing a later-dated proxy relating to the same shares and delivering it to the Secretary of World Access before the taking of the vote at the World Access special meeting; or - attending the World Access special meeting and voting in person. Attendance at the World Access special meeting will not in and of itself constitute a revocation of a proxy. Any written notice of revocation or subsequent proxy should be sent so as to be delivered to World Access, Inc., at 945 E. Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326, Attention: Secretary, or hand delivered to the Secretary of World Access at or before the taking of the vote at the World Access special meeting. All expenses of this solicitation, including the cost of preparing and mailing this joint proxy statement/prospectus to stockholders of World Access, will be borne by World Access. In addition to solicitation by use of the mails, proxies may be solicited by directors, officers and employees of World Access in person or by telephone, telegram or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. Arrangements will also be made with custodians, nominees and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of shares held of record by such custodians, nominees and fiduciaries, and World Access will reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred by them. 38 52 THE STAR SPECIAL MEETING Date, time and place of the STAR special meeting. , 2000 11:00 a.m., local time Four Seasons Biltmore Hotel Montecito, California STAR board of directors' recommendations. The board of directors of STAR approved the STAR merger agreement and the transactions considered in the STAR merger agreement and recommends that the stockholders of STAR vote: - for the approval and adoption of the STAR merger agreement; and - for the approval of the transactions considered in the STAR merger agreement. STAR record date. The board of directors of STAR has fixed , 2000 as the date for determination of holders of STAR common stock, who will be entitled to notice of the STAR special meeting and to vote at the STAR special meeting. Stockholders entitled to vote. As of the close of business on the STAR record date, shares of STAR common stock were outstanding, held by approximately holders of record. Each share of outstanding STAR common stock is entitled to one vote. Only STAR stockholders on the close of business on the STAR record date are entitled to notice of the STAR special meeting and to vote at the STAR special meeting, or vote on any adjournment or postponement of the STAR special meeting. Quorum and vote required. Each STAR stockholder on the STAR record date is entitled to cast one vote for each share of STAR common stock held by the STAR stockholder. The holders of a majority of the shares of STAR common stock issued and outstanding and entitled to vote at the STAR special meeting, who are present in person or represented by proxy, will constitute a quorum for the transaction of business at the STAR special meeting. The approval of the STAR merger agreement and the transactions considered in the STAR merger agreement require the affirmative vote of a majority of the outstanding shares of STAR common stock. Shares of STAR common stock that are voted "for," "against" or "withheld" at the STAR special meeting are treated as being present at the meeting for purposes of establishing a quorum and are also treated as votes eligible to be cast by the holders of STAR common stock present in person or represented by proxy at the STAR special meeting and entitled to vote on the subject matter. Abstentions are counted for purposes of determining both the presence of a quorum for the transaction of business and the total number of votes cast with respect to a particular matter. Broker non-votes will be counted for purposes of determining the presence of a quorum for the transaction of business but will not be counted for purposes of determining the number of votes cast on the particular proposal that the broker has expressly not voted. Because adoption and approval of the STAR merger agreement and the transactions considered in the STAR merger agreement require the affirmative vote of a majority of outstanding shares of STAR common stock, abstentions and broker non-votes will have the same effect as negative votes. Two of STAR's stockholders holding a total of of the outstanding common stock of STAR as of the STAR record date have agreed to vote in favor of the STAR merger. Security ownership by STAR directors, executive officers and their affiliates. As of the close of business on the STAR record date, directors and executive officers of STAR and their respective affiliates were deemed to be the owners of shares of STAR common stock representing approximately % of the outstanding common stock of STAR. 39 53 Solicitation and revocability of proxies. This joint proxy statement/prospectus is being provided to holders of STAR common stock in connection with the solicitation of proxies by the board of directors of STAR for use at the STAR special meeting. All shares of STAR common stock entitled to vote and represented at the STAR special meeting by properly executed proxies received before or at the meeting and not duly and timely revoked, will be voted at the meeting pursuant to the instructions on the proxies. If the proxies do not have instructions, the proxies will be voted for the approval and adoption of the STAR merger agreement and the transactions considered in the STAR merger agreement. If any other matters are properly presented for consideration at the STAR special meeting or any adjournment or postponement of the STAR special meeting, including the consideration of a motion to adjourn or postpone the STAR special meeting to another time and/or place, the persons named in the enclosed form of proxy will have the right to vote on the matters. However, proxies voting against the proposals presented in this joint proxy statement/prospectus may not be voted for an adjournment or postponement of the STAR special meeting. Any proxy given pursuant to this solicitation may be revoked by the stockholder giving it any time before it is voted. Proxies may be revoked by: - filing with the Secretary of STAR at or before the taking of the vote at the STAR special meeting a later dated written notice revoking the proxy; - executing a later-dated proxy for the same shares and delivering it to the Secretary of STAR before the vote is taken at the STAR special meeting; or - attending the STAR special meeting and voting in person. However attendance at the STAR special meeting will not in and of itself constitute a revocation of a proxy. Any written notice of revocation or subsequent proxy should be sent to STAR Telecommunications, Inc., 223 East De La Guerra Street, Santa Barbara, CA 93101, Attention: Secretary, or hand delivered to the Secretary of STAR at or before the taking of the vote at the STAR special meeting. All expenses of this solicitation, including the cost of preparing and mailing this joint proxy statement/prospectus to stockholders of World Access, will be paid by World Access. In addition to solicitation by mail, proxies may be solicited by directors, officers and employees of STAR in person or by telephone, telegram or other means. Directors, officers and employees who aid in the solicitation will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses for the solicitation. Arrangements will also be made with custodians, nominees and fiduciaries for forwarding proxy solicitation materials to beneficial owners of shares held of record by the custodians, nominees and fiduciaries, and STAR will reimburse the custodians, nominees and fiduciaries for reasonable expenses for the solicitation. PROPOSAL 1 THE MERGER BETWEEN WORLD ACCESS AND STAR This section of the joint proxy statement/prospectus describes the proposed merger between World Access and STAR. This proposal is for consideration by the World Access stockholders and the STAR stockholders, voting separately. The completion of the STAR merger is conditioned on the sale of PT-1 by STAR. Unless World Access waives this condition, World Access will be merging with STAR minus its PT-1 operations. BACKGROUND OF THE STAR MERGER During the first quarter of 1999, the STAR board of directors and members of its management began searching for additional capital at a time when STAR's core business margins were declining as a result of increased competition. In addition, STAR was incurring significant capital costs in connection with the expansion of its business into Germany and the development of its retail long distance operations. During 40 54 this time period, STAR engaged Goldman Sachs Credit Partners LP, Kaufman Bros., L.P., Lehman Brothers, Morgan Stanley Dean Witter and Deutsche Bank Securities Inc. to pursue a possible high yield bond offering and to provide financial advice on strategic mergers. STAR concluded that it would not raise sufficient capital from a high yield bond offering. During this same period, STAR also consulted with Goldman Sachs, Kaufman Bros., Lehman Brothers, Morgan Stanley and Deutsche Bank about the feasibility of spinning off its European operations, the possibility of the sale of stock of one or more of STAR's subsidiaries and raising senior subordinated debt. STAR determined that it could not pursue these transactions because the telecommunications market conditions were not favorable and STAR lacked sufficient capital. STAR received several acquisition proposals in the last quarter of 1999 for STAR's German operations. These proposals were not considered attractive by the STAR board of directors because the sale of STAR's German operations would have provided additional cash but did not fit with STAR's strategy to diversify and improve its business mix. In the late fall of 1999, STAR was approached by World Access, which was aware of STAR's search for a strategic transaction. STAR was unable to discuss a transaction with World Access at that time because it was subject to an exclusive negotiating agreement with a third party. On December 20, 1999, after the exclusive negotiating agreement had expired, STAR and World Access announced the execution of a letter of intent under which World Access would acquire all of STAR's outstanding capital stock in exchange for shares of common stock of World Access, and possibly cash, valued at approximately $10.50 per share of STAR common stock. The letter also called for World Access to provide STAR with a short-term loan when a definitive agreement was signed. During the due diligence period, World Access concluded that STAR would require substantial capital to achieve its business objectives, including capital expenditures necessary to expand its network, employ new technologies and enter foreign markets. World Access also concluded that STAR's operating losses could not be stemmed as easily as World Access had first thought and it would require a significant capital investment to return STAR to profitability. World Access and STAR both maintained strong networks but both parties determined that there would be a continuing need for capital to fund expansions into new geographic areas and in order to enter into new operating agreements. Representatives of World Access and STAR met to renegotiate the terms of the STAR merger. STAR's management had taken steps to improve cash flow, including through the reduction of capital expenditures, but in part due to capital constraints, had not been able to return STAR to profitability or positive cash flow. World Access determined that the initial offer it had made to STAR was too high because of STAR's financial condition and future capital requirements. STAR considered World Access' revised proposal and determined that the revised offer was in the best interests of the STAR stockholders because of STAR's operating results, capital requirements and prospects. On February 2, 2000, the parties agreed to reprice the STAR merger, and World Access indicated that STAR was free to shop for better offers from other bidders. Under the revised terms, World Access agreed to pay between $7.50 and $8.00 for each outstanding share of STAR common stock. A closing condition was added to the STAR merger agreement which required STAR to sell PT-1 for net cash proceeds of at least $150.0 million. World Access required STAR to sell PT-1 because the sale would provide STAR with needed capital in the near term and the business of PT-1 did not fit into World Access' long-term strategic plans. In addition, World Access agreed in principle to provide STAR with a short-term loan, subject to STAR's and World Access' agreement on the definitive terms of the short-term loan. Based on this agreement, the parties issued a joint press release announcing the repricing and worked to finalize the STAR merger agreement. During the period between December 20, 1999 and February 2, 2000, STAR did not receive a superior proposal from another potential competing bidder. Prior to signing a definitive agreement, the STAR board of directors was free to and did seek out other proposals. The STAR board of directors met on February 7, 2000 and considered the revised proposal at length. Given STAR's rising debt and cash 41 55 shortage and the lack of superior offers, management was instructed to continue negotiations with World Access. On February 8, 2000, the board of directors of World Access met to receive a report from management regarding the status of the merger discussions with STAR, including the results of World Access' due diligence investigation of STAR and the resulting repricing of the transaction. On February 11, 2000, the board of directors of World Access met again to consider the merger with STAR. At this meeting, management reviewed, for the board of directors, the strategic reasons for a business combination with STAR. Management and legal counsel described the specific terms of the proposed STAR merger agreement. During this meeting, Donaldson, Lufkin & Jenrette gave its oral opinion as to the fairness of the consideration to be paid by World Access under the STAR merger agreement. The board of directors also received summaries of the results of World Access' due diligence investigation of STAR. The World Access board of directors unanimously approved the STAR merger agreement and the transactions contemplated by the STAR merger agreement and unanimously agreed to recommend its adoption to the stockholders of World Access. On February 11, 2000, Donaldson, Lufkin & Jenrette forwarded its written opinion regarding the fairness of the consideration to be paid by World Access under the STAR merger agreement to the members of the board of directors of World Access. On or about February 7, 2000 and February 11, 2000, the STAR board of directors met to consider World Access' renegotiated proposal. The board received an opinion from Deutsche Bank Securities Inc. that the proposal was fair from a financial point of view to STAR and STAR's stockholders. The STAR board of directors also received advice from Delaware legal counsel with respect to its obligations regarding its duty of care and its duty to exercise informed business judgment. At the meeting held on February 11, 2000, the STAR board of directors concluded that the STAR merger was fair to and in the best interests of STAR and its stockholders. The STAR board of directors considered STAR's financial condition, the decline in margins in its core business due to increased competition and the significant capital required to diversify STAR's business mix. The STAR board of directors voted to approve the STAR merger agreement and the transactions contemplated by the STAR merger agreement and voted to recommend that the stockholders of STAR vote for the approval and adoption of the STAR merger agreement and the transactions contemplated by the STAR merger agreement. In approving the STAR merger, the STAR board of directors considered the potential benefits of the STAR merger, including all material business, financial, legal and market factors, and the risks associated with the STAR merger discussed below under the heading "STAR's reasons for the STAR merger." Beginning on or about May 18, 2000, STAR began discussions with World Access regarding the PT-1 asset sale agreement with Counsel. STAR sought World Access' approval of the terms of the PT-1 asset sale agreement, as well as World Access' consent to STAR's execution of the PT-1 asset sale agreement, as required by the STAR merger agreement. On May 25, 2000, STAR received World Access' consent to enter into the PT-1 asset sale agreement although World Access had not yet determined whether the PT-1 asset sale agreement met the requirements of the STAR merger agreement. On May 30, 2000, representatives of both STAR and World Access met in Atlanta, Georgia to discuss the terms of the PT-1 asset sale agreement in relation to the requirements of the STAR merger agreement. STAR and World Access determined that an amendment to the STAR merger agreement was necessary to adjust the amount of net cash proceeds that STAR was required to obtain from the PT-1 asset sale because STAR was not going to receive net cash proceeds of at least $150.0 million from the sale of PT-1 to Counsel. The STAR merger agreement was also amended to: - reduce the exchange ratio from 0.3905 to 0.386595; - provide for a reduction in the amount of financing that World Access would provide to STAR by the amount of financing provided to STAR by WorldCom, on a dollar-for-dollar basis, up to an aggregate of $30.0 million; 42 56 - provide that a material adverse effect will not be deemed to have occurred if the change, circumstance or effect relates to an action taken by STAR at the specific request of World Access; and - eliminate the requirement that STAR provide evidence of the termination of its obligations with respect to the China-U.S. Cable Network. On June 6, 2000, the STAR board of directors met to consider the proposal to amend the STAR merger agreement. The STAR board of directors received advice from Delaware legal counsel with respect to its obligations regarding its duty of care and its duty to exercise informed business judgment. The STAR board of directors seriously considered and evaluated the need for an updated fairness opinion from Deutsche Bank as a result of the amendment to the STAR merger agreement, the WorldxChange merger, the PT-1 asset sale to Counsel for net cash proceeds of less than $150.0 million, the decrease in the consideration to be paid to STAR's stockholders as a result of the decrease in the price of the World Access common stock and the TelDaFax acquisition by World Access. Deutsche Bank informed the STAR board of directors that an updated fairness opinion would require substantial additional cost and extensive diligence resulting in a significant delay in executing the amendment. As a result of the timing concerns, the status of the STAR merger and STAR's financial situation, the STAR board of directors determined that an updated fairness opinion was not, under the circumstances, in the best interests of the STAR stockholders. The STAR board of directors concluded that, while the amendment of the STAR merger agreement was vital to securing the PT-1 asset sale agreement with Counsel rapidly and to meeting STAR's obligations under the STAR merger agreement, the amendment of the exchange ratio and other provisions of the STAR merger agreement did not require an updated fairness opinion. In addition, the STAR board of directors determined that neither the WorldxChange merger nor the TelDaFax acquisition undertaken by World Access were material to STAR's decision to enter into the STAR merger agreement. Finally, the STAR board of directors assessed the volatility of the price of the World Access common stock, including its recent significant decline and the general decline in the stock prices of other public telecommunications companies, the likelihood that the value of the consideration to be received by the STAR stockholders at the closing of the STAR merger may be less than the consideration anticipated at the time the STAR merger agreement was signed and the fact that an updated fairness opinion would not materially develop the information currently available to the STAR board of directors, and concluded that it continued to believe that the STAR merger agreement is fair to, and in the best interests of, the STAR stockholders. The conclusion of the STAR board of directors on June 6 that the STAR merger remains fair to, and in the best interests of, the STAR stockholders is based on the following factors: - the general decline in the stock prices of other public telecommunications companies since February 11, 2000; - STAR's financial condition and cash flow situation that continue to dictate that the STAR board of directors quickly implement a plan to avoid insolvency and the need to seek bankruptcy protection; and - the potential cost savings and synergies to be achieved by the combined company as a result of the STAR merger. The STAR board of directors considered the potential benefits of the amendment to the STAR merger agreement, including the importance of completing the STAR merger for the reasons discussed below under the heading "STAR's reasons for the STAR merger." The STAR board of directors also considered the potential negative consequences of the amendment to the STAR merger agreement also discussed below. On June 6, 2000, STAR entered into the PT-1 asset sale agreement with Counsel. On June 7, 2000, STAR and World Access executed the amendment to the STAR merger agreement and issued a joint press release announcing the amendment to the STAR merger agreement. On October 6, 2000, the parties 43 57 again amended the STAR merger agreement to extend the date after which either party may terminate the STAR merger agreement from September 30, 2000 to December 31, 2000. WORLD ACCESS' REASONS FOR THE STAR MERGER In approving the STAR merger, the World Access board of directors considered the potential benefits of the STAR merger and the risks associated with the STAR merger. All material business, financial, legal and market factors are discussed below. In view of the number and wide variety of factors considered in connection with its evaluation of the STAR merger, the board did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the material factors considered in reaching its determination. The board viewed its position and recommendation as being based on the totality of the information and factors presented to and considered by it. In addition, individual directors may have given different weight to different information and to the following factors. The financial terms of the STAR merger. The World Access board of directors considered information concerning the business, earnings, operations, financial condition and prospects of World Access and STAR, individually, on a combined basis, and in conjunction with the WorldxChange merger. The board determined to approve the STAR merger agreement and the transactions contemplated by the STAR merger agreement based on its consideration of these factors with and without taking into account the WorldxChange merger. The board also considered the opinion of Donaldson, Lufkin & Jenrette Securities Corporation as to the fairness to World Access, from a financial point of view, of the consideration to be paid by World Access pursuant to the STAR merger agreement. STAR's facilities-based network. The board considered the approximately $350.0 million that STAR has invested in its international network and the additional geographic coverage, connectivity and capacity this network would bring World Access. The STAR network connects more than 51 countries worldwide and includes 24 international gateway switches, 17 transoceanic cable systems and a North American fiber network that connects 30 cities. The board placed particular emphasis on the investments made by STAR in recent years to implement its German network, including switching and transmission equipment, cable connections between 23 German cities and related operating licenses. The presence of the network and related infrastructure within Germany was a significant factor in evaluating the STAR merger due to the size of the German telecommunications market, the importance of this market to World Access' future strategic plans and the ability of the network to support future retail service offerings. STAR's established revenue base. The board considered the current revenue base of STAR, which consisted primarily of approximately $350.0 million in U.S.-based carrier traffic and $150.0 million from traffic originated in Germany. Potential cost savings and synergies. The board reviewed financial analyses prepared by World Access management that estimated a range of gross margin improvement that could be realized by redirecting selected World Access traffic over the STAR network, redirecting selected STAR traffic over the World Access network and eliminating duplicate leased circuits. The board determined that the World Access estimates were realistic and that based on the financial analyses presented and their own business judgment, the annual gross margin improvement for the combined company should be in excess of $10.0 million. The board also reviewed financial analyses by World Access management that estimated a range of selling, general and administrative cost savings that could be realized by combining World Access and STAR, including the elimination of redundant switching centers, redundant customer care operations, duplicate U.S. divisional headquarters and corporate office functions. The board determined that the World Access estimates were realistic and that based on the financial analyses presented and their own business judgment, these annual cost savings should be in excess of $35.0 million. STAR's customer base. The board considered the compatibility of STAR's established base of carrier customers with World Access' existing customer base. STAR's customer base includes 14 of the 44 58 top 40 global carriers, the vast majority of which are complementary to World Access' customer base. In particular, STAR does considerable business with AT&T, Sprint and Qwest Communications, three global telecommunications companies. Although STAR does not have long-term contracts with its customers, World Access currently does not do significant business with these companies and is optimistic that these and other STAR customer relationships can be leveraged to provide incremental revenue and further cost reductions. Ability to accelerate plans to become a provider of bundled voice, data and Internet services to key European markets. The board considered the additional services offered by STAR, which would be made available to current and future customers of World Access. Specifically, of STAR's German service offerings, World Access management estimated approximately 90% was related to carrier services and 10% from retail services. The addition of this base of service offerings would establish World Access as one of the largest providers of carrier services in the world and provide a significant base within Germany to leverage future growth. The World Access board of directors also considered the following material risks associated with completing the STAR merger, but concluded that the advantages of the STAR merger far outweighted the risks: - STAR's history of operating losses and negative cash flow, though the board felt that the spending plans and controls of World Access combined with the realization of margin improvement and cost savings as a result of the merger would eliminate these losses and negative cash flow within a one year period; - World Access' ability to service and repay STAR's outstanding debt and financial commitments, though this risk was significantly reduced as a result of the cancellation of STAR's participation in a China-U.S. cable consortium and WorldCom's agreement to convert approximately $90.0 million of STAR trade debt into shares of World Access common stock upon consummation of the STAR merger; and - the risk that World Access would be unable to effectively integrate the technical operations, customers, suppliers and management of both STAR and WorldxChange and realize the margin and cost savings synergies noted above. Finally, the World Access board of directors considered the exclusion of PT-1's operations from the planned merger and the related closing condition for STAR to receive $150.0 million in net cash proceeds from the sale of PT-1. The board agreed with World Access management that the U.S. prepaid calling card and dial around business of PT-1 did not fit the long-term strategy for the combined company, which is focused on market opportunities arising from the consolidation of the European telecommunications market. They also shared management's concern that World Access would not be interested in merging with STAR if it had to assume the current debt position of STAR. The board concluded that the PT-1 closing condition adequately addressed these two management concerns and supported management's plan to use the net cash proceeds from the sale of PT-1 to reduce the combined company's debt. In connection with an amendment to the STAR merger agreement entered into in June 2000, World Access agreed to reduce the PT-1 cash proceeds requirement from $150.0 million to $120.0 million. This reduction was agreed to after careful review of the terms and conditions of the Counsel asset purchase agreement, STAR's agreement to reduce the merger exchange ratio and WorldCom's agreement to convert an additional $30.0 million of STAR trade debt into World Access common stock effective with the consummation of the STAR merger. Although the net effect of these agreements required World Access to issue additional shares of its common stock, there was no impact on the projected net cash and net debt positions of the combined company. The board also considered that under the terms of the PT-1 asset purchase agreement, Counsel is expected to become a significant long-term customer of the combined company. 45 59 THE WORLD ACCESS BOARD OF DIRECTORS' RECOMMENDATION THAT STOCKHOLDERS APPROVE THE STAR MERGER The World Access board of directors considered the advisability of the STAR merger and believes that the terms of the STAR merger agreement and the transactions contemplated by the STAR merger agreement are fair to and in the best interests of the stockholders of World Access. The World Access board of directors has unanimously approved the STAR merger agreement and the transactions contemplated by the STAR merger agreement. The World Access board of directors unanimously recommends that the stockholders of World Access vote for the approval and adoption of the STAR merger agreement and the transactions contemplated by the STAR merger agreement. STAR'S REASONS FOR THE STAR MERGER In approving the STAR merger, the STAR board of directors considered the potential benefits of the STAR merger and the risks associated with the STAR merger. All material business, financial, legal and market factors are discussed below. After due deliberation, the STAR board of directors concluded that the STAR merger was fair to and in the best interest of STAR and its stockholders based on the following material factors: The financial condition of STAR. The STAR board of directors examined the current financial condition of STAR and determined that STAR was facing significant cash restraints resulting in difficulty in meeting STAR's ongoing obligations. STAR was experiencing substantial operating losses and negative cash flow and its ability to implement its operating and business plans was severely constrained by the absence of available capital. The STAR board of directors noted that as of December 31, 1999 STAR had long term debt obligations of $94.3 million and total debt obligations of $156.4 million. The STAR board of directors also considered that STAR was unable to fund required future capital expenditures needed to expand and maintain STAR's business. STAR's management focused on minimizing losses and improving cash flow but it lacked the capital necessary to implement a business plan designed to return STAR to profitability. The STAR board of directors considered that all of these factors and STAR's debt obligations created a substantial risk of insolvency and the need to seek bankruptcy protection. On June 6, 2000, the STAR board of directors determined that the financial condition of STAR required STAR to amend the STAR merger agreement to reduce the exchange ratio without seeking an updated fairness opinion from Deutsche Bank. Lack of financing alternatives. During the first quarter of 1999, STAR began to explore financing alternatives. The STAR board of directors engaged financial advisors to examine STAR's options with respect to sources of financing, including equity and debt financing. The STAR board of directors determined that the necessary financing would not be available or would not be available on acceptable terms. The potential cost savings and synergies. The STAR board of directors considered the potential cost savings and synergies that World Access and STAR would achieve through the STAR merger. The STAR board of directors reviewed a number of financial analyses prepared by World Access that estimated a range of cost savings achievable through the STAR merger. World Access estimated annual gross margin improvement for the combined company in excess of $10.0 million and annual cost savings in excess of $35.0 million. The STAR board of directors determined that the World Access estimates were realistic and that based on the World Access analyses and their own business judgment, the cost savings would be substantial. The STAR board of directors considered the following material potential cost savings and synergies that would be achieved through the STAR merger: - the combined technical operations would create a more efficient communications network than STAR's and World Access' networks on a stand-alone basis; - the combined company would have a geographically broader, more diverse network and savings could be achieved through the elimination of overlapping networks; and - STAR could combine its network monitoring operations with those of World Access, which would generate cost savings. 46 60 Diversified geographic market position. The STAR board of directors considered that World Access' network coverage would complement STAR's existing coverage. The STAR board of directors considered that STAR would obtain a broader European presence through the combination of STAR's network assets and licenses in Germany with World Access' existing operations. Diversified product and service offering. The STAR board of directors considered that the combined company would be in a position to offer a broader array of services and products than STAR could individually. STAR was facing declining profit margins in the wholesale business and STAR's efforts to enter the retail market were encountering difficulty, in part due to capital constraints. The combination with World Access would provide STAR with an increased presence in foreign markets, expanded use of Internet based technologies and expansion opportunities in selected retail markets, which the STAR board of directors believed would increase stockholder value. Enhanced Management Strength. The STAR board of directors considered that the STAR merger would strengthen STAR's management team by providing additional financial and technical expertise. The STAR board of directors noted that STAR was facing difficulty filling key managerial positions and determined that the STAR merger would obviate the need to fill key management positions and would improve STAR's ability to recruit key personnel. General decline in the stock prices of public telecommunications companies. On June 6, 2000, the STAR board of directors reconsidered the fairness of the STAR merger in light of a recent renegotiation of the exchange ratio. The STAR board of directors determined that the volatility in the price of World Access' stock since the execution of the STAR merger agreement did not adversely affect the fairness of the STAR merger because the telecommunications industry in general had experienced a decline in stock prices since February 11, 2000. The STAR board of directors also considered the following material risks associated with completing the STAR merger, but concluded that the advantages of the STAR merger far outweighed these risks: - the possibility that World Access would be unable to complete the STAR merger and the WorldxChange merger simultaneously; - the risk that World Access would be unable to effectively integrate the technical operations and management of STAR, WorldxChange and TelDaFax, or to effectively integrate future acquisitions considering the announced intention of World Access to make acquisitions; - the risk that World Access might not have sufficient funds available to finance the combined companies, though the STAR board of directors considered that at the time of its approval of the STAR merger, World Access had significant capital resources; - the risk that World Access' stock price would continue to decline and therefore provide less consideration to STAR's stockholders; - the likelihood that an updated fairness opinion in connection with the amendment of the STAR merger agreement would not materially develop the information available to the STAR board of directors; - the risk that STAR's financial condition and cash flow situation would continue to deteriorate and require the STAR board of directors to act quickly to avoid insolvency and the need to seek bankruptcy protection; and - overall risks inherent in the highly competitive telecommunications industry, but the STAR board of directors considered that the combined companies would be better able to withstand and respond to competitive risks. The above discussion of the information and factors considered by the STAR board of directors sets forth the material factors considered by the STAR board of directors. The STAR board of directors considered many factors when evaluating the STAR merger agreement and the STAR merger. The STAR board of directors did not quantify, rank or attempt to assign relative weights to the factors considered in 47 61 reaching its determination. In addition, the STAR board of directors conducted an overall analysis of the above factors, including a thorough discussion with and questioning of STAR's management. The STAR board of directors also considered management's analysis of the STAR merger based on information received from STAR's legal, financial and accounting advisors. The STAR board of directors considered all these factors as a whole, and considered the factors overall to be favorable to and to support its determination. THE STAR BOARD OF DIRECTORS' RECOMMENDATION THAT STOCKHOLDERS APPROVE THE STAR MERGER The STAR board of directors carefully considered the advisability of the STAR merger and believes that the terms of the STAR merger agreement and the transactions contemplated by the STAR merger agreement are fair to and in the best interests of the stockholders of STAR. The STAR board of directors approved the STAR merger agreement and the transactions contemplated by the STAR merger agreement. The STAR board of directors recommends that the stockholders of STAR vote for the approval and adoption of the STAR merger agreement and the transactions contemplated by the STAR merger agreement. OPINION OF WORLD ACCESS' FINANCIAL ADVISOR REGARDING THE STAR MERGER World Access asked Donaldson, Lufkin & Jenrette Securities Corporation in its role as financial advisor, to render an opinion to the World Access board as to the fairness, from a financial point of view, to World Access of the consideration to be paid by World Access. On February 11, 2000, Donaldson, Lufkin & Jenrette rendered an oral opinion to World Access' board of directors, which was subsequently confirmed in writing as of the same date, to the effect that, as of the date of the opinion, and based upon and subject to the assumptions, limitations and qualifications set forth in the written opinion, the consideration to be paid by World Access pursuant to the STAR merger agreement was fair to World Access, from a financial point of view. The full text of Donaldson, Lufkin & Jenrette's opinion is attached as Annex C to this joint proxy statement/prospectus. Donaldson, Lufkin & Jenrette's fairness opinion was delivered to the World Access board on February 11, 2000 and relates to the fairness of the STAR merger as of that date. Some of the assumptions relied upon by Donaldson, Lufkin & Jenrette in preparing the analyses described below and in rendering its opinion have changed since Donaldson, Lufkin & Jenrette was asked to deliver its opinion. The following sets forth a summary of such changes: - Donaldson, Lufkin & Jenrette assumed an exchange ratio of 0.3905 shares of World Access common stock for each share of STAR common stock based on net cash proceeds from the sale of PT-1 of $150.0 million as compared to revised exchange ratio of 0.386595 and assumed net cash proceeds of $120.0 million. - Certain assumptions underlying the projections for World Access and STAR have been revised to reflect lower carrier revenues for both World Access and STAR due to a reduction in the number of carrier customers resulting from a strengthened credit policy implemented by World Access as well as lower organic growth in retail revenues for STAR due to a greater focus on World Access' European retail acquisition strategy, which seeks to increase retail revenues through acquisitions. - The market prices of shares of World Access common stock and STAR common stock have decreased significantly since Donaldson, Lufkin & Jenrette rendered its opinion. The closing price per share of the World Access common stock on February 9, 2000, the price Donaldson, Lufkin & Jenrette used in its analyses, and the closing price on October 5, 2000 were $22.88 and $5.25, respectively. World Access has not asked, and does not intend to ask, Donaldson, Lufkin & Jenrette for a new or updated fairness opinion and Donaldson, Lufkin & Jenrette has not been asked to update the analyses described above and is not opining as to the fairness of the STAR merger as of any date subsequent to the date of its opinion. 48 62 Donaldson, Lufkin & Jenrette expressed no opinion as to the prices at which STAR common stock or World Access common stock would actually trade at any time. Donaldson, Lufkin & Jenrette's opinion did not address the relative merits of the STAR merger and the other business strategies considered by the World Access board of directors nor did it address the decision of the World Access board of directors to proceed with the STAR merger. Donaldson, Lufkin & Jenrette's opinion did not constitute a recommendation to any World Access stockholder as to how a stockholder should vote on the STAR merger. World Access and STAR determined the consideration to be paid by World Access in arm's length negotiations, in which Donaldson, Lufkin & Jenrette advised World Access. World Access selected Donaldson, Lufkin & Jenrette as its financial advisor because Donaldson, Lufkin & Jenrette is an internationally recognized investment banking firm that has substantial experience providing strategic advisory services. Donaldson, Lufkin & Jenrette was not retained as an advisor or agent to the stockholders of World Access or any other person. As part of its investment banking business, Donaldson, Lufkin & Jenrette is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. World Access did not impose any restrictions or limitations upon Donaldson, Lufkin & Jenrette with respect to the investigations made or the procedures followed by Donaldson, Lufkin & Jenrette in rendering its opinion. In arriving at its opinion, Donaldson, Lufkin & Jenrette: - reviewed the draft dated February 26, 2000 of the merger agreement and assumed the final form of that agreement would not vary in any respect material to Donaldson, Lufkin & Jenrette's analysis; - reviewed financial and other information that was publicly available or furnished to it by World Access and STAR, including information provided during discussions with their respective managements, which included financial projections of each of World Access and STAR that were prepared by World Access' management; - compared financial and securities data of World Access and STAR with various other companies whose securities are traded in public markets; - reviewed the historical stock prices and trading volumes of the common stock of World Access and STAR; - reviewed prices paid in selected other business combinations; and - conducted other financial studies, analyses and investigations as Donaldson, Lufkin & Jenrette deemed appropriate for purposes of rendering its opinion. In rendering its opinion, Donaldson, Lufkin & Jenrette relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to it from public sources, that was provided to it by World Access and STAR or their respective representatives, or that was otherwise reviewed by it. Donaldson, Lufkin & Jenrette relied upon the estimates of the management of World Access of the operating synergies achievable as a result of the STAR merger. Donaldson, Lufkin & Jenrette also assumed that the financial projections of World Access and STAR supplied to it were reasonably prepared on the basis reflecting the best currently available estimates and judgments of the management of World Access as to the future operating and financial performance of World Access and STAR. In addition, Donaldson, Lufkin & Jenrette relied upon and assumed net cash proceeds of $150.0 million from the sale of PT-1 by STAR. Donaldson, Lufkin & Jenrette expressed no opinion with respect to these forecasts or the assumptions on which they were based. Donaldson, Lufkin & Jenrette did not assume any responsibility for making any independent evaluation or appraisal of the assets or liabilities of World Access or for making any independent verification of any of the information reviewed by Donaldson, Lufkin & Jenrette. Donaldson, Lufkin & Jenrette also did not assume any responsibility for making any independent investigation of any legal matters affecting World Access or STAR and assumed the correctness of all legal advice given to each of them and to World Access' board of directors, including 49 63 advice as to the tax consequences of the STAR merger. Donaldson, Lufkin & Jenrette assumed that the STAR merger would be accounted for as a purchase under generally accepted accounting principles and that it would qualify as a tax-free reorganization for U.S. federal income tax purposes. Donaldson, Lufkin & Jenrette's opinion is necessarily based upon economic, market, financial and other conditions as they existed on, and on information available to Donaldson, Lufkin & Jenrette as of, the date of its opinion. Donaldson, Lufkin & Jenrette states in its opinion that, although subsequent developments may affect its opinion, Donaldson, Lufkin & Jenrette does not have any obligation to update, revise or reaffirm its opinion. SUMMARY OF FINANCIAL ANALYSES PERFORMED BY DONALDSON, LUFKIN & JENRETTE The following is a summary of the financial analyses Donaldson, Lufkin & Jenrette presented to the World Access board of directors on February 11, 2000 in connection with the preparation of Donaldson, Lufkin & Jenrette's opinion. No company or transaction Donaldson, Lufkin & Jenrette used in the analyses described below is directly comparable to World Access, STAR or to the STAR merger. In addition, mathematical analysis such as determining the mean or median is not in itself a meaningful method of using selected company or transaction data. The analyses Donaldson, Lufkin & Jenrette performed are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. The information summarized in the tables which follow should be read in conjunction with the accompanying text. For purposes of the following analyses, Donaldson, Lufkin & Jenrette (i) used the February 9, 2000 closing price of the World Access common stock of $22.88 per share and (ii) assumed net cash proceeds of $150.0 million from the sale by STAR of PT-1. It should be understood that Donaldson, Lufkin & Jenrette makes no prediction, and there can be no assurance, as to what the closing price of World Access common stock or the net cash proceeds from the sale of PT-1 will actually be. 1. Consideration paid analysis Donaldson, Lufkin & Jenrette reviewed the consideration to be paid by World Access under the STAR merger agreement. In reviewing the consideration to be paid by World Access, Donaldson, Lufkin & Jenrette assumed an exchange ratio of 0.3905, which represents the exchange ratio based on net cash proceeds from the sale of PT-1 of $150.0 million. 2. Comparable publicly traded company analysis Donaldson, Lufkin & Jenrette analyzed the market values and trading multiples of selected publicly traded emerging multinational carriers that Donaldson, Lufkin & Jenrette believed were reasonably comparable to STAR based on business and financial characteristics. These comparable companies consisted of: (i) IDT Corporation; (ii) Pacific Gateway Exchange, Inc.; (iii) PRIMUS Telecommunications Group, Incorporated; (iv) RSL Communications, Ltd.; and (v) Startec Global Communications Corporation.
50 64 In examining these comparable companies, Donaldson, Lufkin & Jenrette calculated the enterprise value of each company as a multiple of its respective: - last quarter annualized revenue; - projected calendar year 2000 revenue; - gross property, plant and equipment and - net property plant and equipment. The enterprise value of a company is equal to the value of its fully-diluted common equity plus debt and the liquidation value of outstanding preferred stock, if any, minus cash and the value of other assets, including minority interests in other entities. All historical data was derived from publicly available sources as of February 9, 2000 and all projected data was obtained from Wall Street research reports. Donaldson, Lufkin & Jenrette performed this analysis in order to compare the ratio of STAR's enterprise value to its last quarter annualized revenues, estimated 2000 revenues as provided by World Access, gross property, plant and equipment and net property, plant and equipment to those of the comparable companies and to the reference range, which represents a tighter range of the ratios as deemed reasonable by Donaldson, Lufkin & Jenrette. In addition, Donaldson, Lufkin & Jenrette compared the enterprise value of STAR to the implied enterprise values obtained by the above mentioned ratios of the comparable companies and the reference range and STAR's last quarter annualized revenues, estimated 2000 revenues as provided by World Access, gross property, plant and equipment and net property, plant and equipment. Donaldson, Lufkin & Jenrette's analysis of the comparable companies yielded the following multiple ranges and implied enterprise values: COMPARABLE COMPANY ANALYSIS ($ IN MILLIONS)
COMPARABLE COMPANIES REFERENCE RANGE ----------------- ------------------- STAR HIGH LOW HIGH LOW ------ -------- ------ -------- -------- Enterprise Value/Last Quarter Annualized Revenues........................................ 1.0x 2.2x 0.6x 1.7x 1.2x Enterprise Value/2000 Estimated Revenues.......... 1.1x 1.9x 0.7x 1.5x 1.0x Enterprise Value/Gross Property, Plant and Equipment....................................... 1.6x 7.5x 2.5x 4.5x 3.5x Enterprise Value/Net Property, Plant and Equipment....................................... 2.0x 8.8x 2.9x 5.5x 4.5x Implied Enterprise Value based on: Last Quarter Annualized Revenues................ $619.7 $1,311.6 $391.9 $1,035.4 $ 730.9 2000 Estimated Revenues......................... 619.7 1,052.9 370.8 828.4 552.3 Gross Property, Plant and Equipment............. 619.7 2,882.5 943.3 1,718.4 1,336.5 Net Property, Plant and Equipment............... 619.7 2,786.4 924.5 1,742.9 1,426.0
- --------------- The comparable company analysis showed that the implied multiples of World Access' consideration were either within or lower than the range of multiples implied by the prevailing market prices of the comparable companies. In addition, the analysis showed that the enterprise value based on World Access' consideration was either within or lower than the range of enterprise values implied by the multiples of the comparable companies and STAR's last quarter annualized revenues, estimated 2000 revenues, gross property, plant and equipment and net property, plant and equipment. 51 65 3. Analysis of selected merger and acquisition transactions Donaldson, Lufkin & Jenrette reviewed selected mergers and acquisitions transactions of companies that operate businesses reasonably similar to that of STAR. In addition, for purposes of this analysis, Donaldson, Lufkin & Jenrette selected key mergers and acquisitions transactions deemed most relevant by Donaldson, Lufkin & Jenrette based on the business characteristics of the acquiror and/or target and the business nature of the transaction. The following mergers and acquisitions transactions were deemed most relevant by Donaldson, Lufkin & Jenrette: - Viatel, Inc.'s acquisition of Destia Communications, Inc. - PRIMUS Telecommunications Group, Incorporated's acquisition of TresCom International, Inc. In examining these acquisitions, Donaldson, Lufkin & Jenrette calculated the enterprise value of the acquired company implied by each of these transactions as a multiple of the last twelve-month revenue, last quarter annualized revenue, and net property, plant and equipment. The last twelve-month period for which financial data for the company at issue has been reported is referred to as the last twelve-month revenue. In addition, Donaldson, Lufkin & Jenrette calculated the enterprise values implied by the above mentioned ratios of the selected mergers and acquisitions transactions and STAR's last twelve-month revenue, last quarter annualized revenue and net property, plant and equipment. Donaldson, Lufkin & Jenrette's analysis of these comparable acquisitions yielded the following multiple ranges and implied enterprise values: SELECTED MERGERS AND ACQUISITIONS TRANSACTIONS ($ IN MILLIONS)
ALL SELECTED M&A KEY SELECTED M&A TRANSACTIONS TRANSACTIONS -------------------- ------------------- STAR HIGH LOW HIGH LOW ------ --------- -------- -------- -------- Enterprise Value/Last Twelve Months Revenues... 1.1x 16.5x 1.1x 3.3x 1.1x Enterprise Value/Last Quarter Annualized Revenues..................................... 1.0x 4.0x 1.2x 2.6x 1.2x Enterprise Value/Net Property, Plant and Equipment.................................... 2.0x 42.0x 5.9x 6.2x 5.9x Implied Enterprise Value based on: Last Twelve Months Revenues.................... $619.7 $ 9,270.1 $ 622.8 $1,828.8 $ 622.8 Last Quarter Annualized Revenues............... 619.7 2,436.3 706.8 1,571.4 706.8 Net Property, Plant and Equipment.............. 619.7 13,307.0 1,876.5 1,971.8 1,876.5
The analysis of selected mergers and acquisitions transactions showed that the implied multiples of World Access' consideration were, in each case, within or lower than the range of multiples paid by the selected mergers and acquisitions transactions as well as by the key mergers and acquisitions transactions. In addition, the analysis of selected mergers and acquisitions transactions showed that the transaction value of World Access' consideration was, in each case, within or lower than the range of implied transaction values based on the multiples paid by selected mergers and acquisition transactions. 4. Discounted cash flow analysis In addition, Donaldson, Lufkin & Jenrette performed a discounted cash flow analysis for STAR on a stand-alone basis. The analysis was based upon financial projections, including synergies, for the five-year period ending fiscal 2004 as provided by the management of World Access. Donaldson, Lufkin & Jenrette performed this analysis to estimate the net present value of STAR's enterprise value and to compare it to the implied enterprise value based on World Access' consideration. Donaldson, Lufkin & Jenrette calculated EBITDA for STAR. EBITDA is earnings before interest, taxes, depreciation and amortization and other items. Donaldson, Lufkin & Jenrette calculated the terminal value of STAR at the end of the forecast period, by applying a range of estimated EBITDA multiples selected in Donaldson, Lufkin & Jenrette's subjective judgment. The terminal value estimates are a hypothetical approximation of the value of the enterprise's cash flows beyond the end of the five-year period covered by the management's projections. The management's projected EBITDA and Donaldson, Lufkin & Jenrette's subjective estimate 52 66 of the terminal values based on management's projected EBITDA were then discounted to the present using a range of discount rates selected in Donaldson, Lufkin & Jenrette's subjective judgment. DISCOUNTED CASH FLOW ANALYSIS ($ IN MILLIONS) Range of EBITDA Multiples.................... 10.0x - 12.0x Discount rates............................... 15.0% - 18.3% Implied Total Enterprise Value............... $507.6 - $662.4 STAR Enterprise Value........................ $619.7
The above analysis shows that the implied enterprise value based on World Access' consideration of $619.7 million is near the high range of the implied enterprise values of $507.6 million to $662.4 million obtained by the analysis. The summary set forth above does not purport to be a complete description of the analyses performed by Donaldson, Lufkin & Jenrette but describes the material elements of the presentation that Donaldson, Lufkin & Jenrette made to the World Access board on February 11, 2000 in connection with the preparation of Donaldson, Lufkin & Jenrette's fairness opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, an opinion is not readily susceptible to summary description. Donaldson, Lufkin & Jenrette conducted each of the analyses in order to provide a different perspective on the transaction and to add to the total mix of information available. Donaldson, Lufkin & Jenrette did not for a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to fairness from a financial point of view. Rather, in reaching its conclusion, Donaldson, Lufkin & Jenrette considered the results of the analyses in light of each other and ultimately reached its opinion based on the results of all analyses taken as a whole. Donaldson, Lufkin & Jenrette did not place any particular reliance or weight on any individual analysis, but instead concluded that its analyses, taken as a whole, supported its determination. Accordingly, notwithstanding the separate factors summarized above, Donaldson, Lufkin & Jenrette has indicated to World Access that it believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. The analyses Donaldson, Lufkin & Jenrette performed are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. Engagement letter Under the terms of an engagement letter dated January 12, 2000, World Access agreed to pay Donaldson, Lufkin & Jenrette a fee of $400,000 at the time that Donaldson, Lufkin & Jenrette delivered to the World Access board of directors its opinion, irrespective of the conclusion reached in the opinion, and to pay Donaldson, Lufkin & Jenrette a fee of $750,000, less any amounts paid pursuant to delivery of the fairness opinion, payable in cash promptly upon consummation of a business combination between World Access and STAR. In addition, World Access agreed to reimburse Donaldson, Lufkin & Jenrette for all of its out-of-pocket expenses, including the reasonable fees and expenses of counsel incurred by Donaldson, Lufkin & Jenrette in connection with its engagement, and to indemnify Donaldson, Lufkin & Jenrette for liabilities and expenses arising out of Donaldson, Lufkin & Jenrette's engagement, including liabilities under federal securities laws. The terms of the fee arrangement with Donaldson, Lufkin & Jenrette, which Donaldson, Lufkin & Jenrette and World Access believe are customary in transactions of this nature, were negotiated at arms-length between World Access and Donaldson, Lufkin & Jenrette. World Access' board of directors was aware of the arrangement, including the fact that a significant portion of the aggregate fee payable to Donaldson, Lufkin & Jenrette is contingent upon consummation of the STAR merger. 53 67 Other Relationships In the ordinary course of business, Donaldson, Lufkin & Jenrette may own or actively trade the securities of World Access and STAR for its own accounts and for the accounts of its customers and, accordingly, may at any time hold a long or short position in World Access or STAR securities. Donaldson, Lufkin & Jenrette has performed investment banking and other services for World Access in the past and has been compensated for such services, including; - acting as financial advisor to World Access in connection with its acquisition of FaciliCom International, Inc. in 1999 and acting as financial advisor in connection with the exchange offer for FaciliCom's outstanding senior notes; - acting as financial advisor in connection with the sale of World Access' Telco Systems Inc. subsidiary and World Access' Wireless Local Loop Division in 2000; and - acting as financial advisor to World Access in connection with its pending acquisitions of both WORLDxCHANGE and TelDaFax in 2000. OPINION OF STAR'S FINANCIAL ADVISOR REGARDING THE STAR MERGER Deutsche Bank Securities Inc. acted as financial advisor to the board of directors of STAR in connection with the proposed merger of World Access and STAR. At the February 7, 2000, meeting of the board of directors of STAR, Deutsche Bank delivered its oral opinion, subsequently confirmed in writing dated as of the same date, to the board of directors of STAR to the effect that, as of the date of the opinion, based upon and subject to the assumptions made, matters considered and limits of the review undertaken by Deutsche Bank, the merger consideration was fair, from a financial point of view, to STAR stockholders. The full text of Deutsche Bank's opinion is attached as Annex E to this joint proxy statement/prospectus. DEUTSCHE BANK'S FAIRNESS OPINION RELATES TO THE FAIRNESS OF THE STAR MERGER AS OF FEBRUARY 7, 2000. SOME OF THE ASSUMPTIONS RELIED UPON BY DEUTSCHE BANK IN PREPARING ITS ANALYSES AND IN RENDERING ITS OPINION HAVE CHANGED SINCE DEUTSCHE BANK WAS ASKED TO DELIVER ITS OPINION. THE FOLLOWING IS A SUMMARY OF THESE CHANGES: - DEUTSCHE BANK ASSUMED AN EXCHANGE RATIO OF 0.3905 SHARES OF WORLD ACCESS COMMON STOCK FOR EACH SHARE OF STAR COMMON STOCK BASED ON NET CASH PROCEEDS FROM THE SALE OF PT-1 OF $150.0 MILLION AS COMPARED TO A REVISED EXCHANGE RATIO OF 0.386595 AND ASSUMED NET CASH PROCEEDS OF $120.0 MILLION. - WORLD ACCESS HAS REVISED THE PROJECTIONS THAT WERE ORIGINALLY FURNISHED TO, AND RELIED UPON BY, DEUTSCHE BANK IN RENDERING ITS FAIRNESS OPINION. DEUTSCHE BANK HAS NOT BEEN ASKED TO ANALYZE, AND HAS NOT ANALYZED, ANY PROJECTIONS GENERATED BY WORLD ACCESS SINCE FEBRUARY 7, 2000. FOR A DESCRIPTION OF WORLD ACCESS' MOST RECENT FINANCIAL PROJECTIONS, PLEASE SEE PAGE OF THIS JOINT PROXY STATEMENT/PROSPECTUS. - THE MARKET PRICE OF SHARES OF STAR COMMON STOCK AND WORLD ACCESS COMMON STOCK HAVE DECREASED SIGNIFICANTLY FROM $6.41 AND $22.00 AT FEBRUARY 4, 2000 TO $1.66 AND $5.25 AT OCTOBER 5, 2000 FOR STAR AND WORLD ACCESS, RESPECTIVELY. - DEUTSCHE BANK DID NOT INCLUDE THE IMPACT OF THE WORLDXCHANGE MERGER OR THE TELDAFAX ACQUISITION BY WORLD ACCESS IN ITS EVALUATION OF THE STAR MERGER. STAR HAS NOT ASKED, AND DOES NOT INTEND TO ASK, DEUTSCHE BANK FOR A NEW OR UPDATED FAIRNESS OPINION AND DEUTSCHE BANK HAS NOT BEEN ASKED TO UPDATE THE ANALYSES DESCRIBED ABOVE AND IS NOT OPINING AS TO THE FAIRNESS OF THE STAR MERGER AS OF ANY DATE SUBSEQUENT TO THE DATE OF ITS OPINION. 54 68 In connection with Deutsche Bank's role as financial advisor to the board of directors of STAR, and in arriving at its opinion, Deutsche Bank has, among other things: - reviewed publicly available financial information and other information concerning STAR and World Access; - reviewed internal analyses and other information furnished to it by STAR and World Access; - held discussions with the members of the senior managements of STAR and World Access regarding the businesses and prospects of their respective companies and the joint prospects of the World Access/STAR combined company; - reviewed the reported prices and trading activity for the common stock of both STAR and World Access; - compared financial and stock market information for STAR and World Access with similar information for selected companies whose securities are publicly traded; - reviewed the terms of the draft STAR merger agreement, dated February 6, 2000, and assumed that the final form of the STAR merger agreement would not vary in any respect that would be material to Deutsche Bank's analysis; and - performed other studies and analyses and considered other factors as it deemed appropriate. Deutsche Bank prepared its financial analyses of the STAR merger before the merger agreement with WorldxChange was announced, the PT-1 asset sale agreement was signed, or the STAR merger agreement was amended on June 7, 2000 to reduce the exchange ratio from 0.3905 to 0.386595. Deutsche Bank did not consider the WorldxChange merger, the terms of the PT-1 asset sale agreement, or the June 7, 2000 adjustment in the exchange ratio when analyzing the fairness, from a financial point of view, of the STAR merger consideration to STAR stockholders. In preparing its opinion, Deutsche Bank did not assume responsibility for the independent verification of, and did not independently verify, any information, whether publicly available or furnished to it, concerning STAR or World Access, including, without limitation, any financial information, forecasts or projections, considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, Deutsche Bank assumed and relied upon the accuracy and completeness of all of this information. Deutsche Bank did not conduct a physical inspection of any of the properties or assets, and did not prepare or obtain any independent evaluation or appraisal of any of the assets or liabilities of STAR or World Access. With respect to the financial forecasts and projections made available to Deutsche Bank and used in its analysis, Deutsche Bank assumed that the forecasts and projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of STAR and World Access. In rendering its opinion, Deutsche Bank expressed no view as to the reasonableness of these forecasts and projections, or the assumptions on which they are based. Deutsche Bank's opinion was necessarily based upon economic, market and other conditions as in effect on, and the information made available to Deutsche Bank as of, the date of its opinion. For purposes of rendering its opinion, Deutsche Bank assumed that, in all respects material to its analysis: - the representations and warranties of STAR and World Access contained in the STAR merger agreement are true and correct; - STAR and World Access will each perform all of the covenants and agreements to be performed by it under the STAR merger agreement; - all conditions to the obligations of each of STAR and World Access to consummate the STAR merger will be satisfied without any waiver of these obligations; 55 69 - all material governmental, regulatory or other approvals and consents required in connection with the consummation of the transactions contemplated by the STAR merger agreement will be obtained; and - in connection with obtaining any necessary governmental, regulatory or other approvals and consents, or any amendments, modifications or waivers to any agreements, instruments or orders to which either STAR or World Access is a party or is subject or by which it is bound, no limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have a material adverse effect on STAR or World Access or materially reduce the contemplated benefits of the STAR merger to STAR or its stockholders. In addition, Deutsche Bank was advised by STAR, and accordingly assumed for purposes of its opinion, that the STAR merger will be treated as a tax-free reorganization for federal income tax purposes. In connection with Deutsche Bank's role as financial advisor to STAR and in arriving at its opinion, Deutsche Bank was not requested or authorized to solicit, and did not solicit, any alternative transactions to the STAR merger. The following is a summary of the material financial analyses used by Deutsche Bank in reaching its opinion and does not purport to be a complete description of the analyses performed by Deutsche Bank. The following quantitative information, to the extent it is based on market data, is based on market data as it existed at or about February 4, 2000, and is not necessarily indicative of current market conditions. Readers should understand that the order of analyses described below do not represent relative importance or weight given to these analyses by Deutsche Bank. Analysis of selected publicly traded companies. Deutsche Bank compared financial information and commonly used valuation measurements for STAR and World Access to corresponding information and measurements for three groups of publicly traded telecom services companies: a group of large capitalization competitive global carriers consisting of Global Telesystems, Energis and Teleglobe; a group of mid capitalization competitive global carriers consisting of Primus, RSL and Viatel; and a group of international long distance carriers consisting of IDT, Pacific Gateway, Startec Global and Telscape International. The financial information and valuation measurements of the selected comparable companies included, among other things: - total enterprise value, which is common equity market value plus debt and cash; - ratios of total enterprise value to sales for the last reported quarter, which was the third quarter of 1999, annualized; - ratios of total enterprise value to estimated sales for the year 2000; - ratios of total enterprise value to earnings before interest expenses, tax, depreciation and amortization, or EBITDA, for the last quarter annualized; - ratios of total enterprise value to property, plant and equipment, or property, plant and equipment, net of depreciation; and - ratios of total enterprise value to gross property, plant and equipment. The total enterprise value of a company is equal to the value of its fully-diluted common equity plus debt, cash and the liquidation value of outstanding preferred stock, if any. Last quarter, annualized revenue means the last quarter annualized for which financial data for the company at issue has been reported. In this case, the last quarter was the third quarter of 1999. To calculate the total enterprise value multiples for STAR, World Access and the selected comparable companies, Deutsche Bank used publicly available information concerning historical and projected financial performance, including published historical financial information and estimates of future financial results from published equity research analyst reports. 56 70 For each of the selected comparable companies, Deutsche Bank calculated five trading multiples: - total enterprise value to sales of the last quarter annualized; - total enterprise value to 2000 estimated sales; - total enterprise value to EBITDA of last quarter annualized; - total enterprise value to property, plant and equipment net of depreciation; and - total enterprise value to gross property, plant and equipment. This analysis indicated the following medians and means:
TOTAL TOTAL TOTAL ENTERPRISE ENTERPRISE TOTAL ENTERPRISE VALUE/ VALUE/ ENTERPRISE VALUE/ LAST TOTAL LAST VALUE/ GROSS QUARTER ENTERPRISE QUARTER NET PROPERTY, PROPERTY, ANNUALIZED VALUE/ ANNUALIZED PLANT AND PLANT AND COMPANY OR GROUP OF COMPANIES SALES 2000E SALES EBITDA EQUIPMENT EQUIPMENT - ----------------------------- ---------- ------------ ------------- ------------- -------------- Big Cap Competitive Global Carrier range:............................ 4.8x-29.1x 4.1x-18.8x 42.9x(1) 8.5x-18.6x 7.1x(2) median:........................... 8.4x 5.8x 42.9x 12.0x 7.1x mean:............................. 14.1x 9.6x 42.9x 13.0x 7.1x Mid Cap Competitive Global Carrier range:............................ 1.5x-7.8x 1.1x-4.5x NM (3) 3.5x-7.7x 3.2x-6.6x median:........................... 1.9x 1.7x NM 5.2x 4.2x mean:............................. 3.7x 2.4x NM 5.5x 4.7x International Long Distance Carrier range:............................ 0.4x-1.3x 0.4x-1.0x(4) 14.9x-24.5x(5) 2.5x-4.8x 2.3x-4.4x median:........................... 1.0x 0.5x 19.7x 3.6x 2.8x mean:............................. 0.9x 0.6x 19.7x 3.6x 3.1x IDT................................. 0.4x 0.4x 24.5x 3.8x 2.8x Pacific Gateway..................... 0.7x 0.5x 14.9x 3.4x 2.9x STAR................................ 0.6x 0.5x 52.6x 1.7x 1.5x World Access........................ 1.9x 1.5x 13.9x 8.4x 7.4x
- --------------- (1) The range, median and mean of the EBITDA multiple for the Big Cap Competitive Global Carrier group were based solely on the EBITDA multiple for Teleglobe because the EBITDA multiple was negative and therefore not meaningful for each of Global Telesystems and Energis. (2) The range, median and mean of the gross property, plant and equipment multiple were based solely on the gross property, plant and equipment multiple of Global Telesystems because the gross property, plant and equipment multiple for each of Energis and Teleglobe was not applicable. (3) The designation "NM" means "not meaningful." The range, median and mean of the EBITDA multiple for the Mid Cap Competitive Global Carrier group were not meaningful because the EBITDA for each of these companies is negative. (4) The range, median and mean of the 2000E sales multiple for the International Long Distance Carrier group was calculated excluding Telscape International because the 2000E sales multiple for Telscape International was not available. (5) The range, median and mean of the EBITDA multiple for the International Long Distance Carrier group was calculated excluding Startec Global and Telscape International because the EBITDA multiple for each of these companies was negative and therefore not meaningful. 57 71 Deutsche Bank calculated: - the implied total enterprise value of STAR on a stand alone basis; - the implied equity value of STAR on a stand alone basis; and - the implied equity value per share of STAR on a stand alone basis, in each case based on the trading multiples for the International Long Distance Carrier group. Deutsche Bank analyzed the three groups and concluded that STAR most closely resembles the International Long Distance Carrier group and, more specifically, IDT and Pacific Gateway in that group because STAR's business strategy and the market segment in which STAR operates are most similar to those two companies. Deutsche Bank deemed World Access most comparable, because of its businesses, to a range between the International Long Distance Carrier group and the Mid Cap Competitive Global Carrier Group with a closer emphasis on the International Long Distance Carrier Group. The implied total enterprise value, implied equity value and implied equity value per share for STAR, in each case based on the multiple ranges for the International Long Distance Carriers, are as follows:
TOTAL ENTERPRISE VALUE AS A MULTIPLE OF --------------------------------------------- LAST QUARTER GROSS PROPERTY, ANNUALIZED PLANT AND REVENUE 2000E REVENUE EQUIPMENT ------------- ------------- --------------- ($MM, EXCEPT PER SHARE) Comparable trading multiple range............ 0.6x-0.9x 0.5x-0.7x 2.3x-2.6x STAR......................................... $1,116.9 $1,202.5 $382.9 Implied total enterprise value............... 670.1-1,005.2 601.2-841.7 880.7-995.5 Implied equity value......................... 400.8-735.9 282.3-522.8 611.4-726.2 Implied equity value per share............... $6.60-$12.11 $4.65-$8.61 $10.06-$11.96
Deutsche Bank also calculated: - the implied total enterprise value of World Access on a stand alone basis; - the implied equity value of World Access on a stand alone basis; and - the implied equity value per share of World Access on a stand alone basis, in each case based on a comparable trading multiple range Deutsche Bank deemed appropriate from the multiples of the three categories of Selected Comparable Companies. The implied total enterprise value, implied equity value and implied equity value per share for World Access, in each case based on the multiple ranges Deutsche Bank deemed appropriate, are as follows:
TOTAL ENTERPRISE VALUE AS A MULTIPLE OF ---------------------------------------- LAST QUARTER ANNUALIZED REVENUE 2000E REVENUE ------------------- ------------------- ($MM, EXCEPT PER SHARE) Comparable trading multiple........................... 1.3x-1.6x 1.1x-1.4x World Access Telecom Group............................ $1,106.8 $1,333.3 Implied total enterprise value........................ 1,438.8-1,770.9 1,466.7-1,866.7 Implied equity value.................................. 1,510.3-1,842.4 1,483.0-1,883.0 Implied equity value per share........................ $16.50-$20.13 $16.20-$20.57
The gross property, plant and equipment for World Access (pro forma for its previously announced acquisitions and divestitures) was not provided to Deutsche Bank and therefore Deutsche Bank did not calculate total enterprise value as a multiple of the gross property, plant and equipment. The preceding analysis shows that the ranges of per share implied equity values in the preceding analysis for STAR and for World Access are not materially inconsistent with the per share trading value of 58 72 STAR and World Access common stock before the February 7, 2000 meeting of STAR's board of directors. On February 4, 2000, STAR's stock closed at $6.41 and World Access' stock closed at $22.00. None of the companies utilized as a comparison are identical to STAR or World Access. Accordingly, Deutsche Bank believes the analysis of the publicly traded comparable companies is not simply mathematical. Rather, it involves complex considerations and qualitative judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public trading value of the comparable companies. Contribution analysis. Deutsche Bank analyzed the relative contributions of STAR and World Access to the estimated pro forma income statement and balance sheet of the combined company. This analysis was based on the estimated 2000 figures and showed that on a pro forma combined basis, excluding the effect of any synergies that may be realized as a result of the STAR merger and non- recurring expenses relating to the STAR merger, the following:
COMBINED COMBINED COMPANY'S COMPANY'S COMBINED PRO FORMA GROSS COMPANY'S TOTAL REVENUES PROFIT EBITDA -------------- --------- --------- World Access........................................ 52.6% 47.7% 108.2% STAR................................................ 47.4% 52.3% (8.2%)
These percentage contributions may be compared with the percentage of World Access shares to be owned following the STAR merger, without giving effect to the WorldxChange merger or the June 7, 2000 adjustment of the exchange ratio, by former STAR stockholders and by the stockholders of World Access before the STAR merger of 20.6% and 79.4%, respectively, and approximately 28.9% and 71.1%, respectively, of the combined company's total enterprise value, based on the closing price of World Access stock of $22.00 on February 4, 2000 and on the assumptions that there will be no increase in the STAR merger consideration as a result of the sale of PT-1 and that all of the merger consideration will be paid in stock. The contribution analysis shows that the percentage of World Access shares to be owned by the former STAR holders is substantially higher than STAR's contribution to the combined companies' EBITDA, but less than STAR's contribution to the combined companies' revenues and gross profits. Discounted cash flow analysis. Deutsche Bank performed a discounted cash flow analysis for both World Access and STAR. Deutsche Bank calculated the discounted cash flow values for each of World Access and STAR as the sum of the net present values of: - the estimated future cash flow that World Access or STAR, as the case may be, will generate for the years 2000 through 2004, plus - the value of World Access or STAR at the end of the period. The total enterprise values, equity values and equity values per share for STAR were based on the financial projections for STAR for the years 2000 through 2004 prepared by STAR's management. The discounted cash flow analysis of STAR management's projections assumes ranges of discount rates of 14% to 16% and 2004 estimated EBITDA exit multiples of 9x to 11x. The total enterprise values, equity values and equity values per share for World Access were based on the financial projections for World Access for the years 2000 through 2004 prepared by World Access' management. The discounted cash flow analysis of World Access management's projections assumes ranges of discount rates of 12% to 14% and 2004 estimated EBITDA exit multiples of 11x to 13x. For the combined company, Deutsche Bank used the same discounted cash flow methodology as for the discounted cash flow analyses of STAR and World Access on a stand alone basis and assumed the same ranges of discount rates and 2004 estimated exit 59 73 multiples as World Access on a stand alone basis. Projections for the combined company included assumed synergies and transaction expenses. This analysis indicated:
COMBINED STAR WORLD ACCESS COMPANY ---- ------------ -------- Discount Rate Range................ 14-16% 12-14% 12-14% 2004E EBITDA Exit Multiple Range... 9x-11x 11x-13x 11x-13x Total enterprise value............. $490-$658 million $1.3-$1.6 billion $2.6-$3.2 billion Equity Value....................... $221-$389 million $1.4-$1.7 billion $2.4-3.0 billion Equity Value Per Share............. $3.63-$6.41 $14.97-$18.71 $20.45-$26.35
The preceding analysis indicates equity values per share for STAR and World Access stock that are generally consistent with the closing prices for shares of the two companies on February 4, 2000, which was $6.41 for STAR and $22.00 for World Access. The exchange ratio in the merger agreement approved by the STAR board of directors on February 7, 2000, which was .3905, is more favorable to STAR stockholders than the exchange ratio indicated by the February 4, closing prices for the two companies' shares, which was .2914. Pro forma financial effects analysis. Deutsche Bank analyzed pro forma effects of the STAR merger. Based on the analysis, Deutsche Bank computed the share price, revenues per share and total debt per share for STAR stockholders pre-transaction, for stockholders of the combined company and the STAR equivalent post-transaction, based on management's 2000 estimates, after taking into account the potential cost savings and other synergies identified by management that STAR and World Access could achieve if the STAR merger was consummated and after non-recurring costs relating to the STAR merger, and assuming the exchange ratio is 0.3905 and also assuming that the entire consideration is stock. Deutsche Bank calculated the following pro forma effects of the STAR merger, after taking into account the potential cost savings and other synergies and after non-recurring costs:
STAR 2000E STAR PRE- COMBINED EQUIVALENT TRANSACTION COMPANY POST-TRANSACTION ----------- -------- ---------------- Revenues per share.................................. $19.80 $22.00 $8.59 EBITDA per share.................................... (0.08) 1.03 0.40 Earnings before interest and taxes or EBIT per share............................................. (0.92) (0.09) (0.04) Total debt per share................................ 5.25 4.99 1.95 Total book value per share.......................... 3.87 10.15 3.96
This analysis shows that, based on management's 2000 estimates, the STAR-World Access merger (without giving effect to the WorldxChange merger or the June 7, 2000 adjustment in the exchange ratio), on a pro forma basis per STAR share equivalent, would increase EBITDA, EBIT and book value and reduce debt, but would reduce revenues. Premiums analysis. Deutsche Bank conducted a premiums analysis, comparing the World Access/STAR transaction to the median and mean of 27 telecom transactions, completed or pending, greater than $100 million and less than $2 billion for the period of May 1, 1997 to February 4, 2000 and to the median and mean of 124 general transactions, completed or pending, greater than $250 million and less than $1 billion that resulted in a controlling stake for the period of January 1, 1999 to February 4, 2000. The premiums analysis was conducted one day prior to announcement date, one week prior to announcement date and four weeks prior to announcement date. The premium to STAR's share price was calculated using the original announcement date of the execution of the letter of intent of December 20, 1999, to 60 74 enter into the STAR merger and an exchange ratio of 0.3905 World Access share per STAR share. This analysis indicated:
MEDIAN AND MEAN PREMIUMS -------------------------------------------------------- 1 DAY PRIOR TO ANN. 1 WEEK PRIOR TO 4 WEEKS PRIOR TO PERIOD DATE ANN. DATE ANN. DATE - ------ ------------------- --------------- ---------------- Telecom transactions (27 transactions) Median................................... 21.3% 25.4% 28.7% Mean..................................... 23.8 29.7 41.1 General transactions (124 transactions) Median................................... 27.8 36.1 46.5 Mean..................................... 31.0 40.7 63.0 World Access/STAR.......................... 25.0 9.5 27.3
This premium analysis permits a comparison between the premium over STAR's share price, based on the market price of World Access and STAR shares at the times shown, with the premiums involved at comparable times in other transactions. Other considerations and analyses. In connection with its opinion Deutsche Bank also considered, among other things: - telecom equipment company trading and transaction comparables to corroborate World Access' statement that it will be able to sell its Equipment Division for $525 to $600 million, - the amounts of STAR shares that have traded at different price levels, and - precedent telecom services transactions. Because many of the precedent transactions occurred in market conditions for international long distance companies that differed from market conditions at the time the financial analyses were conducted and/or because business mix or other factors made the targets in the precedent transactions non-comparable to STAR, while Deutsche Bank reviewed precedent telecom services transactions, it did not rely on a precedent transactions analysis. Deutsche Bank also considered historical exchange ratios of World Access and STAR based on historical trading prices for the two companies' shares. From August 1999 through the beginning of February 2000, the historical exchange ratios were generally similar to the exchange ratio of .3905 in the original merger agreement. The historical exchange ratios were higher before August 1999, but Deutsche Bank viewed these exchange ratios as less relevant, since World Access was in the process of transforming itself from an equipment provider to a service provider. World Access' stock prices changed in response to the acquisitions and divestitures World Access was involved in to facilitate this shift in business strategy. The foregoing summary describes analyses that Deutsche Bank deemed material in its presentation to the STAR board of directors, but it is not a comprehensive description of all analyses performed by Deutsche Bank in connection with preparing its opinion. The preparation of a fairness opinion is a complex process involving the application of subjective business judgment in determining the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, is not readily susceptible to summary description. Deutsche Bank believes that its analyses must be considered as a whole and that considering any portion of the analyses and of the factors considered without considering all analyses and factors could create a misleading view of the process underlying the opinion. In arriving at its fairness determination, Deutsche Bank did not assign specific weights to any particular analyses. In conducting its analyses and arriving at its opinions, Deutsche Bank utilized a variety of generally accepted valuation methods. The analyses were prepared solely for the purpose of enabling Deutsche Bank to provide its opinion to the board of directors of STAR as to the fairness to STAR stockholders, from a financial point of view, of the merger consideration and do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold, which are inherently subject to 61 75 uncertainty. In connection with its analyses, Deutsche Bank made, and was provided by STAR's management with, numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond STAR's or World Access' control. Analyses based on estimates or forecasts of future results are not necessarily indicative of actual past or future values or results, which may be significantly more or less favorable than suggested by the analyses. Because the analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of STAR, World Access or their respective advisors, neither STAR nor Deutsche Bank nor any other person assumes responsibility if future results or actual values are materially different from these forecasts or assumptions. The terms of the STAR merger were determined through negotiations between STAR and World Access and were approved by the STAR board of directors. Although Deutsche Bank provided advice to the STAR board of directors as to the fairness of the merger consideration to the stockholders of STAR, from a financial point of view, the decision to enter into the STAR merger was solely that of the STAR board of directors. The opinion of Deutsche Bank was only one of a number of factors taken into consideration by the STAR board of directors in making its determination to approve the STAR merger. Deutsche Bank's opinion was provided to the STAR board of directors to assist it in connection with its consideration of the STAR merger and does not constitute a recommendation to any holder of STAR common stock as to how to vote with respect to the STAR merger. The STAR board of directors selected Deutsche Bank as financial advisor in connection with the STAR merger based on Deutsche Bank's qualifications, expertise, reputation and experience in mergers and acquisitions. STAR has retained Deutsche Bank pursuant to an engagement letter dated January 25, 2000. As compensation for Deutsche Bank's services in connection with the STAR merger, a cash fee of $250,000 became payable by STAR to Deutsche Bank upon signing and STAR will pay Deutsche Bank an additional $1,050,000 upon consummation of the STAR merger. Regardless of whether the STAR merger is consummated, STAR has agreed to reimburse Deutsche Bank for reasonable fees and disbursements of Deutsche Bank's counsel and all of Deutsche Bank's reasonable travel and other out-of-pocket expenses incurred in connection with the STAR merger or otherwise arising out of the retention of Deutsche Bank under the engagement letter. STAR has also agreed to indemnify Deutsche Bank and related persons to the full extent lawful against liabilities, including liabilities under the federal securities laws that may arise out of its engagement or the STAR merger. Deutsche Bank is an internationally recognized investment banking firm experienced in providing advice in connection with mergers and acquisitions and related transactions. It is an affiliate of Deutsche Bank AG (together with its affiliates, the DB Group). One or more members of the DB Group have, from time to time, provided investment banking, commercial banking, including extension of credit, other financial services to STAR and World Access or their respective affiliates for which it has received compensation. In the ordinary course of business, members of the DB Group may actively trade in the securities and other instruments and obligations of STAR and World Access for their own accounts and for the accounts of their customers. Accordingly, the DB Group may at any time hold a long or short position in these securities, instruments and obligations. CONSIDERATION THAT STAR STOCKHOLDERS WILL RECEIVE IN THE STAR MERGER Upon completion of the STAR merger, each outstanding share of STAR common stock will be automatically canceled and converted into the right to receive one of two forms of merger consideration to be determined by World Access. - Under the first form of STAR merger consideration, each STAR stockholder will be entitled to receive, for each share of STAR common stock, 0.386595 shares of World Access common stock, subject to upward adjustment if STAR sells PT-1 prior to the completion of the STAR merger for net cash proceeds in excess of $150.0 million. World Access and STAR expect PT-1 to be sold to Counsel and accordingly, view any upside adjustment as unlikely. STAR stockholders will receive cash in lieu of any fractional shares based on the average of the daily closing price for a share of 62 76 World Access common stock on the Nasdaq National Market for the ten consecutive trading days ending at the close of trading on the date the STAR merger becomes effective. Please see page 2 for a table summarizing the consideration that STAR stockholders will receive under the first form of STAR merger consideration. - Under the second form of STAR merger consideration, each STAR stockholder will be entitled to receive, for each share of STAR common stock, substantially the equivalent total value as that paid in the first form of consideration. However, under the second form, each STAR stockholder will receive up to 40% of the consideration in cash based on the average closing price of World Access common stock on the Nasdaq National Market for the ten trading day period ending at the close of trading on the trading day immediately preceding the close of the STAR merger and the remainder in World Access common stock. If World Access selects the second form of consideration, each STAR stockholder will receive the same percentages of stock and cash as other STAR stockholders. The following table summarizes the consideration that STAR stockholders will receive under the second form of STAR merger consideration, assuming that World Access elects to pay 60% of the STAR merger consideration in World Access stock and 40% in cash:
SHARES OF SHARES OF VALUE OF VALUE VALUE OF WORLD ACCESS STAR WORLD ACCESS WORLD ACCESS CASH TOTAL PER COMMON STOCK OWNED RECEIVED STOCK RECEIVED VALUE STAR SHARE - --------------------- --------- ------------ ------------ -------- ------- ---------- $ 4.00 100 23 $ 92.00 $ 62.64 $154.64 $1.55 5.00 100 23 115.00 78.30 193.30 1.93 6.00 100 23 138.00 93.96 231.96 2.32 7.00 100 23 161.00 109.62 270.62 2.71 8.00 100 23 184.00 125.28 309.28 3.09 9.00 100 23 207.00 140.94 347.94 3.48
Although World Access believes it has adequate cash reserves to support current working capital requirements and business plans for at least the next 12 months, including the integration of STAR, WorldxChange and TelDaFax, World Access intends to pay 100% of the STAR merger consideration through the issuance of World Access common stock. World Access feels that the number one reason for failure by companies operating in its business segment is the lack of sufficient cash to operate and grow telecommunications businesses. World Access is also aware that the ability for telecommunications companies to raise new capital has become increasingly difficult during the past year. For these reasons, World Access intends to use World Access common stock as consideration in the STAR merger even if the prices of World Access and STAR common stock were to fall below their current trading levels. STAR has entered into an agreement to sell the assets of PT-1 to Counsel for $150.0 million in cash, subject to a net assets purchase price adjustment. Under the STAR merger agreement, STAR is required to sell PT-1 for net cash proceeds of at least $120.0 million if the assets of PT-1 are sold to Counsel. Net cash proceeds means the cash proceeds received by STAR at the consummation of the PT-1 asset sale, net of all taxes, fees, expenses and costs incurred in connection with the PT-1 asset sale. The net cash proceeds expected to be received from the sale of PT-1 to Counsel are estimated as follows (in thousands): Gross purchase price........................ $150,000 Net assets adjustment....................... (8,000) Fees and expenses........................... (2,100) STAR income taxes........................... (19,000) Other costs................................. (900) -------- $120,000 ========
The gross PT-1 purchase price will be adjusted upward or downward to the extent the net assets of PT-1 as of the closing date differ from the net assets of PT-1 as of December 31, 1999. World Access and STAR currently estimate that the net assets of PT-1 will be approximately $8.0 million lower on the 63 77 closing date. The sale of PT-1 is expected to result in an income tax liability of approximately $19.0 million for STAR. This liability will be assumed by World Access in connection with the STAR merger. If STAR completes the PT-1 asset sale with Counsel, STAR will not receive net cash proceeds in excess of $150.0 million. Therefore, STAR stockholders will receive 0.386595 shares of World Access common stock for each share of STAR common stock if the PT-1 asset sale is completed. If STAR sells PT-1 to another purchaser for net cash proceeds in excess of $150.0 million, the net cash proceeds in excess of $150.0 million that STAR receives at the consummation of the sale of PT-1 will be divided by 62,856,702 and added to the exchange ratio. No fractional shares of World Access common stock will be issued in connection with the STAR merger. Instead, STAR stockholders will receive cash, without interest, instead of a fractional share of World Access common stock. Shares of STAR common stock for which dissenters' rights of appraisal, if available, have been perfected in accordance with Delaware law will not be entitled to receive the merger consideration described above. Upon completion of the STAR merger, each outstanding STAR stock option or warrant will be automatically converted into an option to purchase the number of shares of World Access common stock as is equal to the number of shares of STAR common stock covered under the STAR stock option or warrant multiplied by the exchange ratio at a per share price equal to the exercise price specified in the STAR stock option or warrant divided by the exchange ratio. The amount of World Access common stock each STAR stock option or warrant will be convertible into is subject to upward adjustment if STAR sells PT-1 before the completion of the STAR merger for net cash proceeds in excess of $150.0 million. Each newly issued World Access stock option will contain terms which are substantially similar to the terms governing the original STAR stock option or warrant. COMPLETION OF THE STAR MERGER The completion of the STAR merger will occur two business days after the conditions to completion are satisfied or waived or at a later time agreed to by World Access and STAR. The STAR merger will be effective at the time that the certificate of merger is filed unless World Access and STAR specify a later effective time in the certificate of merger. MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE STAR MERGER The following discussion summarizes the material federal income tax consequences of the STAR merger. The following discussion is not a complete analysis of all aspects of federal income taxation that may be relevant to you as a STAR stockholder in light of your particular circumstances. For example, it does not address the federal income tax considerations or the special tax rules that may be relevant to you if you are one of the following types of holders: - an insurance company; - a tax-exempt organization; - an employee stock ownership plan; - a bank; - a broker, dealer or financial institution; - a holder that holds STAR common stock as part of a position in a "straddle" or as part of a "hedging" or "conversion" transaction for federal income tax purposes; - a holder that has a "functional currency" other than the United States dollar; - a holder subject to the alternative minimum tax; 64 78 - a holder that is not a citizen or resident of the United States, or that is a foreign corporation, foreign partnership or foreign estate or trust as to the United States; - a holder who acquired shares of STAR common stock pursuant to the exercise of options or otherwise as compensation or through a tax-qualified retirement plan; or - a holder of options to acquire shares of STAR common stock. In addition, the discussion does not consider the effect of any foreign, state, local, or other tax laws, or any tax consequences, such as estate or gift tax, other than the federal income tax consequences of the STAR merger that may be applicable to STAR stockholders, or the consequences of transactions completed before or after the STAR merger. Further, this discussion assumes that as a STAR stockholder, you hold your STAR common stock as a "capital asset" within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended. Generally, a capital asset is property held for investment. This discussion is based on the Internal Revenue Code and final, temporary and proposed treasury regulations promulgated under the Internal Revenue Code, administrative pronouncements and rulings, and judicial decisions as of the date of this joint proxy statement/prospectus, all of which are subject to change or differing interpretations at any time with possible retroactive effect and any such change could affect the continuity and validity of this discussion. We have not requested a ruling from the Internal Revenue Service with respect to the federal income tax consequences of the STAR merger nor is the completion of the STAR merger conditioned on the receipt by World Access or STAR of a ruling or an opinion of tax counsel concerning the tax consequences. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO YOU OF THE STAR MERGER. The STAR merger Long Aldridge & Norman LLP has rendered an opinion to World Access with respect to the material federal income tax consequences of the STAR merger. Among other opinions, counsel has opined that the STAR merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. In rendering its opinion as to status of the STAR merger as a "reorganization" and in rendering its other opinions summarized below concerning the material federal income tax consequences of the STAR merger, counsel has relied upon, and assumed that: - the STAR merger and the related transactions described in the STAR merger agreement (and all exhibits thereto) will be consummated as described in the STAR merger agreement (and all exhibits thereto) and this joint proxy statement/prospectus; - the PT-1 asset sale is consummated by STAR prior to the effective time of the STAR merger; - the respective parties to such documents and all parties referred to in such documents will act in all respects at all relevant times in conformity with the requirements and provisions of such documents; - none of the terms and conditions contained in such documents has been or will be waived or modified in any respect prior to the closing of the STAR merger; - all statements, facts and representations made in the STAR merger agreement, this joint proxy statement/prospectus and in those representations to counsel contained in certificates of their officers are true, complete and correct (without regard to any knowledge or other qualifications set forth therein and without undertaking to verify such statements, facts and representations by any independent investigation or review thereof); - all covenants contained in the STAR merger agreement (and all exhibits thereto) are performed without waiver or breach of a material provision thereof; and - other customary assumptions as to the accuracy and authenticity of documents provided to counsel. 65 79 Counsel's opinion neither binds the Internal Revenue Service nor precludes it or the courts from adopting a contrary position, and no assurance can be given that contrary positions will not be successfully asserted by the Internal Revenue Service or adopted by a court if the issues are litigated. If the Internal Revenue Service or the courts successfully challenge the status of the STAR merger as a reorganization or if any of the assumptions set forth above is inaccurate, the STAR merger may not be treated as a reorganization. If the STAR merger is not treated as a reorganization, each STAR stockholder generally will be required to recognize gain or loss equal to the difference between the sum of the fair market value of the World Access common stock and cash received in the STAR merger and such stockholder's tax basis in the STAR common stock surrendered in the STAR merger. In that case, the stockholder's tax basis in the World Access common stock received the STAR merger generally would equal the fair market value of that stock on the day of the STAR merger, and the holding period for the World Access common stock received in the STAR merger generally would begin on the day following the STAR merger. In addition, if the STAR merger is not treated as a reorganization, STAR would incur gain equal to the excess of the sum of the cash and fair market value of the World Access common stock issued in the STAR merger over the tax basis in STAR's assets. This gain, if recognized, would give rise to substantial tax liability and could have a material adverse effect on the value of STAR and its stock. The following discussion summarizes the opinions rendered by Long Aldridge & Norman LLP to World Access with respect to the material federal income tax consequences of the STAR merger. The discussion is based on the conclusion in the opinion that the STAR merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code, and that STAR completes the PT-1 asset sale prior to the STAR merger. Tax considerations for World Access stockholders World Access stockholders will not recognize any gain or loss for federal income tax purposes solely as a result of the STAR merger. Tax considerations for STAR stockholders Receipt of World Access stock in the STAR merger. You will recognize neither gain nor loss upon the exchange of your STAR common stock for World Access common stock. Your tax basis in the shares of World Access common stock you receive in the exchange will be the same as the tax basis of the shares of STAR common stock you surrender in the exchange less any portion of such basis allocable to any fractional share interest in any share of World Access common stock for which cash is received. The holding period of the World Access common stock you receive in the exchange will include the holding period during which you held your STAR common stock, provided you held the shares as a capital asset as of the effective time of the STAR merger. Receipt of World Access stock and cash. If World Access elects to pay cash, and you realize gain on the exchange of your STAR common stock for a combination of cash and World Access common stock and fractional share interests, you will be required to recognize the gain in an amount equal to the lesser of: - the amount of gain you realize on the exchange, which will be equal to the excess of the sum of the cash and the fair market value of the World Access common stock you receive over your tax basis in the STAR common stock surrendered in the exchange and - the amount of cash you receive in the exchange. If, however, you realize a loss on the exchange of your STAR common stock for a combination of cash and World Access common stock, you cannot recognize the loss. Your tax basis in the shares of World Access common stock you receive in the exchange in which you also receive cash will be the same as the tax basis of your shares of STAR common stock surrendered in the exchange, less any portion of such basis allocable to any fractional share interest in any share of World Access common stock for which cash is received, increased by the amount of any gain recognized 66 80 in the exchange, whether treated as a capital gain or a dividend as discussed below, and decreased by the amount of cash you receive. The holding period of the World Access common stock you receive in the exchange will include the holding period during which you held your STAR common stock. Character of gain recognized. The character of the gain you are required to recognize upon your receipt of cash depends on your particular facts and circumstances as a STAR stockholder. Assuming you held your STAR common stock as a capital asset, any gain recognized will be characterized as capital gain unless your receipt of cash is treated as having the effect of the distribution of a dividend under the Internal Revenue Code. To determine whether any recognized gain is capital gain or is a dividend, a hypothetical redemption is deemed to occur under which a STAR stockholder that receives a combination of cash and World Access common stock is treated as: - hypothetically receiving solely shares of World Access common stock in exchange for all of its STAR common stock, and - having a portion of its shares of World Access common stock equal in value to the cash actually received in the STAR merger redeemed by World Access. The cash you receive in the hypothetical redemption will have the effect of a distribution of a dividend to you unless the hypothetical redemption: - is "not essentially equivalent to a dividend" with respect to you or - results in a "substantially disproportionate" redemption of your equity interest in World Access, in both cases after giving effect to the constructive ownership rules of the Internal Revenue Code, which apply in determining a STAR stockholder's ownership interest in World Access immediately after the STAR merger but before the hypothetical redemption, and after the hypothetical redemption. Under those rules, a STAR stockholder is deemed to own stock held by specific family members, estates and trusts of which the shareholder is a beneficiary, a partnership in which the stockholder is a partner, and a corporation in which the stockholder is a direct or indirect 50% stockholder, as well as stock subject to options that are held by the stockholder or the entities. Because these constructive ownership rules are complex, each STAR stockholder who believes that he or she may be subject to these rules should consult his or her tax advisor. The determination of whether the hypothetical redemption is "substantially disproportionate" must be made by comparing (i) the percentage of the World Access common stock that is owned, either actually or constructively, by the STAR stockholder after the merger with (ii) the percentage of the World Access common stock that would have been owned, either actually or constructively, by the STAR stockholder if the STAR stockholder had received solely stock, and no cash, in the STAR merger. If the percentage described in clause (i) of the preceding sentence is less than 80% of the percentage described in clause (ii) of that sentence, the hypothetical redemption is considered to be "substantially disproportionate." For example, a STAR stockholder who receives a combination of cash and stock in the STAR merger and who would have owned 5% of the outstanding stock of World Access had it received solely stock in the merger, will satisfy the "substantially disproportionate" test if the stockholder owns less than 4% of the outstanding stock of World Access after the STAR merger. The hypothetical redemption will not be "essentially equivalent to a dividend" if it results in a "meaningful reduction" in the stockholder's proportionate interest in World Access. Based on a published ruling of the Internal Revenue Service, if a stockholder that is considered to have a relatively minimal interest in World Access and no right to exercise control over corporate affairs suffers a reduction in the stockholder's proportionate interest in World Access, the stockholder should be regarded as having suffered a meaningful reduction of its interest in World Access. For example, a STAR stockholder whose relative stock interest in World Access after the STAR merger is minimal (for example, an interest of less than 1%) and who exercises no control with respect to corporate affairs is considered to have a "meaningful reduction" if such stockholder is considered to experience even a very slight reduction (for example, a 67 81 reduction of as little as 3.5%) in the stockholder's percentage stock ownership in World Access by virtue of the hypothetical redemption. The determination of whether a STAR stockholder will satisfy either the "substantially disproportionate" or the "not essentially equivalent to a dividend" test will depend on such STAR stockholder's particular facts and circumstances. The "substantially disproportionate" test will be satisfied if the stockholder can comply with the objective numerical criteria described above in light of its own particular facts and circumstances. The "not essentially equivalent to a dividend" test, however, is not based on any numerical criteria; rather it is highly subjective. Generally, the receipt of cash by a STAR stockholder who does not actually or constructively own any World Access stock, other than the shares of World Access stock that are received in the merger, will satisfy those tests. However, because the consequences of the application of those tests to each STAR stockholder will vary depending on each STAR stockholder's particular facts and circumstances, there can be no assurance that any STAR stockholder can satisfy either test. As a result, Long Aldridge & Norman LLP has expressed no opinion as to whether gain recognized by a STAR stockholder who receives a combination of World Access common stock and cash in the STAR merger will be treated as capital gain or ordinary income. Each STAR stockholder should consult his or her own tax advisor as to the character of the gain. If either of these redemption tests is satisfied, then your gain will be capital gain, and will be long-term capital gain if your STAR common stock was held for more than one year as of the effective time of the STAR merger. If none of the redemption tests is satisfied, you will be treated as having received a dividend distribution in that hypothetical redemption exchange. The amount of the distribution will generally equal the amount of cash you receive, but not in excess of the gain you realize on the exchange pursuant to the STAR merger, and the amount will be treated as a dividend, and thus ordinary income, to the extent of your allocable portion of the accumulated earnings and profits, if any, as determined for federal income tax purposes of STAR. If the amount of the distribution exceeds your allocable portion of STAR's accumulated earnings and profits, then the excess will first be applied against and reduce your basis in the stock, but not below zero, and then any excess will be treated as gain from the sale or exchange of World Access common stock, and thus capital gain, and will be long-term capital gain if your STAR common stock was held for more than one year as of the effective time of the STAR merger. If the distribution is taxable as a dividend to you as a corporate stockholder, it may qualify for the "dividends received deduction;" such dividend distribution may, however, also be subject to the "extraordinary dividend" provisions of the Internal Revenue Code. Cash for fractional shares. Based on the current published ruling position of the Internal Revenue Service, you will recognize gain or loss measured by the difference between the amount of cash received and the portion of the tax basis of your STAR common stock allocable to the fractional share interest. The gain or loss will be capital gain or loss, and will be long-term capital gain if your STAR common stock was held for more than one year as of the effective time of the STAR merger. Cash received by dissenting STAR stockholders. If you exercise appraisal rights, any cash received in connection with exercising your appraisal rights will be treated as having been received in redemption of your STAR common stock, provided the payment is not treated as a dividend pursuant to the Internal Revenue Code. If, after the redemption, you own no World Access stock after giving effect to the constructive ownership rules of the Internal Revenue Code, then you will recognize gain or loss measured by the difference between the amount of cash received and the tax basis of your STAR common stock surrendered, which will be long-term capital gain or loss if your STAR common stock was held for more than one year as of the effective time of the STAR merger. Reporting requirements. When you file your federal income tax return for the taxable year in which the STAR merger occurs, you will be required to attach a statement to your return which includes information required by the Internal Revenue Service concerning your participation as a STAR stockholder in the STAR merger. ACCORDINGLY, YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR CONCERNING COMPLIANCE WITH THIS REQUIREMENT AND ANY OTHER TAX REPORTING REQUIREMENTS. 68 82 Tax considerations for the corporate parties World Access, STI Merger Co. and STAR. No gain or loss will be recognized by World Access, STI Merger Co. or STAR as a result of the STAR merger. Limitation on STAR tax attributes. Under the Internal Revenue Code, STI Merger Co. will succeed to the net operating losses, certain "recognized built-in losses," capital losses, general business credits, minimum tax credits, excess foreign tax credits and other tax attributes of STAR. Use of these tax attributes by World Access is subject to specific limitations under the Internal Revenue Code and provisions of the treasury regulations governing the filing of a consolidated federal income tax return, such as the "separate return limitation year" rules. After an ownership change, the amount of the loss corporation's taxable income for a post-ownership change year that may be offset by the loss corporation's net operating losses arising before the ownership change is annually limited to an amount referred to as the "Section 382 limitation." The Section 382 limitation generally equals the product of (i) the fair market value of the loss corporation's stock immediately before the ownership change, multiplied by (ii) the federal long-term, tax-exempt rate published monthly by the Internal Revenue Service, which is 5.41% for September 2000. STAR and its domestic subsidiaries are members of a "consolidated group" which files a consolidated federal income tax return. The STAR consolidated group, with STI Merger Co. as STAR's corporate successor, will constitute a "loss subgroup" which will undergo a Section 382 ownership change upon completion of the STAR merger. Utilization of any STAR loss subgroup's net operating loss carryover, after taking into account the PT-1 asset sale, which we refer to as the "pre-change STAR loss subgroup net operating losses," against future World Access consolidated federal taxable income will be subject to an annual loss subgroup Section 382 limitation. An additional limitation may apply under which the pre-change STAR loss subgroup net operating losses can only be used to the extent of the "qualifying separate return limitation year subgroup" members' aggregate, cumulative contribution to World Access consolidated taxable income, or the "separate return limitation year limitation." Because the STAR loss subgroup and its separate return limitation year net operating loss subgroup should be treated as co-extensive, and the Section 382 ownership change and separate return limitation year event will occur at the same time, the separate return limitation year limitation should be eliminated with respect to the STAR loss subgroup net operating losses. Notwithstanding the foregoing, it is anticipated that any net operating loss carryovers of STAR will be used to partially offset gain to be recognized by STAR from the sale of the PT-1 assets. Limitation on World Access tax attributes. World Access and its domestic subsidiaries are members of a "consolidated group" which files a consolidated federal income tax return. For its taxable year ended December 31, 1999, the World Access consolidated group incurred a consolidated net operating loss, and has a consolidated net operating loss carryover. As such, it constitutes a "loss group." World Access believes that the World Access loss group may have already incurred a Section 382 ownership change in either or both of its 1998 and 1999 taxable years. Thus, the World Access consolidated group's ability to utilize its own consolidated net operating loss carryover as of December 31, 1999 against its future consolidated federal taxable income may already be subject to an annual loss group Section 382 limitation. If the completion of either or both the STAR merger and the WorldxChange merger does result in an ownership change for the World Access loss group, the amount of the annual loss group Section 382 limitation will depend in part, on future values which cannot be predicted at this time. In the case of successive ownership changes, the applicable pre-ownership change World Access loss group or member's net operating losses will be subject to the lowest amount of Section 382 limitation which results from any of such successive ownership changes. If instead, completion of either or both the STAR merger and the WorldxChange merger does not result in an ownership change for the World Access loss group, then any existing annual loss group Section 382 limitation for World Access will simply continue to apply. 69 83 EXCHANGE OF STAR STOCK CERTIFICATES FOR WORLD ACCESS STOCK CERTIFICATES When the STAR merger is completed, World Access' exchange agent will mail a letter of transmittal and instructions to former STAR stockholders describing the procedures for surrendering STAR stock certificates in exchange for the applicable STAR merger consideration. STAR stockholders will be required to deliver their STAR stock certificates, an executed letter of transmittal and any other required documents to the exchange agent. The STAR stock certificates will be canceled, and STAR stockholders will receive the number of shares of World Access common stock and a check for any cash consideration to which they are entitled under the STAR merger agreement. STAR stockholders also will receive cash instead of fractional shares of World Access common stock that they would have otherwise received. YOU SHOULD NOT SUBMIT YOUR STAR STOCK CERTIFICATES FOR EXCHANGE UNLESS AND UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF WORLD ACCESS AND STAR The World Access common stock that will be issued in the STAR merger will be registered under the Securities Act. These shares will be freely transferable under the Securities Act, except for shares issued to any person who is an affiliate of either World Access or STAR. Affiliates include individuals or entities that control, are controlled by, or are under common control of, either World Access or STAR and may include some of their respective officers, directors and principal stockholders. Affiliates may not sell the shares of World Access common stock they acquire in the STAR merger except pursuant to: - an effective registration statement under the Securities Act covering the resale of those shares; - Rule 145 under the Securities Act, whereby an affiliate of either party to the STAR merger may resell his or her shares without having to register the shares so long as the affiliate complies with specific sale restrictions; or - any other exemption under the Securities Act. ACCOUNTING TREATMENT OF THE STAR MERGER World Access intends to account for the STAR merger as a purchase for financial reporting and accounting purposes, under United States generally accepted accounting principles. After the STAR merger, the results of operations of World Access and STAR will be included in the consolidated financial statements of World Access. The purchase price will be allocated based on the fair values of the assets acquired and the liabilities assumed. Any excess of cost over fair value of the net tangible assets of STAR acquired will be recorded as goodwill and other intangible assets and will be amortized by charges to operations under United States generally accepted accounting principles. These allocations will be made based upon valuations and other studies that have not yet been finalized. REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE STAR MERGER The STAR merger is subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Hart-Scott-Rodino Act prevents the completion of transactions until required information and materials are furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and the appropriate waiting periods end or expire. World Access and STAR have filed the required information and materials with the Antitrust Division of the Department of Justice and the Federal Trade Commission. The Department of Justice and Federal Trade Commission granted an early termination of the waiting period, effective March 16, 2000. No further action under the Hart-Scott-Rodino Act is required, as long as the STAR merger is completed prior to March 16, 2001. The Antitrust Division of the Department of Justice or the Federal Trade Commission may challenge the STAR merger on antitrust grounds either before or after expiration of the waiting period. Other persons could take action under the antitrust laws, including seeking to enjoin the STAR merger. Additionally, at any time before or after the completion of the STAR merger or the expiration of the waiting period, any state could take action under the antitrust laws. 70 84 The STAR merger also requires notification in certain European countries. Under the German Competition Act, the German Cartel Office must be notified of the STAR merger, and the STAR merger cannot be completed until it has been approved by the German Cartel Office or a one month waiting period has expired. The waiting period starts from the date that the German Cartel Office considers the notification complete. On May 18, 2000, the German Cartel Office approved the STAR merger. Following the completion of the STAR merger, an information filing must be made in Denmark with the national competition authority. The STAR merger is subject to state and federal telecommunications regulatory approvals. All but two of the state regulatory agencies and the Federal Communications Commission require prior notice or approval of the STAR merger. Requests for approval or notifications of the STAR merger have been filed on behalf of World Access and STAR in 48 states and with the Federal Communications Commission. The legal standard for approval varies from state to state, but approval of the STAR merger generally requires a showing that it is consistent with the public interest. The Federal Communications Commission has approved the STAR merger. STAR and World Access cannot complete the STAR merger unless and until the registration statement of which this joint proxy statement/prospectus is a part is declared effective and STAR and World Access are in compliance with Delaware law. Other than as described above, we are not aware of any other material governmental or regulatory approval required for completion of the STAR merger. RIGHTS OF DISSENTING STAR STOCKHOLDERS If World Access elects to convert shares of STAR common stock into the right to receive a combination of shares of World Access common stock and cash in the STAR merger, and you are a STAR stockholder who does not wish to accept the merger consideration, you have the right to demand the appraisal of and be paid the fair value of your shares in cash. The fair value of your shares of STAR common stock will exclude any element of value arising from the expectation or completion of the STAR merger. Appraisal rights are not available if World Access elects to convert shares of STAR common stock into the right to receive shares of World Access common stock only. THIS JOINT PROXY STATEMENT/PROSPECTUS CONSTITUTES THE NOTICE OF APPRAISAL RIGHTS REQUIRED BY DELAWARE LAW. FAILURE TO PROPERLY AND TIMELY COMPLY WITH THESE PROCEDURES WILL RESULT IN THE LOSS OF YOUR APPRAISAL RIGHTS. IF YOU LOSE YOUR APPRAISAL RIGHTS, YOU WILL RECEIVE THE MERGER CONSIDERATION ONLY. THE FOLLOWING DISCUSSION IS A SUMMARY OF DELAWARE LAW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE RELEVANT PROVISIONS OF DELAWARE LAW, A COPY OF WHICH IS ATTACHED AS ANNEX F AND INCORPORATED HEREIN BY REFERENCE. If you have a beneficial interest in STAR common stock held of record by another person or entity, such as a nominee, and you wish to exercise the right to appraisal, if available, you must promptly act to cause the record holder to follow the steps below and in Annex F properly and in a timely manner. Delaware courts have decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a stockholder's exclusive remedy in connection with transactions such as the STAR merger. Several decisions of the Delaware courts, which may or may not apply to the STAR merger, hold that the statutory appraisal remedy may not be a stockholder's exclusive remedy in circumstances in which a stockholder is able to prove a claim of unfair dealing by fiduciaries. In these circumstances, the court is empowered to grant such relief as the court deems appropriate, including recissory damages. Written demand. If World Access elects to convert shares of STAR common stock into the right to receive both shares of World Access common stock and cash, and you are a STAR common stockholder who wishes to exercise appraisal rights you must deliver a written demand for appraisal of your shares of 71 85 STAR common stock to STAR before the vote on the STAR merger at the STAR stockholders meeting. The demand should be delivered to STAR at 223 East De La Guerra Street, Santa Barbara, California 93101, Attention: Corporate Secretary. Your written demand must reasonably inform STAR: - of your identity as a STAR common stockholder; and - that by your written demand, you intend to demand appraisal of your shares. An abstention or proxy or vote against the STAR merger is not a written demand for appraisal. You must hold your shares of STAR common stock of record: - on the record date for the STAR stockholders meeting; and - from the time you make the written demand, continuously through the STAR merger. You must not vote in favor of the STAR merger or consent to the STAR merger in writing. After the STAR merger. Within ten days after the STAR merger, if appraisal rights are available, World Access must send notice of the STAR merger to each person who has satisfied the procedures established by Delaware law. Within 120 days after the STAR merger, if you are a STAR common stockholder who complied with these appraisal procedures, you are, upon written request, entitled to receive from World Access a statement of: - the total number of shares of STAR common stock not voted for the STAR merger and for which written demands for appraisal were received; and - the total number of holders of the shares. This statement must be mailed by World Access within ten days after its receipt of the written request for the statement or within ten days after the expiration of the period for delivery of written demand for appraisal, whichever is later. Petition in the Court of Chancery. If you have followed the steps above, if appraisal rights are available, and the STAR merger is completed, you or World Access may file a petition in the Court of Chancery of the State of Delaware, within 120 days after the STAR merger is completed, demanding a determination of the "fair value" of your shares. World Access has no obligation to file this petition, and does not currently intend to file this petition. If you wish to have the Court of Chancery determine the "fair value" of your shares, you must file the petition. You will fail to perfect and lose your right to appraisal if no petition is filed within 120 days after the STAR merger is completed. The Court of Chancery may require you to submit your share certificates to the Register in Chancery for notation of the appraisal proceeding. If you fail to comply with this direction, the court may dismiss the appraisal proceedings as to you. If you have complied with these procedures, the Court of Chancery will determine whether you have complied with Delaware law and if you are entitled to appraisal rights. After determining the STAR common stockholders entitled to appraisal, the court will appraise the "fair value" of shares of STAR common stock. "Fair value" will be determined exclusive of any element of value arising from the completion or expectation of the STAR merger. The court may consider all relevant factors including market value, asset value, dividends, earning prospects, and the nature of the business. "Fair value" may be more than, the same as, or less than the value of the merger consideration. The court will also determine if interest will be paid on the amounts to be received by those STAR common stockholders whose shares have been appraised. The costs of the appraisal proceeding may be determined by the court and taxed on the parties as the court determines to be equitable. You also may apply to the court to have the expenses of the appraisal proceeding incurred by you charged pro rata against the value of all shares entitled to appraisal. 72 86 Withdrawal of written demand for appraisal. If you fail to perfect, lose or withdraw your right to appraisal under Delaware law, you will receive the merger consideration provided in the STAR merger agreement. You may withdraw your written demand for appraisal by delivering a written withdrawal of your demand for appraisal and acceptance of the merger consideration to World Access. Any attempt to withdraw made more than 60 days after the STAR merger will require the written approval of World Access. No appraisal proceeding filed with the Court of Chancery may be dismissed as to you without approval of the court. Rights of STAR common stockholders demanding appraisal. If you have complied with the procedures of Delaware law as to appraisal, after the STAR merger, you will not be entitled to: - vote your shares of STAR common stock subject to appraisal, or - dividends or distributions on your shares of STAR common stock subject to appraisal. You will still be entitled to dividends or distributions payable on your shares subject to appraisal as to a date prior to the STAR merger. INTERESTS OF DIRECTORS, OFFICERS AND STOCKHOLDERS IN THE STAR MERGER Option plans and change in control arrangements STAR's stockholders should be aware that some of STAR's executive officers and directors have interests in the STAR merger that are in addition to the interests of the stockholders of STAR generally. Under STAR's 1997 Omnibus Stock Incentive Plan, the administrator of the plan, which is a committee of the STAR board of directors, may provide for the acceleration of the stock options, stock appreciation rights, stock units or restricted shares granted to employees and outside directors in the event of a change in control. Under STAR's 1996 Outside Director Nonstatutory Stock Option Plan, the STAR board of directors may decide upon a change in control, that it is necessary or desirable to accelerate the exercisability of outstanding options granted under the plan. The STAR board of directors also has the discretion to terminate any outstanding options that have been accelerated but not exercised during the exercise period. The STAR merger constitutes a change in control under the 1997 Omnibus Stock Incentive Plan and the 1996 Outside Director Nonstatutory Stock Option Plan. Other than as discussed below, the STAR board of directors does not intend to accelerate options or other securities held by executive officers or directors of STAR under the 1997 Omnibus Stock Incentive Plan or the 1996 Outside Director Nonstatutory Stock Option Plan. On January 3, 2000, STAR's non-executive stock option committee determined that all of David Vaun Crumly's currently outstanding and future unvested options would become exercisable five business days before a change in control. The non-executive stock option committee accelerated Mr. Crumly's stock options as an incentive for Mr. Crumly's continued employment with STAR through the completion of the STAR merger. As of the STAR record date, Mr. Crumly's options to purchase shares will accelerate upon the STAR merger. The approximate value of his accelerated options as of the STAR record date, is $ . Change in control agreement In January 1996, STAR entered into an employment agreement with David Vaun Crumly, whereby Mr. Crumly became Executive Vice President. Under his employment agreement, Mr. Crumly will receive a bonus equal to the lesser of $1,500,000 or a percentage of the monthly gross sales of accounts relating to customers introduced to STAR by Mr. Crumly for the month before a sale transaction. The percentage is either ten, twenty or thirty percent, depending on the size of the monthly gross sales. STAR must pay the bonus in cash within 90 days of the sale transaction, or if the stockholders of STAR receive stock in the transaction, STAR can pay up to 50% of the bonus in STAR common stock or the shares of common 73 87 stock of the acquiring company. The STAR merger constitutes a sale transaction under the agreement. As of the STAR record date, Mr. Crumly's bonus is approximately $ . Registration rights under voting agreement of Christopher Edgecomb World Access and Christopher Edgecomb entered into a voting and stock transfer restriction agreement under which World Access granted to Mr. Edgecomb an unlimited right to include the shares of World Access common stock he acquires in the STAR merger in any registration of capital stock for the account of World Access or any selling stockholder. World Access has also agreed to pay all of Mr. Edgecomb's expenses in any registration under the voting and stock transfer restriction agreement, other than underwriting commissions and fees of Mr. Edgecomb's legal counsel. Mr. Edgecomb is restricted from selling his shares of World Access common stock under Rule 145 of the Securities Act of 1933. Rule 145 allows persons with restricted securities to publicly sell those securities in limited amounts where adequate current public information concerning the issuer is available. However, if Mr. Edgecomb invokes his registration rights, he will be able to sell all of the shares of World Access common stock that he acquired in the STAR merger without the sale restrictions that would otherwise be imposed by Rule 145. Mr. Edgecomb can only exercise his registration rights if he requests the registration of at least 25% of his World Access shares or his World Access shares have a value of at least $2.0 million. Election of member of board of directors of World Access In the STAR merger agreement, World Access agreed to elect Christopher Edgecomb to the board of directors of World Access or another person designated by STAR and agreed to by World Access. DESCRIPTION OF THE STAR MERGER AGREEMENT World Access and STAR entered into the original STAR merger agreement on February 11, 2000. On June 7, 2000, the parties amended the original STAR merger agreement to: - reduce the exchange ratio from 0.3905 to 0.386595; - provide for a reduction in the amount of financing that World Access would provide to STAR by the amount of financing provided to STAR by WorldCom Network Services, on a dollar-for-dollar basis, up to an aggregate of $30.0 million; - provide that a material adverse effect will not be deemed to have occurred if the change, circumstance or effect relates to an action taken by STAR at the specific request of World Access; - eliminate the requirement that STAR provide evidence of the termination of its obligations with respect to the China-U.S. Cable Network; and - provide that the condition to World Access' obligations under the STAR merger agreement relating to STAR's sale of PT-1 will be satisfied if STAR sells the assets of PT-1 to Counsel for net cash proceeds of at least $120.0 million pursuant to the PT-1 asset sale agreement. On October 6, 2000, the parties again amended the STAR merger agreement to extend the date after which either party may terminate the STAR merger agreement from September 30, 2000 until December 31, 2000. The original STAR merger agreement as amended is referred to in this joint proxy statement/prospectus as the STAR merger agreement. This is only a summary of the material terms of the STAR merger agreement and may not contain all of the information that is important to you. The STAR merger agreement is attached to this joint proxy statement/prospectus as Annex A. World Access and STAR urge you to read it carefully. 74 88 Description of the STAR merger consideration For a description of the consideration that each STAR stockholder will receive in the STAR merger, please see page 62. Representations and warranties contained in the STAR merger agreement World Access and STAR each made representations and warranties in the STAR merger agreement regarding their businesses, financial condition, structure and other facts pertinent to the STAR merger, including: - corporate existence, organization, standing, authority and capitalization; - consents and regulatory approvals necessary to complete the STAR merger; - validity of required filings and reports with the Securities and Exchange Commission; - absence of pending or threatened suits, actions or other proceedings not already disclosed in the STAR merger agreement; - maintenance of permits and licenses necessary for the operation of business; - compliance with applicable laws and required licenses and permits; - absence of material changes in business or the occurrence of certain events since December 31, 1998; - ownership of intellectual property and absence of infringement on any intellectual property rights of any person or entity; - fairness opinions to be received by financial advisors; - the filing of tax returns and payment of taxes; and - validity of material contracts. In addition, STAR made representations and warranties regarding employees and employee benefits matters. Except with respect to breaches that occur before the completion of the STAR merger, the representations and warranties of World Access and STAR do not survive beyond the effective time of the STAR merger. STAR's conduct of business before completion of the STAR merger STAR has agreed that until the completion of the STAR merger or unless World Access consents in writing, STAR will conduct its business in the ordinary course and will use reasonable efforts to preserve intact its lines of business, maintain its rights and franchises and preserve its relationships with customers and suppliers. STAR has also agreed that until the completion of the STAR merger or unless World Access consents in writing, STAR will conduct its business in compliance with restrictions relating to the following: - the issuance, redemption, reclassification, combination or split of any of its capital stock; - employees and employee benefits and remuneration; - the issuance of dividends or other distributions on its capital stock; - modification of its certificate of incorporation or bylaws; - the acquisition of assets or other entities; 75 89 - the sale of assets; - capital expenditures or other investments; - the creation, assumption or incurrence of indebtedness not currently outstanding; - the settlement of litigation; - the entering into of contracts that would restrict World Access from engaging in business in specified geographic areas after the completion of the STAR merger; - the changing of its accounting policies and procedures; and - actions which would jeopardize the tax treatment of the STAR merger. No other negotiations involving potential acquirors of STAR Until the STAR merger is completed or the STAR merger agreement is terminated, STAR has agreed that it will not permit any of its agents or representatives to take any of the following actions without World Access' prior written consent: - encourage or knowingly facilitate any inquiries regarding an acquisition proposal; - participate in any discussions or negotiations regarding an acquisition proposal; - disclose any confidential information to any person in connection with an acquisition proposal; or - knowingly facilitate any effort to make or accept an acquisition proposal. Notwithstanding the above limitations on STAR's actions, for any unsolicited, bona fide written acquisition proposal by a person unaffiliated with STAR that proposes: - a business combination or similar action involving STAR; - any purchase or sale of a material portion of STAR's assets, taken as a whole; or - any purchase or sale of, or tender or exchange offer for, a material portion of the shares of STAR common stock. STAR may: - recommend approval by its stockholders of the proposal or withdraw, modify or qualify its recommendation that the STAR stockholders approve the STAR merger; or - furnish information and engage in discussions regarding the proposal. Provided that: - the STAR stockholders meeting has not occurred; - if the STAR board of directors changes its recommendation, the STAR board of directors must conclude that the acquisition proposal is a superior proposal to the STAR merger, terminate the STAR merger agreement and pay the $14.0 million termination fee to World Access; - if the STAR board of directors furnishes information regarding an acquisition proposal, the STAR board of directors must conclude that the proposal could reasonably be expected to result in a superior proposal; - STAR enters into a confidentiality agreement with a third party making an acquisition proposal before providing any confidential information; and - STAR notifies World Access of any third party inquiries, proposals or offers before providing any confidential information. 76 90 Description of the management services between World Access and STAR The STAR merger agreement provides that, to the extent permitted by applicable law, World Access and STAR intend to enter into a management agreement under which World Access would provide management services to STAR pending the completion of the STAR merger. At the time of the mailing of this joint proxy statement/prospectus, World Access and STAR have not entered into a management services agreement. Board of directors of World Access World Access and STAR agreed that immediately following the completion of the STAR merger, World Access will elect a STAR designee to the World Access board of directors. Conditions to completion of the STAR merger Each party's obligation to complete the STAR merger is subject to the satisfaction or waiver of each of the following material conditions: - the STAR merger agreement and the STAR merger must be approved by the required vote of the stockholders of World Access and STAR; - this joint proxy statement/prospectus must be declared effective by the Securities and Exchange Commission, and must not be subject to a stop order; - the representations and warranties of each party contained in the STAR merger agreement must be true and correct as of February 11, 2000 and as of the date the STAR merger is completed, except where any failure to be true and correct would not have a material adverse effect on the other party; - each of the parties must perform or comply in all material respects with all of its material agreements and covenants required by the STAR merger agreement to be performed or complied with at or before completion of the STAR merger; - each of the parties must obtain all consents and approvals that are necessary to complete the STAR merger. However, if the failure of a party to use reasonable efforts to obtain the consents and approvals is the cause of the failure to obtain the consents and approvals, the party failing to use reasonable efforts must complete the STAR merger; - no material adverse effect with respect to either party shall have occurred since February 11, 2000; and - the waiting period applicable to the STAR merger under the Hart-Scott-Rodino Act must have terminated or expired. World Access' obligations to complete the STAR merger are subject to the satisfaction or waiver of each of the following material conditions: - STAR must comply with all procedures and requirements applicable to it under the dissenters' rights requirements of Delaware law, the period for exercising appraisal rights in connection with the STAR merger must have expired and fewer than 1% of the shares of STAR common stock must have exercised appraisal rights; - STAR must complete the PT-1 asset sale to Counsel for net cash proceeds of at least $120.0 million pursuant to the PT-1 asset purchase agreement, or sell PT-1 to another purchaser for net cash proceeds of at least $150.0 million pursuant to an agreement reasonably satisfactory to World Access; and - STAR must not have received notification, and World Access must not have any reasonable reason to believe, STAR's obligations relating to the China-U.S. Cable Network were not fully satisfied by 77 91 the reclamation of STAR's capacity in the network, and STAR must have no further obligations or liabilities with respect to the network. Termination of the STAR merger agreement The STAR merger agreement may be terminated at any time before completion of the STAR merger by either party for any of the following reasons: - by mutual written consent; - if the other party fails to comply with its material covenants or agreements in the STAR merger agreement and fails to cure the noncompliance within ten business days after receiving a notice of breach; however, the non-breaching party may not terminate the STAR merger agreement if the breaching party continues to use reasonable efforts to cure the breach; - if the other party has breached any of its representations or warranties, and the breach remains uncured for ten business days after receiving a notice of breach; however, the non-breaching party may not terminate the STAR merger agreement if the breaching party continues to use reasonable efforts to cure the breach; - if the STAR merger has not been completed by December 31, 2000, unless the failure to complete the STAR merger is the result of a breach of the STAR merger agreement by the party seeking to terminate the STAR merger agreement; - if any permanent injunction, order, decree or ruling by any governmental entity preventing the completion of the merger has become final and nonappealable; or - if the stockholders of World Access or STAR fail to approve the STAR merger agreement by the required vote. The STAR merger agreement may be terminated at any time prior to completion of the STAR merger by STAR if, prior to the STAR stockholders vote and upon three business days' prior notice to World Access, STAR's board of directors determines that an acquisition proposal is a superior proposal. However, STAR's termination of the STAR merger agreement is subject to the following conditions: - prior to termination and upon request by World Access, STAR negotiates with World Access regarding a revised proposal by World Access; - the STAR board of directors determines, during the three-day period and after considering the revised World Access proposal, that the acquisition proposal is a superior proposal; and - STAR pays the $14.0 million termination fee. The STAR merger agreement may be terminated at any time prior to completion of the STAR merger by World Access if STAR: - is involved in a voluntary or involuntary bankruptcy or similar proceeding; - is subject to the appointment of a receiver or similar official; - is subject to a winding up or a liquidation decree or order; - shares a general assignment for the benefit of its creditors; - prior to the stockholder vote, makes an adverse change in the board's recommendation or approves or recommends a superior proposal before the STAR stockholders meeting; or - is involved in an event of default under the anticipated short-term loan agreements between World Access and STAR. 78 92 Payment of termination fee if the STAR merger agreement is terminated STAR must pay World Access a termination fee of $14.0 million if the STAR merger agreement is terminated for the following reasons: - because the STAR board of directors determines that a competing acquisition proposal is a superior proposal; - if the STAR merger agreement is terminated by World Access because the STAR board of directors makes an adverse change in the STAR recommendation or approves or recommends a superior proposal; or - because the stockholders of STAR have not adopted the STAR merger agreement by the required vote and STAR enters into a definitive agreement with respect to a business combination with an entity other than World Access within 12 months after the termination of the STAR merger agreement. Extension, waiver and amendment of the STAR merger agreement The STAR merger agreement may be amended by World Access and STAR at any time before completion of the STAR merger. However, no amendment may be made after adoption of the STAR merger agreement by the World Access and STAR stockholders. World Access or STAR may, at any time prior to completion of the STAR merger: - extend the time for the performance of any of the obligations or other acts of the other party under the STAR merger agreement; - waive any inaccuracies in representations and warranties of the other party; or - waive compliance with any of the agreements of the other party contained in the STAR merger agreement. STAR voting agreements and credit agreements This section of the joint proxy statement/prospectus describes the voting agreements of Christopher E. Edgecomb and Samer Tawfik and the anticipated STAR credit agreements. Edgecomb voting agreement World Access and Christopher E. Edgecomb have entered into a voting and stock transfer restriction agreement, dated February 11, 2000, under which Mr. Edgecomb has agreed to vote all of his shares of STAR common stock in favor of the STAR merger and against any action that would not be in favor of the STAR merger. Under the agreement, Mr. Edgecomb may not: - sell or transfer any of his shares of STAR common stock; - trade or take any position with respect to his shares of STAR common stock; - enter into any voting arrangement or understanding with respect to his shares of STAR common stock; or - take any action that would make his representations or warranties untrue or prevent him from performing any of his obligations. 79 93 The agreement also prohibits Mr. Edgecomb from transferring or taking a position in any of the shares of World Access common stock he receives in the STAR merger for six months after the completion of the STAR merger or as long as he is a member of the World Access board of directors. World Access has the first right to assist Mr. Edgecomb in the sale of his shares to an "accredited investor" or "qualified institutional buyer," as defined in the Securities Exchange Act of 1934, as amended. However, if World Access is unable to arrange for a sale within 30 days, Mr. Edgecomb may complete the sale. Mr. Edgecomb has also been granted registration rights with respect to the shares of World Access common stock he acquires in the STAR merger. Mr. Edgecomb's registration rights are summarized on page 74 under the subsection entitled "Registration rights under voting agreement of Christopher Edgecomb." For additional detail, see the voting and stock transfer restriction agreement for Christopher Edgecomb filed as an exhibit to the registration statement filed with the Securities and Exchange Commission that contains this joint proxy statement/prospectus. Mr. Edgecomb has also agreed to restrictions on the solicitation or employment of STAR employees. The voting and stock transfer restriction agreement terminates upon the termination of the STAR merger agreement in accordance with its terms. Tawfik voting agreement On February 11, 2000, World Access also entered into a voting and stock transfer restriction agreement with Samer Tawfik. Under this agreement, Mr. Tawfik has agreed to vote all of his shares of STAR common stock in favor of the STAR merger and against any action that would not be in favor of the STAR merger. Under the agreement, Mr. Tawfik may not: - sell or transfer any of his shares of STAR common stock, except that Mr. Tawfik can transfer up to 2,430,000 shares of his STAR common stock to unaffiliated third parties; - trade or take any position with respect to his shares of STAR common stock; - enter into any voting arrangement or understanding with respect to his shares of STAR common stock; or - take any action that would make his representations or warranties untrue or prevent him from performing any of his obligations. Mr. Tawfik may not transfer any of the shares of World Access common stock he receives in the STAR merger agreement for six months after the completion of the STAR merger. World Access has the first right to assist Mr. Tawfik in the sale of his shares to an "accredited investor" or a "qualified institutional buyer," as defined in the Securities Exchange Act of 1934. However, if World Access is unable to arrange for a sale within 30 days, Mr. Tawfik may complete the sale. The voting and stock transfer restriction agreement terminates upon the termination of the STAR merger agreement in accordance with its terms. Because Mr. Edgecomb and Mr. Tawfik each hold a significant number of shares of STAR common stock, there is a greater likelihood that the STAR merger will be approved by the required vote of the STAR stockholders. Mr. Edgecomb's voting agreement applies to shares representing approximately % of the voting power for the STAR merger as of the STAR record date, Mr. Tawfik's voting agreement applies to shares representing approximately % of the voting power for the STAR merger as of the STAR record date. The combined voting power for the STAR merger under the agreements of Mr. Edgecomb and Mr. Tawfik is approximately % as of the STAR record date. 80 94 STAR credit agreements World Access expects to enter into a credit agreement with STAR which would provide STAR with a short-term loan of up to $25.0 million. The loan will provide an initial advance to STAR and additional advances, each of which will be made in World Access' sole discretion. The loan will be secured by all personal property of STAR, PT-1 and Helvey Com LLC, including all equipment, inventory, Indefeasible Rights of Use in telecommunications cables and cable systems, accounts receivable, and general intangibles of STAR, PT-1, and Helvey; by a pledge of all capital stock owned by STAR in some of its subsidiaries; and by a pledge of all capital stock owned by PT-1 in some of its subsidiaries. The interest rate will be LIBOR plus 4% per year. The loan will be due on the earlier of: - one year from the date of the STAR credit agreement; or - 90 days after the STAR merger agreement terminates. World Access also expects to enter into a credit agreement with STAR Telecommunications Holding GmbH, which is STAR's wholly-owned German subsidiary. This credit agreement would provide STAR GmbH with a short-term loan of $10.0 million. This loan will provide an initial advance to STAR GmbH and additional advances, each of which will be made in World Access' sole discretion. The loan will be secured by all personal property of STAR GmbH. STAR will pledge all of its interest in STAR GmbH and STAR GmbH will pledge all of its interest in STAR Telecommunications Deutschland GmbH and STAR Telecommunications Network GmbH. The interest rate will be LIBOR plus 4% per year. The loan will be due on the earlier of: - one year from the date of the STAR GmbH credit agreement; or - 90 days after the STAR merger agreement is terminated. World Access will reduce the amount of credit it provides to STAR or its subsidiaries for each dollar of additional financing provided to STAR and its subsidiaries by WorldCom Network Services up to an aggregate of $30.0 million. INFORMATION REGARDING STAR STAR provides high-quality, competitively priced, long distance telecommunication services to consumer and commercial retail customers as well as to other telecommunications carriers located within the U.S. and Europe. In Germany, STAR offers Internet service providers wholesale dial-up services along with a range of support services including dedicated facilities for secured storage of data and servers, which includes resources such as a secure cage, regulated power, dedicated Internet connection, security and support. In Germany, STAR also offers Internet service providers the ability to increase or decrease the amount of data they transfer in a fixed amount of time. STAR seeks to capitalize on the increasing demand for high-quality international communications services which is being driven by the globalization of the world's economies, the worldwide trend toward telecommunications deregulation, and the growth of voice, data and Internet traffic. STAR was incorporated in Delaware on September 13, 1996. Additional information regarding STAR is contained in STAR's filings with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. See "Where You Can Find More Information" on the inside front cover page of this joint proxy statement/prospectus. STAR LITIGATION On March 11, 1999, a proceeding was commenced by PT-1 by notice of petition following the election by a PT-1 stockholder to dissent from STAR's merger with PT-1 and following a demand for payment of the fair value of approximately 2,731,330 shares of PT-1 held by the stockholder. The proceeding was commenced in the Supreme Court of the State of New York. Under New York law, the PT-1 stockholder has the right to receive, in cash, the fair market value of his PT-1 shares as of the time 81 95 of STAR's acquisition of PT-1. The PT-1 stockholder is seeking damages in accordance with his appraisal rights under New York law. On July 26, 2000, the Supreme Court of the State of New York of the County of Queens issued a temporary restraining order in favor of the stockholder which prevents PT-1 from distributing any of the proceeds of the PT-1 asset sale to STAR unless PT-1 has first set aside a reserve in the amount of $37,649,800 in cash to satisfy the stockholder's claim. On August 15, 2000, the temporary restraining order was modified to reduce the required reserve to $25.0 million. By a decision dated September 11, 2000, the Supreme Court of the State of New York denied the PT-1 stockholder's motion for a preliminary injunction and vacated the existing injunction. STAR is no longer required to reserve $25.0 million from the proceeds of the PT-1 asset sale. From time to time, STAR is party to various legal proceedings, including billing disputes and collection matters and actions brought by some terminated employees that arise in the ordinary course of business. COMPARISON OF RIGHTS OF HOLDERS OF WORLD ACCESS COMMON STOCK AND STAR COMMON STOCK This section of the joint proxy statement/prospectus summarizes the differences between the World Access common stock and STAR common stock. STAR stockholders should read this entire document, and each companies' certificate of incorporation, bylaws and the other documents referred to carefully for a more complete understanding of the differences between the World Access common stock and STAR common stock. For information on how to obtain these documents, see "Where You Can Find More Information" on the inside front cover page of this joint proxy statement/prospectus. The rights of World Access' stockholders are governed by its certificate of incorporation, as amended, its bylaws and the laws of the State of Delaware. The rights of STAR stockholders are currently governed by its certificate of incorporation, as amended and restated, its bylaws and the laws of the State of Delaware. After the completion of the STAR merger, STAR stockholders will become stockholders of World Access. Because STAR and World Access are both Delaware corporations, after the STAR merger is completed, the rights of STAR's stockholders will continue to be governed by Delaware law. The following paragraphs compare the rights of World Access stockholders and STAR stockholders under the certificates of incorporation and bylaws of World Access and STAR, as applicable. Comparison of authorized and outstanding capital stock The authorized capital stock of World Access currently consists of 160,000,000 shares, of which 150,000,000 shares are common stock of $.01 par value per share, and 10,000,000 shares of which are preferred stock of $.01 par value per share. Note, however, that pursuant to this joint proxy statement/prospectus, the World Access stockholders are being asked to approve an amendment to the World Access certificate of incorporation that would increase the number of shares of common stock World Access is authorized to issue to 290,000,000. As of October 1, 2000, 73,254,336 shares of World Access common stock were outstanding and 613,905 shares of World Access preferred stock were outstanding. The authorized capital stock of STAR consists of 100,000,000 shares of common stock, of which 58,656,802 shares were outstanding as of October 1, 2000 and 5,000,000 shares of preferred stock, of which no shares were outstanding as of October 1, 2000. Comparison of classes of common stock World Access and STAR each have one class of common stock issued and outstanding. Holders of World Access common stock and holders of STAR common stock are each entitled to one vote for each share held. 82 96 Comparison of requirements for special meeting of stockholders Special meetings of World Access may be called by World Access' board of directors or an officer instructed by the board of directors to call a meeting. Special meetings of STAR may be called by the president of STAR and must be called by the president or secretary of STAR at the request of a majority of the board of directors. Comparison of requirements for action by written consent in lieu of a stockholders' meeting Pursuant to the World Access certificate of incorporation, World Access stockholders may not take action without a meeting by written consent except for preferred stockholders. STAR stockholders may take action without a meeting only by unanimous written consent of the stockholders entitled to vote on the action. Comparison of record date for determining stockholders Both the World Access bylaws and the STAR bylaws provide that each of their boards of directors may fix a record date that: - in the case of determination of the stockholders entitled to vote at any meeting of stockholders or adjournment of any meeting, may not be more than 60 days or less than ten days before the date of the meeting; and - in the case of any other action, may not be more than 60 days before the action. Furthermore, if the World Access board of directors or the STAR board of directors do not fix a record date in the manner described above, then: - the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders will be at the close of business on the day after the day that notice is given, or, if notice is waived, at the close of business on the day after the day that the meeting is held; and - the record date for determining stockholders for any other purpose will be at the close of business on the day the board of directors adopt the related resolution. Comparison of procedures to nominate directors The World Access bylaws require that board nominations be made by the board of directors or a stockholder who gives timely notice to the secretary of World Access. To give timely notice, a stockholder's nomination notice must be received by the secretary of World Access at least 120 days before the one-year anniversary of the date of the proxy statement in connection with the previous year's annual meeting of stockholders. A nominating stockholder's notice must be received by World Access no later than the close of business on the tenth day following the earlier of: - the day on which notice of the upcoming meeting was mailed or given to the World Access stockholders; or - the day on which public disclosure of the date of the upcoming meeting was made by World Access if: - no annual meeting was held in the previous year; - the date of the upcoming annual meeting has changed by more than 30 days from the date set forth in the previous year's proxy statement; or - the upcoming meeting is not an annual meeting. The STAR certificate of incorporation and bylaws are silent with respect to the nomination of persons for election to the STAR board of directors. 83 97 Comparison of number of directors The World Access amended certificate of incorporation and bylaws provide that the World Access board of directors may not have less than three and not more than 12 directors. The exact number of directors will be determined from time to time by the World Access board of directors. Note, however, that in connection with this joint proxy statement/prospectus, World Access is seeking approval by its stockholders of an amendment to its certificate of incorporation that would increase the maximum number of directors to 15. The STAR certificate of incorporation and bylaws provide that the number of directors will be determined from time to time by the STAR board of directors. Comparison of classified board of directors Each of World Access' and STAR's board of directors is currently divided into three classes, as nearly equal in size as possible, in which each class of directors is elected annually. Directors of World Access and STAR are elected for a three year term and until their successors are elected and qualified. You should note, however, that in connection with this joint proxy statement/prospectus, World Access is seeking the approval of its stockholders to amend its certificate of incorporation to eliminate World Access' classified board of directors. If this amendment is approved by the required vote of the World Access stockholders, all World Access directors would be elected annually to serve a one-year term. At an annual meeting in which a quorum is present, the persons receiving a plurality of the votes cast by World Access stockholders would be elected as the directors. Comparison of procedures for the removal of directors The World Access bylaws provide that any director or the entire board of directors may be removed at any time, with cause, by the holders of a majority of the voting power of the shares entitled to vote at an election of directors. Delaware law provides that any director or the entire board of directors of STAR may be removed for cause, by the holders of a majority of the shares entitled to vote at an election of directors. Comparison of board of directors vacancies The bylaws of both World Access and STAR provide that vacancies on the board of directors may be filled by the vote of the majority of directors remaining in office. Comparison of notice requirements of special meetings of the board of directors The World Access bylaws provide that the chairman of the board, the vice-chairman of the board, the president or a majority of directors then in office may call special meetings of the board of directors. The bylaws do not require a specific notice period, but only require that the notice provide sufficient time for the convenient assembly of the directors. The STAR bylaws provide that special meetings may be called by the president on ten days notice to each director by mail or 48 hours notice either personally by telephone, telegram or facsimile. Special meetings must be called in like manner and on like notice by the president or secretary upon the written request of two directors, or the sole director if the board consists of only one director. Comparison of procedures for an amendment of certificate of incorporation and bylaws The World Access amended certificate of incorporation imposes a super-majority voting requirement with respect to particular amendments. Any amendment to the classified board provisions of the certificate of incorporation, or any proposed change to the certificate or bylaws which is inconsistent with such provision, requires the vote of holders of at least 75% of the voting power of all shares entitled to vote in 84 98 the election of directors, voting as a single class. The World Access bylaws may be amended by either the board of directors or stockholders of World Access. Except with respect to the corporate name, registered office, name of the registered agent and purpose of the corporation, which require a majority vote, the stockholders of STAR may amend the certificate of incorporation only by the vote of at least 75% of the voting power of the outstanding shares entitled to vote in the election of directors, voting as a single class. The STAR bylaws may be amended by the STAR board of directors or by the vote of stockholders owning 75% of the shares of STAR. 85 99 STAR SELECTED CONSOLIDATED FINANCIAL DATA In the table below, STAR provides you with selected consolidated financial data of STAR. The selected consolidated statements of operations data for the years ended December 31, 1997, 1998, and 1999 and the balance sheet data at December 31, 1998 and 1999 are derived from STAR's audited financial statements incorporated by reference in this joint proxy statement/prospectus. The consolidated statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997 are derived from audited financial statements not contained herein. The selected consolidated financial data as of June 30, 2000 and for the six-month periods ended June 30, 1999 and 2000 are derived from STAR's unaudited consolidated financial statements incorporated by reference in this joint proxy statement/prospectus, which, in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the information. When you read this selected consolidated financial data, it is important that you also read the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and STAR's consolidated financial statements and the related notes thereto incorporated by reference in this joint proxy statement/prospectus.
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- ---------- -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues........................... $66,964 $283,450 $434,086 $619,220 $1,061,774 $500,478 $497,400 Operating expenses: Cost of services (exclusive of depreciation and amortization).................. 50,300 244,153 374,504 523,621 925,206 441,503 433,657 Selling, general and administrative................. 13,356 41,804 48,906 66,140 160,067 77,053 61,555 Depreciation and amortization.... 952 2,343 5,650 15,054 44,236 19,640 26,539 Loss on impairment of goodwill... -- -- -- 2,604 -- -- -- Merger expense................... -- -- 286 1,026 1,878 1,872 -- ------- -------- -------- -------- ---------- -------- -------- Total operating expenses......... 64,608 288,300 429,346 608,445 1,131,387 540,068 521,751 ------- -------- -------- -------- ---------- -------- -------- Income (loss) from operations.... 2,356 (4,850) 4,740 10,775 (69,613) (39,590) (24,351) Other income (expenses): Interest income.................. 65 138 464 4,469 2,192 1,675 265 Interest expense................. (214) (1,270) (2,617) (3,386) (9,895) (3,532) (7,742) Legal settlements and expense.... -- (100) (1,653) -- -- -- -- Other............................ (97) 186 208 (304) 1,373 (1,923) 7,554 ------- -------- -------- -------- ---------- -------- -------- Income (loss) before provision for income taxes............... 2,110 (5,896) 1,142 11,554 (75,943) (43,370) (24,274) Provision (benefit) for income taxes............................ 66 577 2,905 9,923 (12,096) (7,886) (5,706) ------- -------- -------- -------- ---------- -------- -------- Net income (loss).................. $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847) $(35,484) $(18,568) ======= ======== ======== ======== ========== ======== ======== Pro forma net income (loss) (unaudited)(1)................... $ 478 $ (7,416) $ (1,958) ======= ======== ======== Income (loss) per common share(2) Basic and Diluted................ $ 0.10 $ (0.27) $ (0.06) $ 0.04 $ (1.12) $ (0.64) $ (0.32) ======= ======== ======== ======== ========== ======== ======== Pro forma income (loss) per common share (unaudited)(2) Basic and Diluted................ $ 0.02 $ (0.31) $ (0.06) ======= ======== ======== Weighted average number of common shares outstanding -- basic(2) Basic............................ 19,916 24,076 31,101 40,833 57,036 55,541 58,609 Diluted.......................... 19,916 24,076 31,101 42,434 57,036 55,541 58,609
86 100
AS OF DECEMBER 31, AS OF JUNE 30, -------------------------------------------------------- ------------------------ 1995 1996 1997 1998 1999 1999 2000 ------- -------- --------- ---------- ---------- ---------- ----------- (UNAUDITED) BALANCE SHEET DATA: Working capital (deficit).... $(1,065) $(10,913) $ 4,692 $ 46,698 $ (197,921) $ (85,773) $ (151,862) Total assets................. 37,169 76,250 130,382 374,651 807,754 638,674 729,789 Total long-term liabilities, net of current portion......... 2,980 8,834 14,800 33,048 96,693 38,691 93,037 Accumulated deficit.......... (6,294) (12,077) (13,737) (12,106) (75,953) (19,657) (94,521) Stockholders' equity......... 6,614 9,986 40,615 195,591 278,054 336,207 258,569 OTHER FINANCIAL DATA: EBITDA from continuing operations(3).............. $ 3,308 $ (2,507) $ 10,390 $ 25,829 $ (25,377) $ (19,950) $ 2,188 Cash flows (used in) provided by operating activities.... 2,076 (2,847) 11,476 (12,379) 40,138 13,365 11,357 Cash flows (used in) provided by investing activities.... (1,123) (10,403) (31,157) (100,986) (58,297) (63,331) 8,326 Cash flows (used in) provided by financing activities.... (839) 14,721 19,174 158,526 (991) 11,860 (28,728) Capital expenditures(4)...... 2,922 14,810 26,584 147,236 150,588 56,015 5,678 North American wholesale billed minutes of use(5)... 38,106 479,681 1,034,187 1,657,523 2,129,296 1,102,804 921,885 North American wholesale revenue per billed minute of use(6).................. $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084 $ 0.2256 $ 0.1670
- --------------- (1) The pro forma net income or loss per share assumes that STAR and CEO Telecommunications, Inc., which STAR acquired in a pooling of interests transaction on November 30, 1997, were C-corporations for all periods presented. (2) See Note 2 of Notes to Consolidated Financial Statements set forth in STAR's annual report on Form 10-K for the fiscal year ended December 31, 1999, as amended by Form 10-K/A filed on September 11, 2000, and incorporated by reference herein, for an explanation of the method used to determine the number of shares used in computing basic and diluted income (loss) per common share and pro form basic and diluted income (loss) per common share. (3) EBITDA from continuing operations as used in this joint proxy statement/prospectus is earnings (loss) before net interest expense (income), income taxes, foreign exchange gains or losses, depreciation and amortization and is presented because STAR believes that the information is commonly used in the telecommunications industry as one measure of a company's operating performance and historical ability to service debt. EBITDA from continuing operations is not determined in accordance with generally accepted accounting principles, is not indicative of cash provided by operating activities, should not be used as a measure of operating income and cash flows from operations as determined under generally accepted accounting principles and should not be considered in isolation or as an alternative to, or to be more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. EBITDA, as calculated by STAR, may not be comparable to similarly titled measures reported by other companies and could be misleading unless all companies and analysts calculate EBITDA in the same manner. 87 101 The following table reconciles STAR's income (loss) from continuing operations to EBITDA from continuing operations (in thousands):
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------- ------- ------- -------- -------- -------- (UNAUDITED) Income (loss) from continuing operations.................. $2,044 $(6,473) $(1,763) $ 1,631 $(63,847) $(35,484) $(18,568) Net interest expense (income).................... 149 1,132 2,153 (1,083) 7,703 1,857 7,477 Income tax expense (benefit)................... 66 577 2,905 9,923 (12,096) (7,886) (5,706) Other......................... 97 (86) 1,445 304 (1,373) 1,923 (7,554) Depreciation and amortization................ 952 2,343 5,650 15,054 44,236 19,640 26,539 ------ ------- ------- ------- -------- -------- -------- EBITDA from continuing operations.................. $3,308 $(2,507) $10,390 $25,829 $(25,377) $(19,950) $ 2,188 ====== ======= ======= ======= ======== ======== ========
(4) Includes assets financed with capital leases, notes and vendor financing arrangements. (5) Does not include wholesale billed minutes of use from T-One Corporation, a former subsidiary of STAR, prior to the year ended December 31, 1997. Includes wholesale billed minutes of use attributable to ALLSTAR Telecom, formerly know as United Digital Network, Inc., a subsidiary of STAR, for all years presented. (6) Represents wholesale gross call usage revenue per billed minute. Amounts exclude other revenue related items such as finance charges. This data does not include wholesale billed minutes of use from T-One prior to the year ended December 31, 1997. PROPOSAL 2 THE MERGER BETWEEN WORLD ACCESS AND WORLDXCHANGE This section of the joint proxy statement/prospectus describes the proposed merger between World Access and WorldxChange. This proposal is for the consideration of the World Access stockholders. Under California law, the WorldxChange merger can be approved without a shareholders' meeting by the written consent of holders of a majority of the outstanding shares of WorldxChange's stock. WorldxChange expects to obtain the written consents of the four shareholders that have executed agreements with World Access to approve the WorldxChange merger. Since these shareholders collectively own a majority of WorldxChange's outstanding shares, WorldxChange is not soliciting proxies from any shareholder and is not seeking the approval of any other shareholder of the merger with World Access. While we believe that the description covers the material terms of the WorldxChange merger and the related transactions, this summary may not contain all of the information that is important to you. You should read this entire document and the other documents we refer to carefully for a more complete understanding of the WorldxChange merger. BACKGROUND OF THE WORLDXCHANGE MERGER In the spring of 1999, Roger B. Abbott, Chief Executive Officer of WorldxChange, met with John D. Phillips and W. Tod Chmar in Atlanta, Georgia. At this meeting, Mr. Phillips explained his views regarding trends in the international long distance industry, including the likely consolidation among international long distance providers. Mr. Phillips expressed his desire to make World Access a leader in the movement toward consolidation of the international long distance industry and asked Mr. Abbott to consider a possible business combination involving World Access and WorldxChange. No agreement regarding a possible transaction was reached at this meeting, but the parties kept in contact with periodic telephone conversations throughout the summer and remainder of 1999. On December 14, 1999, after World Access acquired FaciliCom International, Inc. and entered into a definitive agreement to acquire Long Distance International, Inc., Mr. Abbott called Mr. Phillips regarding 88 102 a possible transaction. During numerous phone calls over the next few weeks, the parties worked through the basic economic terms of a transaction and instructed their representatives to begin working on a definitive merger agreement. During the month of January and into the early part of February, the parties worked on the definitive merger agreement and conducted their respective due diligence investigations of the other party. On January 18, 2000, Roger Abbott and Walter Anderson, the Chairman of the board of WorldxChange, met with John D. Phillips and W. Tod Chmar in Atlanta to discuss Mr. Phillips' vision for the combined company. On February 8, 2000, the World Access board of directors met by telephonic conference call to receive an update from World Access management on, and to discuss the terms of, the proposed transaction with WorldxChange. On February 11, 2000, the World Access board of directors met again by telephonic conference call to consider the merger with WorldxChange. At this meeting, management reviewed, for the board of directors, the strategic reasons for a business combination with WorldxChange and management and legal counsel described the specific terms of the proposed merger agreement. During this meeting, Donaldson, Lufkin & Jenrette Securities Corporation, or Donaldson, Lufkin & Jenrette gave its oral opinion as to the fairness of the consideration to be paid by World Access pursuant to the merger agreement. The board of directors also received summaries of the results of World Access' due diligence investigation of WorldxChange. After the foregoing, the World Access board of directors unanimously approved the WorldxChange merger agreement and the related transactions and unanimously agreed to recommend its adoption to the stockholders of World Access. On February 11, 2000, Donaldson, Lufkin & Jenrette forwarded its written opinion regarding the fairness of the consideration to be paid by World Access pursuant to the merger agreement to the members of the board of directors of World Access. On February 5, 2000, the WorldxChange board of directors met by telephonic conference call to consider the merger with World Access. During this meeting, management reviewed the strategic reasons for a business combination with World Access and described the specific terms of the proposed merger agreement. After the foregoing, the WorldxChange board approved the WorldxChange merger agreement and the related transactions. Throughout April and early May 2000, Roger Abbott of WorldxChange and John Phillips of World Access discussed the possibility of World Access increasing its participation in WorldxChange's loan arrangement with Foothill Capital Corporation. In connection with these discussions, Mr. Abbott and Mr. Phillips discussed amending the merger agreement to eliminate contingent shares as a component of the merger consideration. On May 22, 2000, the World Access board of directors met by telephonic conference call and approved a $15 million increase by World Access of its participation in the Foothill loan arrangement with WorldxChange. The World Access board also discussed and approved an amendment to the merger agreement eliminating contingent shares as a component of the merger consideration. The WorldxChange board approved the same merger agreement amendment at a telephonic meeting held May 22, 2000. In July 2000 Mr. Abbott and Mr. Phillips discussed entering into an arrangement under which World Access would provide executive management services to WorldxChange. In connection with these discussions, Mr. Abbott and Mr. Phillips also discussed further amending the merger agreement to reflect this management services arrangement. On July 25, 2000, the World Access board met by telephonic conference call and approved an executive management services agreement between World Access and WorldxChange under which World Access would provide management services to WorldxChange as described above. The World Access board also considered and approved a further amendment to the merger agreement reflecting the executive management services agreement, deleting the minimum World Access stock price closing condition and extending the date by which the WorldxChange merger must be completed to December 31, 2000. The WorldxChange board approved the executive services management agreement and the same merger agreement amendment by unanimous written consent on July 28, 2000. 89 103 WORLD ACCESS' REASONS FOR THE WORLDXCHANGE MERGER In approving the WorldxChange merger, the World Access board of directors considered the potential benefits of the WorldxChange merger and the risks associated with the WorldxChange merger. All material business, financial, legal and market factors are discussed below. In view of the number and wide variety of factors considered in connection with its evaluation of the WorldxChange merger, the board did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the material factors considered in reaching its determination. The board viewed its position and recommendation as being based on the totality of the information and factors presented to and considered by it. In addition, individual directors may have given different weight to different information and to the following factors: The financial terms of the WorldxChange merger. The World Access board of directors considered information concerning the business, earnings, operations, financial condition and prospects of World Access and WorldxChange, individually, on a combined basis, and in conjunction with the STAR merger. The board determined to approve the WorldxChange merger agreement and the related transactions based on its consideration of these factors with and without taking into account the STAR merger. The board of directors also considered the opinion of Donaldson, Lufkin & Jenrette as to the fairness to World Access, from a financial point of view, of the consideration to be paid by World Access pursuant to the WorldxChange merger agreement. WorldxChange's global communications network. The board considered WorldxChange's presence in Europe and the Pacific Rim and the potential for entry into additional countries. The board believes WorldxChange's retail presence in the United Kingdom will accelerate the implementation of World Access' strategy to increase its retail telecommunications services throughout Europe. The board also considered the technical capabilities, cost effectiveness, expansion possibilities and available capacity of WorldxChange's telecommunications network in multiple countries, ownership interest in undersea cable telecommunications systems and indefeasible rights of use in additional undersea cable systems. Potential cost savings and synergies. The board reviewed financial analyses prepared by World Access management that estimated a range of gross margin improvement that could be realized by redirecting selected World Access traffic over the WorldxChange network, redirecting WorldxChange traffic over the World Access network and eliminating duplicate leased circuits. The board determined that the World Access estimates were realistic and that based on the financial analyses presented and their own business judgement, the annual gross margin improvement for the combined company should be in excess of $30.0 million. The board also reviewed financial analyses by World Access management that estimated a range of selling, general and administrative cost savings that could be realized by combining World Access and WorldxChange, including the elimination of redundant switching centers, redundant customer care operations, duplicate U.S. divisional headquarters and corporate office functions. The board determined that the World Access estimates were realistic and that based on the financial analyses presented and their own business judgement, the annual cost savings should be in excess of $35.0 million. WorldxChange's international presence. The board considered the compatibility of WorldxChange's operations in Australia, Canada, the Netherlands, New Zealand and the United Kingdom with World Access' existing operations. The board also considered WorldxChange's agreements for telecommunications services in Belgium, Chile, France, Germany and Guatemala in light of potential expansion. The combination of World Access and WorldxChange would result in a combined network covering 18 countries worldwide. This increased international presence accelerates World Access' strategy to increase its non-U.S. services. Growing retail operations and diversified revenues. The board considered WorldxChange's growing retail operations, which would be made available to World Access in the future. Additionally, the board believes that WorldxChange would strengthen World Access' position outside of North America because more than 40% of WorldxChange's revenues originate outside of North America. 90 104 The World Access board of directors also considered the following potentially negative factors but concluded they were outweighed by the positive factors described above: Risks associated with integration. The board considered the risk that World Access would be unable to effectively integrate the technical operations and management of World Access and WorldxChange. Risk of not achieving profitability. The board considered the risk that the combined company may not be profitable. Both World Access and WorldxChange had losses in the first quarter of 2000. Despite expected cost savings from the WorldxChange merger, the combined company may continue to have losses which may cause the price of the World Access common stock to decline. THE WORLD ACCESS BOARD OF DIRECTORS' RECOMMENDATION THAT STOCKHOLDERS APPROVE THE WORLDXCHANGE MERGER The World Access board of directors has carefully considered the advisability of the WorldxChange merger and believes that the terms of the WorldxChange merger are fair to, and that the WorldxChange merger is in the best interests of, the stockholders of World Access. The board of directors of World Access has unanimously approved the WorldxChange merger agreement and the transactions contemplated by the WorldxChange merger agreement and unanimously recommends that the stockholders of World Access vote for the approval and adoption of the WorldxChange merger agreement and the transactions contemplated by the WorldxChange merger agreement. WORLDXCHANGE'S REASONS FOR THE WORLDXCHANGE MERGER The WorldxChange board of directors believes that the WorldxChange merger is fair to and in the best interests of WorldxChange's stockholders for the following reasons: - The WorldxChange merger provides WorldxChange shareholders with an amount of World Access shares, in a tax-free exchange, which, based on the World Access share price at the time the WorldxChange merger agreement was signed, represented a premium over the most recent price at which WorldxChange sold shares of its capital stock; - WorldxChange shareholders will be able to participate in the potential growth of World Access' business after the WorldxChange merger and to benefit from the potential appreciation in the value of World Access common stock; and - WorldxChange shareholders will have the liquidity of publicly traded World Access shares in place of their WorldxChange shares, which are not publicly traded. In reaching its decision to approve the WorldxChange merger agreement and the proposed WorldxChange merger, the WorldxChange board consulted with WorldxChange management and its advisors and considered the following factors: - The belief of the WorldxChange board that WorldxChange's telecommunications equipment and other assets, together with WorldxChange's presence in key European markets, would provide the combined company with opportunities for growth superior to those of WorldxChange as an independent company; - The fact that WorldxChange requires significant additional financing to fund operating cash needs and continue growing, and the belief of the WorldxChange board that WorldxChange has limited ability to obtain this needed capital as an independent company; - The belief of the WorldxChange board that the terms of the merger agreement, including the value of the World Access stock to be exchanged for the shares of WorldxChange common stock, are fair to and in the best interests of the WorldxChange shareholders; - The fact that WorldxChange had not previously been successful in entering into a satisfactory agreement with other potential acquirors or strategic partners; and 91 105 - The belief of the WorldxChange board that the combined company would have a greater ability to serve customers and provide greater opportunities for employees than WorldxChange as an independent company. The WorldxChange board also considered the following potentially negative factors but concluded that they were outweighed by the positive factors described above: - The risk that World Access's stock price would decline between the signing of the merger agreement and the closing of the merger, resulting in the WorldxChange shareholders receiving less value for their WorldxChange shares; - The risk that the WorldxChange merger would not be completed in a timely manner or at all and that the public announcement of the merger could hinder WorldxChange's ability to attract and retain key employees; and - The risk that, after WorldxChange committed to complete the merger, a more attractive strategic alternative would become available to the Company. Based on all of the above factors and considerations, the WorldxChange board concluded that the WorldxChange merger was advisable, fair to, and in the best interests of WorldxChange and its shareholders and that WorldxChange should proceed with the WorldxChange merger. OPINION OF WORLD ACCESS' FINANCIAL ADVISOR REGARDING THE WORLDXCHANGE MERGER World Access asked Donaldson, Lufkin & Jenrette, in its role as financial advisor, to render an opinion to the World Access board as to the fairness, from a financial point of view, to World Access of the consideration to be paid by World Access. On February 11, 2000, Donaldson, Lufkin & Jenrette rendered an oral opinion to World Access' board of directors, which was subsequently confirmed in writing as of the same date, to the effect that, as of the date of the opinion, and based upon and subject to the assumptions, limitations and qualifications set forth in the opinion, the consideration to be paid by World Access pursuant to the WorldxChange merger agreement was fair to World Access, from a financial point of view. The full text of Donaldson, Lufkin & Jenrette's opinion is attached as Annex D to this joint proxy statement/prospectus. DONALDSON, LUFKIN & JENRETTE'S FAIRNESS OPINION WAS DELIVERED TO THE WORLD ACCESS BOARD ON FEBRUARY 11, 2000 AND RELATES TO THE FAIRNESS OF THE WORLDXCHANGE MERGER AS OF THAT DATE. SOME OF THE ASSUMPTIONS RELIED UPON BY DONALDSON, LUFKIN & JENRETTE IN PREPARING THE ANALYSES DESCRIBED BELOW AND IN RENDERING ITS OPINION HAVE CHANGED SINCE DONALDSON, LUFKIN & JENRETTE WAS ASKED TO DELIVER ITS OPINION. THE ASSUMPTIONS UNDERLYING THE PROJECTIONS FOR WORLD ACCESS AND WORLDXCHANGE HAVE BEEN REVISED TO REFLECT LOWER CARRIER REVENUES FOR BOTH WORLD ACCESS AND WORLDXCHANGE DUE TO A REDUCTION IN THE NUMBER OF CARRIER CUSTOMERS RESULTING FROM A STRENGTHENED CREDIT POLICY IMPLEMENTED BY WORLD ACCESS AS WELL AS LOWER ORGANIC GROWTH IN RETAIL REVENUES FOR WORLDXCHANGE DUE TO A GREATER FOCUS ON WORLD ACCESS' EUROPEAN RETAIL ACQUISITION STRATEGY, WHICH SEEKS TO INCREASE RETAIL REVENUES THROUGH ACQUISITIONS. IN ADDITION, THE MARKET PRICE OF SHARES OF WORLD ACCESS COMMON STOCK HAS DECREASED SIGNIFICANTLY SINCE DONALDSON, LUFKIN & JENRETTE RENDERED ITS OPINION. WORLD ACCESS HAS NOT ASKED, AND DOES NOT INTEND TO ASK, DONALDSON, LUFKIN & JENRETTE FOR A NEW OR UPDATED FAIRNESS OPINION AND DONALDSON, LUFKIN & JENRETTE HAS NOT BEEN ASKED TO UPDATE THE ANALYSES DESCRIBED ABOVE AND IS NOT OPINING AS TO THE FAIRNESS OF THE WORLDXCHANGE MERGER AS OF ANY DATE SUBSEQUENT TO THE DATE OF ITS OPINION. Donaldson, Lufkin & Jenrette expressed no opinion as to the price at which World Access common stock would actually trade at any time. Donaldson, Lufkin & Jenrette's opinion did not address the relative merits of the WorldxChange merger and the other business strategies considered by the World Access board of directors nor did it address the decision of the World Access board of directors to proceed with the WorldxChange merger. Donaldson, Lufkin & Jenrette's opinion did not constitute a recommendation to any World Access stockholder as to how a stockholder should vote on the WorldxChange merger. 92 106 World Access and WorldxChange determined the consideration to be paid by World Access in arm's length negotiations, in which Donaldson, Lufkin & Jenrette advised World Access. World Access selected Donaldson, Lufkin & Jenrette as its financial advisor because Donaldson, Lufkin & Jenrette is an internationally recognized investment banking firm that has substantial experience providing strategic advisory services. Donaldson, Lufkin & Jenrette was not retained as an advisor or agent to the stockholders of World Access or any other person. As part of its investment banking business, Donaldson, Lufkin & Jenrette is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. World Access did not impose any restrictions or limitations upon Donaldson, Lufkin & Jenrette with respect to the investigations made or the procedures followed by Donaldson, Lufkin & Jenrette in rendering its opinion. In arriving at its opinion, Donaldson, Lufkin & Jenrette: - reviewed the draft dated February 10, 2000 of the WorldxChange merger agreement and assumed the final form of that agreement would not vary in any respect material to Donaldson, Lufkin & Jenrette's analysis; - reviewed financial and other information that was publicly available or furnished to it by World Access and WorldxChange, including information provided during discussions with their respective managements, which included financial projections of each of World Access and WorldxChange that were prepared by World Access' management; - compared financial and securities data of World Access and WorldxChange with various other companies whose securities are traded in public markets; - reviewed the historical stock prices and trading volumes of the common stock of World Access; - reviewed prices paid in selected other business combinations; and - conducted other financial studies, analyses and investigations as Donaldson, Lufkin & Jenrette deemed appropriate for purposes of rendering its opinion. In rendering its opinion, Donaldson, Lufkin & Jenrette relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to it from public sources, that was provided to it by World Access and WorldxChange or their respective representatives, or that was otherwise reviewed by it. Donaldson, Lufkin & Jenrette relied upon the estimates of the management of World Access of the operating synergies achievable as a result of the WorldxChange merger. Donaldson, Lufkin & Jenrette also assumed that the financial projections of World Access and WorldxChange supplied to it were reasonably prepared on the basis reflecting the best currently available estimates and judgments of the management of World Access as to the future operating and financial performance of World Access and WorldxChange. Donaldson, Lufkin & Jenrette expressed no opinion with respect to the forecasts or the assumptions on which they were based, and Donaldson, Lufkin & Jenrette did not assume any responsibility for making any independent evaluation or appraisal of the assets or liabilities of World Access or for making any independent verification of any of the information reviewed by Donaldson, Lufkin & Jenrette. Donaldson, Lufkin & Jenrette also did not assume any responsibility for making any independent investigation of any legal matters affecting World Access or WorldxChange and assumed the correctness of all legal advice given to each of them and to World Access' board of directors, including advice as to the tax consequences of the WorldxChange merger. Donaldson, Lufkin & Jenrette assumed that the WorldxChange merger would be accounted for as a purchase under generally accepted accounting principles and that it would qualify as a tax-free reorganization for U.S. federal income tax purposes. Donaldson, Lufkin & Jenrette's opinion is necessarily based upon economic, market, financial and other conditions as they existed on, and on information available to Donaldson, Lufkin & Jenrette as of, the date of its opinion. Donaldson, Lufkin & Jenrette states in its opinion that, although subsequent developments may affect its opinion, Donaldson, Lufkin & Jenrette does not have any obligation to update, revise or reaffirm its opinion. 93 107 SUMMARY OF FINANCIAL ANALYSES PERFORMED BY DONALDSON, LUFKIN & JENRETTE The following is a summary of the financial analyses Donaldson, Lufkin & Jenrette presented to the World Access board of directors on February 11, 2000 in connection with the preparation of Donaldson, Lufkin & Jenrette's opinion. No company or transaction Donaldson, Lufkin & Jenrette used in the analyses described below is directly comparable to World Access, WorldxChange or to the WorldxChange merger. In addition, mathematical analysis such as determining the mean or median is not in itself a meaningful method of using selected company or transaction data. The analyses Donaldson, Lufkin & Jenrette performed are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. The information summarized in the tables which follow should be read in conjunction with the accompanying text. For purposes of the following analyses, Donaldson, Lufkin & Jenrette used the February 9, 2000 closing price of the World Access common stock of $22.88 per share. 1. Consideration paid analysis Donaldson, Lufkin & Jenrette reviewed the consideration to be paid by World Access pursuant to the WorldxChange merger agreement by using an exchange ratio of (i) 0.6583, which assumes an average stock price of at least $20.38 per share and is referred to as the initial exchange ratio for the ten-day period ending at the close of trading on the second trading day preceding the closing, which is referred to as the average period, and (ii) 1.1666, which assumes an average stock price of less than $20.38 per share during the averaging period and the issuance of the maximum number of contingent shares on the first anniversary of the completion of the WorldxChange merger, which is referred to as the maximum exchange ratio. In reviewing the consideration to be paid by World Access, Donaldson, Lufkin & Jenrette used the closing stock price on February 9, 2000 of $22.88 per share to determine the consideration to be paid based on the initial exchange ratio and $11.50 per share, the floor price, to determine the consideration to be paid based on the maximum exchange ratio. 2. Comparable publicly traded company analysis Donaldson, Lufkin & Jenrette analyzed the market values and trading multiples of selected publicly traded emerging multinational carriers that Donaldson, Lufkin & Jenrette believed were reasonably comparable to WorldxChange based on business and financial characteristics. These comparable companies consisted of: (i) IDT Corporation; (ii) Pacific Gateway Exchange, Inc.; (iii) PRIMUS Telecommunications Group, Incorporated; (iv) RSL Communications, Ltd.; and (v) Startec Global Communications Corporation.
In examining these comparable companies, Donaldson, Lufkin & Jenrette calculated the enterprise value of each company as a multiple of its respective: - last quarter annualized revenue; - projected calendar year 2000 revenue; - gross property, plant and equipment; and - net property plant and equipment. The enterprise value of a company is equal to the value of its fully-diluted common equity plus debt and the liquidation value of outstanding preferred stock, if any, minus cash and the value of other assets, including minority interests in other entities. All historical data was derived from publicly available sources as of February 9, 2000 and all projected data was obtained from Wall Street research reports. 94 108 Donaldson, Lufkin & Jenrette performed this analysis in order to compare the ratio of WorldxChange's enterprise value to its last quarter annualized revenues, estimated 2000 revenues as provided by World Access, gross property, plant and equipment and net property, plant and equipment to those of the comparable companies and to the reference range, which represents a tighter range of the ratios as deemed reasonable by Donaldson, Lufkin and Jenrette. For purposes of this analysis, Donaldson, Lufkin & Jenrette compared the implied multiples of World Access' consideration to be paid based on the initial exchange ratio, which results in a higher value for the consideration to be paid than the maximum exchange ratio. In addition, Donaldson, Lufkin & Jenrette compared the enterprise value of WorldxChange, based on the initial exchange ratio, to the implied enterprise values obtained by the above mentioned ratios of the comparable companies and the reference range and WorldxChange's last quarter annualized revenues, estimated 2000 revenues as provided by World Access, gross property, plant and equipment and net property, plant and equipment. Donaldson, Lufkin & Jenrette's analysis of the comparable companies yielded the following multiple ranges and implied enterprise values: COMPARABLE COMPANY ANALYSIS ($ IN MILLIONS)
COMPARABLE COMPANIES REFERENCE RANGE -------------------- -------------------- WORLDXCHANGE HIGH LOW HIGH LOW ------------ --------- ------- -------- -------- Enterprise Value/Last Quarter Annualized Revenues................ 1.5x 2.2x 0.6x 1.7x 1.2x Enterprise Value/2000 Estimated Revenues........................... 1.2x 1.9x 0.7x 1.5x 1.0x Enterprise Value/Gross Property, Plant and Equipment................ 3.2x 7.5x 2.5x 4.5x 3.5x Enterprise Value/Net Property, Plant and Equipment...................... 4.8x 8.8x 2.9x 5.5x 4.5x Implied Enterprise Value based on: Last Quarter Annualized Revenues... $924.5 $1,361.9 $406.9 $1,075.1 $ 758.9 2000 Estimated Revenues............ 924.5 1,450.6 510.8 1,141.3 760.9 Gross Property, Plant and Equipment....................... 924.5 2,173.8 711.4 1,295.9 1,007.9 Net Property, Plant and Equipment....................... 924.5 1,705.1 565.7 1,066.5 872.6
The comparable company analysis showed that the implied multiples of World Access' consideration, based on the initial exchange ratio, were either within or lower than the range of multiples implied by the prevailing market prices of the comparable companies. In addition, the analysis showed that the enterprise value based on World Access' consideration, based on the initial exchange ratio, was either within or lower than the range of enterprise values implied by the multiples of the comparable companies and WorldxChange's last quarter annualized revenues, estimated 2000 revenues, gross property, plant and equipment and net property, plant and equipment. 3. Analysis of selected M&A transactions Donaldson, Lufkin & Jenrette reviewed selected mergers and acquisitions transactions of companies that operate businesses reasonably similar to that of WorldxChange. In addition, for purposes of this analysis, Donaldson, Lufkin & Jenrette selected key mergers and acquisitions transactions deemed most relevant by Donaldson, Lufkin & Jenrette based on the business characteristics of the acquiror and/or target and the business nature of the transaction. The following mergers and acquisitions transactions were deemed most relevant by Donaldson, Lufkin & Jenrette: - Viatel, Inc.'s acquisition of Destia Communications, Inc. - PRIMUS Telecommunications Group, Incorporated's acquisition of TresCom International, Inc. 95 109 In examining these acquisitions, Donaldson, Lufkin & Jenrette calculated the enterprise value of the acquired company implied by each of these transactions as a multiple of last quarter annualized revenue and net property, plant and equipment. In addition, Donaldson, Lufkin & Jenrette calculated the enterprise values implied by the above mentioned ratios of the selected mergers and acquisitions transactions and WorldxChange's last quarter annualized revenue and net property, plant and equipment. Donaldson, Lufkin & Jenrette's analysis of these comparable acquisitions yielded the following multiple ranges and implied enterprise values: SELECTED MERGERS AND ACQUISITIONS TRANSACTIONS ($ IN MILLIONS)
ALL SELECTED M&A KEY SELECTED M&A TRANSACTIONS TRANSACTIONS -------------------- -------------------- WORLDXCHANGE HIGH LOW HIGH LOW ------------ -------- -------- -------- -------- Enterprise Value/Last Quarter Annualized Revenues.............. 1.5x 4.0x 1.2x 2.6x 1.2x Enterprise Value/Net Property, Plant and Equipment.............. 4.8x 42.0x 5.9x 6.2x 5.9x Implied Enterprise Value based on: Last Quarter Annualized Revenues... $924.5 $2,529.6 $ 733.9 $1,631.6 $ 733.9 Net Property, Plant and Equipment........................ 924.5 8,143.1 1,148.3 1,206.6 1,148.3
The analysis of selected mergers and acquisitions transactions showed that the implied multiples of World Access' consideration, based on the initial exchange ratio, were, in each case, within or lower than the range of multiples paid by the selected mergers and acquisitions transactions as well as by the key mergers and acquisitions transactions. In addition, the analysis of selected mergers and acquisitions transactions showed that the transaction value of World Access' consideration, based on the initial exchange ratio, was, in each case, within or lower than the range of implied transaction values based on the multiples paid by selected mergers and acquisition transactions, as well as by the key merger and acquisitions transactions. 4. Discounted cash flow analysis In addition, Donaldson, Lufkin & Jenrette performed a discounted cash flow analysis for WorldxChange on a stand-alone basis. The analysis was based upon financial projections, including synergies, for the five-year period ending fiscal 2004 as provided by the management of World Access. Donaldson, Lufkin & Jenrette performed this analysis to estimate the net present value of WorldxChange's enterprise value and to compare it to the implied enterprise value based on World Access' consideration. Donaldson, Lufkin & Jenrette calculated EBITDA for WorldxChange. EBITDA is earnings before interest, taxes, depreciation and amortization. Donaldson, Lufkin & Jenrette calculated the terminal value of WorldxChange at the end of the forecast period, by applying a range of estimated EBITDA multiples selected in Donaldson, Lufkin & Jenrette's subjective judgment. The terminal value estimates are a hypothetical approximation of the value of the enterprise's cash flows beyond the end of the five-year period covered by the management's projections. The management's projected EBITDA and Donaldson, Lufkin & Jenrette's subjective estimate of the terminal values based on management's projected EBITDA were then discounted to the present using a range of discount rates selected in Donaldson, Lufkin & Jenrette's subjective judgment. DISCOUNTED CASH FLOW ANALYSIS ($ IN MILLIONS) Range of EBITDA Multiples................................... 10.0x - 12.0x Discount rates.............................................. 15.0% - 18.3% Implied Total Enterprise Value.............................. $758.2 - $998.1 WorldxChange Enterprise Value............................... $924.5
96 110 The above analysis shows that the implied enterprise value based on World Access' consideration, based on the initial exchange ratio, of $924.5 million is near the high range of the implied enterprise values of $758.2 million to $998.1 million obtained by the analysis. The summary set forth above does not purport to be a complete description of the analyses performed by Donaldson, Lufkin & Jenrette but describes the material elements of the presentation that Donaldson, Lufkin & Jenrette made to the World Access board on February 11, 2000 in connection with the preparation of Donaldson, Lufkin & Jenrette's fairness opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, an opinion is not readily susceptible to a summary description. Donaldson, Lufkin & Jenrette conducted each of the analyses in order to provide a different perspective on the transaction and to add to the total mix of information available. Donaldson, Lufkin & Jenrette did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to fairness from a financial point of view. Rather, in reaching its conclusion, Donaldson, Lufkin & Jenrette considered the results of the analyses in light of each other and ultimately reached its opinion based on the results of all analyses taken as a whole. Donaldson, Lufkin & Jenrette did not place any particular reliance or weight on any individual analysis, but instead concluded that its analyses, taken as a whole, supported its determination. Accordingly, notwithstanding the separate factors summarized above, Donaldson, Lufkin & Jenrette has indicated to World Access that it believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its opinion. The analyses Donaldson, Lufkin & Jenrette performed are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. Engagement letter Under the terms of an engagement letter dated January 18, 2000, World Access agreed to pay Donaldson, Lufkin & Jenrette a fee of $850,000 at the time that Donaldson, Lufkin & Jenrette delivered to the World Access board of directors its opinion, irrespective of the conclusion reached in the opinion, and to pay Donaldson, Lufkin & Jenrette a fee of $1.5 million, less any amounts paid pursuant to delivery of the fairness opinion, payable in cash promptly upon consummation of a business combination between World Access and WorldxChange in one or a series of transactions, by merger, consolidation, or any other business combination, by purchase involving all or a substantial amount of the business, securities or assets of WorldxChange or otherwise. In addition, World Access agreed to reimburse Donaldson, Lufkin & Jenrette for all of its out-of-pocket expenses, including the reasonable fees and expenses of counsel incurred by Donaldson, Lufkin & Jenrette in connection with its engagement, and to indemnify Donaldson, Lufkin & Jenrette for liabilities and expenses arising out of Donaldson, Lufkin & Jenrette's engagement, including liabilities under federal securities laws. The terms of the fee arrangement with Donaldson, Lufkin & Jenrette, which Donaldson, Lufkin & Jenrette and World Access believe are customary in transactions of this nature, were negotiated at arms-length between World Access and Donaldson, Lufkin & Jenrette. World Access' board of directors was aware of the arrangement, including the fact that a significant portion of the aggregate fee payable to Donaldson, Lufkin & Jenrette is contingent upon consummation of the WorldxChange merger. 97 111 Other relationships In the ordinary course of business, Donaldson, Lufkin & Jenrette may own or actively trade the securities of World Access for its own accounts and for the accounts of its customers and, accordingly, may at any time hold a long or short position in World Access securities. Donaldson, Lufkin & Jenrette has performed investment banking and other services for World Access in the past and has been compensated for such services, including: - acting as financial advisor to World Access in connection with its acquisition of FaciliCom International, Inc. in 1999 and acting as financial advisor in connection with the exchange offer for FaciliCom's outstanding senior notes; - acting as financial advisor in connection with the sale of World Access' Telco Systems Inc. subsidiary and World Access' Wireless Local Loop Division in 2000; and - acting as financial advisor to World Access in connection with its pending acquisitions of both STAR and TelDaFax in 2000. CONSIDERATION THAT WORLDXCHANGE SHAREHOLDERS WILL RECEIVE IN THE WORLDXCHANGE MERGER After the completion of the WorldxChange merger, WorldxChange will be a wholly-owned subsidiary of World Access and each outstanding share of WorldxChange common stock held by WorldxChange or a subsidiary of WorldxChange will be cancelled and will no longer be outstanding. Each share of WorldxChange common stock not held by WorldxChange or a subsidiary of WorldxChange will be converted into the right to receive 0.6583 shares of World Access common stock. Under the WorldxChange articles of incorporation, all outstanding shares of WorldxChange preferred stock voted in favor of the WorldxChange merger will be deemed automatically converted into shares of WorldxChange common stock immediately prior to the completion of the WorldxChange merger. Therefore, outstanding shares of WorldxChange preferred stock voted in favor of the WorldxChange merger will be entitled to the WorldxChange merger consideration described above on an as-converted basis. No fractional shares will be issued. Instead, WorldxChange shareholders will receive cash based on the market price of World Access common stock. COMPLETION OF THE WORLDXCHANGE MERGER The closing of the WorldxChange merger will occur on the second business day following the satisfaction or waiver of all conditions to the completion of the WorldxChange merger, or at another time as World Access and WorldxChange agree. On the date of the closing of the WorldxChange merger, World Access and WorldxChange will file a certificate of merger with the Delaware Secretary of State and an agreement of merger with the California Secretary of State. The WorldxChange merger will be effective upon the filing of the certificate of merger and the agreement of merger. MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE WORLDXCHANGE MERGER The following discussion summarizes the material federal income tax consequences of the WorldxChange merger. The following discussion is not a complete analysis of all aspects of federal income taxation that may be relevant to you as a WorldxChange shareholder in light of your particular circumstances. For example, it does not address the federal income tax considerations or the special tax rules that may be relevant to you if you are one of the following types of holders: - an insurance company; - a tax-exempt organization; - an employee stock ownership plan; - a bank; - a broker, dealer or financial institution; 98 112 - a holder that holds WorldxChange capital stock as part of a position in a "straddle" or as part of a "hedging" or "conversion" transaction for federal income tax purposes; - a holder that has a "functional currency" other than the United States dollar; - a holder subject to the alternative minimum tax; - a holder that is not a citizen or resident of the United States, or that is a foreign corporation, foreign partnership or foreign estate or trust as to the United States; - a holder who acquired shares of WorldxChange capital stock pursuant to the exercise of options or otherwise as compensation or through a tax-qualified retirement plan; or - a holder of options to acquire shares of WorldxChange capital stock. In addition, the discussion does not consider the effect of any foreign, state, local, or other tax laws, or any tax consequences, such as estate or gift tax, other than the federal income tax consequences of the WorldxChange merger that may be applicable to WorldxChange shareholders, or except as expressly provided below, the consequences of transactions completed before or after the WorldxChange merger. Further, this discussion assumes that as a WorldxChange shareholder, you hold your WorldxChange capital stock as a "capital asset" within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended. Generally, a capital asset is property held for investment. This discussion is based on the Internal Revenue Code and final, temporary and proposed treasury regulations promulgated under the Internal Revenue Code, administrative pronouncements and rulings, and judicial decisions as of the date hereof, all of which are subject to change or differing interpretations at any time with possible retroactive effect and any such change could affect the continuing validity of this discussion. We have not requested a ruling from the IRS with respect to the federal income tax consequences of the WorldxChange merger nor is the completion of the WorldxChange merger conditioned on the receipt by World Access or WorldxChange of a ruling or an opinion of tax counsel concerning the tax consequences. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES TO YOU OF THE WORLDXCHANGE MERGER. The WorldxChange merger Long Aldridge & Norman LLP has rendered an opinion to World Access with respect to the material federal income tax consequences of the WorldxChange merger. Among other opinions, counsel has opined that the WorldxChange merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. In rendering its opinion as to status of the WorldxChange merger as a "reorganization" and in rendering its other opinions summarized below concerning the material federal income tax consequences of the WorldxChange merger, counsel has relied upon, and assumed that: - the WorldxChange merger and the related transactions described in the WorldxChange merger agreement and exhibits will be consummated as described in the WorldxChange merger agreement and exhibits and this joint proxy statement/prospectus; - the respective parties to such documents and all parties referred to in such documents will act in all respects at all relevant times in conformity with the requirements and provisions of such documents; - none of the terms and conditions contained in such documents has been or will be waived or modified in any respect prior to the closing of the WorldxChange merger; - all statements, facts and representations made in the WorldxChange merger agreement, this joint proxy statement/prospectus and in those representations to counsel contained in certificates of their officers are true, complete and correct, without regard to any knowledge or other qualifications set forth therein and without undertaking to verify such statements, facts and representations by any independent investigation or review; 99 113 - all covenants contained in the WorldxChange merger agreement and exhibits are performed without waiver or breach of a material provision; and - other customary assumptions as to the accuracy and authenticity of documents provided to counsel. Counsel's opinion neither binds the Internal Revenue Service nor precludes it or the courts from adopting a contrary position, and no assurance can be given that contrary positions will not be successfully asserted by the Internal Revenue Service or adopted by a court if the issues are litigated. If the Internal Revenue Service or the courts successfully challenge the status of the WorldxChange merger as a reorganization or if any of the assumptions set forth above is inaccurate, the WorldxChange merger may not be treated as a reorganization. If the WorldxChange merger is not treated as a reorganization, each WorldxChange shareholder generally will be required to recognize gain or loss equal to the difference between the sum of the fair market value of the World Access common stock and cash received in the WorldxChange merger and such shareholder's tax basis in the WorldxChange common stock surrendered in the WorldxChange merger. In that case, the stockholder's tax basis in the World Access common stock received in the WorldxChange merger generally would equal the fair market value of that stock on the day on the WorldxChange merger, and the holding period for the World Access common stock received in the WorldxChange merger generally would begin on the day following the WorldxChange merger. In addition, if the WorldxChange merger is not treated as a reorganization, WorldxChange would incur gain equal to the excess of the sum of the cash and fair market value of the World Access common stock issued in the WorldxChange merger over the tax basis in WorldxChange's assets. This gain, if recognized, would give rise to substantial tax liability and could have a material adverse effect on the value of WorldxChange and its stock. The balance of this discussion is based on the conclusion in the opinion that the WorldxChange merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. WorldxChange has received the opinion of O'Melveny & Myers LLP to the effect that the WorldxChange merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a)(1) of the Internal Revenue Code. The following discussion summarizes the opinions rendered solely by Long Aldridge & Norman LLP to World Access with respect to the material federal income tax consequences of the WorldxChange merger. World Access stockholders will not recognize any gain or loss for federal income tax purposes solely as a result of the WorldxChange merger. Tax considerations for WorldxChange shareholders Receipt of World Access stock in the WorldxChange merger. You will not recognize gain or loss upon the exchange of your WorldxChange common stock and preferred stock for World Access common stock, except for the receipt of cash in lieu of a fractional share of World Access common stock and the portion of the World Access common stock you received in payment of accrued and unpaid dividends on your WorldxChange preferred stock that is treated by the Internal Revenue Service as a dividend distribution to you, as more fully described below. Your tax basis in the shares of World Access common stock you receive in the exchange will be the same as the tax basis of your shares of WorldxChange capital stock, and if you hold shares of both common stock and preferred stock in WorldxChange, by aggregating the tax basis of all such shares, surrendered in the exchange less any portion of such basis allocable to any fractional share interest in any share of World Access common stock for which you receive cash. The holding period of the World Access common stock you receive in the exchange will include the holding period during which you held your WorldxChange capital stock. 100 114 Cash for fractional shares. Based on the current published ruling position of the Internal Revenue Service, you will recognize gain or loss measured by the difference between the amount of cash received in lieu of a fractional share interest in World Access common stock and the portion of the tax basis of your WorldxChange capital stock allocable to the fractional share interest. The gain or loss will be capital gain or loss, provided that you held the WorldxChange capital stock as a capital asset as of the effective time of the WorldxChange merger, and will be long-term capital gain if your WorldxChange capital stock was held for more than one year as of the effective time of the WorldxChange merger. Dividends on escrowed World Access common stock. Dividends paid to you by World Access on World Access common stock you receive in the exchange, including the shares held pursuant to the escrow agreement established under the WorldxChange merger agreement will be treated as if you held the shares of World Access common stock directly. Return of escrowed shares to World Access to satisfy claims. Pursuant to the escrow agreement established under the WorldxChange merger agreement, if a claim is successfully asserted by World Access against the escrow fund, the escrow agent will be instructed to return to World Access that number of shares of World Access common stock with a value in an amount equal to the claim using the $20.38 share price to value the returned shares. Any returned shares would reduce on a pro rata basis the escrowed shares that could be distributed to WorldxChange shareholders after any indemnification claims of World Access under the merger agreement are satisfied. Because the number of shares to be returned to World Access from the escrow account is based on the initial negotiated value of $20.38 per share of World Access common stock, you will realize no benefit or detriment from any appreciation or depreciation of the World Access common stock following the effective time of the WorldxChange merger. Accordingly, the return of the shares to World Access in satisfaction of escrow claims will not result in your recognition of gain or loss and instead, will be treated as a non-taxable purchase price adjustment as part of the original stock-for-stock exchange. Upon a return of any such shares to World Access, your tax basis in your pro rata share of the returned shares will be added to the tax basis of your remaining shares of World Access common stock received in the exchange. Sale of escrowed shares held in the expense fund. To the extent escrowed shares of World Access common stock held in the expense fund established under the WorldxChange merger agreement are sold by the shareholder representative, you will be required to recognize gain or loss for federal income tax purposes with respect to your allocable share of the gross proceeds as if you sold the shares of World Access common stock directly. Release of escrowed shares to WorldxChange shareholders. You will not recognize any gain or loss or any interest income, as a result of the distribution to you of any of the World Access common stock held in either the escrow fund or the expense fund. Under both arrangements established under the WorldxChange merger agreement, the stock-for-stock exchange takes place at the effective time of the WorldxChange merger, not later when the escrowed shares of World Access common stock are released from the applicable escrow provisions to you as former WorldxChange shareholders. World Access common stock received for accrued dividends on WorldxChange preferred stock. The law is unclear as to how shares you receive that are or could be attributed to accrued but undeclared and unpaid dividends, or "dividend related shares," will be characterized for federal income tax purposes. In at least two private letter rulings, which cannot be relied upon by other taxpayers as binding legal precedent, the Internal Revenue Service has taken the position that common stock issued by an acquiring company in payment of the dividends would be treated as part of an overall stock-for-stock exchange and would be tax-free to the recipient shareholders. Moreover, dividends have not been declared on any of the shares of the WorldxChange preferred stock, will not be declared as of the effective time of the WorldxChange merger, and, in general, with exceptions not here applicable, shareholders are not taxable on unpaid dividends that have not been declared. Based upon these principles, you would not recognize gain or loss on the receipt of the dividend related shares. Furthermore, the Internal Revenue Service has not taken a position in any reported case or in any published or private ruling that shares received in exchange for shares in an otherwise tax-free acquisition should be treated in part as payment of unpaid dividends. In 101 115 this case, your tax basis in the dividend related shares will be the same as your basis in the other shares of World Access common stock received in the exchange and your holding period for the dividend related shares will include the holding period during which you held your WorldxChange preferred stock. Notwithstanding the absence of authority on point, however, it is possible that the Internal Revenue Service could attempt to treat the receipt of shares identified with accrued but unpaid dividends, including the dividend related shares, as the actual or deemed payment of dividends, and therefore taxable as ordinary income to the extent of your allocable portion of the accumulated earnings and profits, if any, as determined for federal income tax purposes, of WorldxChange. If the amount of the actual or deemed payment exceeds the earnings and profits, then the excess first will be applied against and reduce your basis in your preferred stock, but not below zero, and then any excess over the amount will be treated as capital gain from the sale of the WorldxChange stock and will be long-term capital gain if your WorldxChange preferred stock was held for more than one year as of the effective time of the WorldxChange merger. If the actual or deemed payment is treated as a dividend and you are a corporation, the distribution may qualify for the "dividends received deduction", and may possibly be subject to the "extraordinary dividend" provisions of the Internal Revenue Code. Here, your tax basis in the dividend related shares will be the fair market value of such shares upon receipt and your holding period will begin upon receipt of such shares. Due to the inherently factual nature of these determinations, coupled with the lack of Internal Revenue Service or judicial authority as to how your receipt of the dividend related shares should be characterized for federal income tax purposes, Long Aldridge & Norman LLP has expressed no opinion with respect to this matter. World Access intends to take the position that the dividend related shares should be treated as part of the overall stock-for-stock exchange. No ruling from the Internal Revenue Service has been sought. Thus, no assurance can be given to you that the position currently intended to be taken by World Access described above will be accepted by the Internal Revenue Service. Cash received by dissenting WorldxChange shareholders. If you exercise appraisal rights, any cash received in connection with exercising your appraisal rights will be treated as having been received in redemption of your WorldxChange common stock, provided the payment is not treated as a dividend payment. If, after the redemption, you own no World Access stock after giving effect to the constructive ownership rules of the Internal Revenue Code, then you will recognize gain or loss measured by the difference between the amount of cash received and the tax basis of your WorldxChange common stock surrendered, which will be long-term capital gain or loss if your WorldxChange common stock was held for more than one year as of the effective time of the WorldxChange merger. Reporting requirements. When you file your federal income tax return for the taxable year in which the WorldxChange merger occurs, you will be required to attach a statement to your return which includes information required by the Internal Revenue Service concerning your participation as a WorldxChange shareholder in the WorldxChange merger. Accordingly, you are urged to consult with your tax advisor concerning compliance with this requirement and any other tax reporting requirements. Tax considerations for the corporate parties World Access, WorldxChange Communications, Inc. formerly known as CTI Merger Co. and WorldxChange. No gain or loss will be recognized by World Access, WorldxChange Communications, Inc., which was formerly known as CTI Merger Co. and is a subsidiary of World Access, or WorldxChange as a result of the WorldxChange merger. Potential "Excess Parachute Payments." Under circumstances, acceleration of the vesting of specific WorldxChange options and the making of payments by World Access to WorldxChange employees following the WorldxChange merger may result in "excess parachute payments" to a "disqualified individual" within the meaning of Section 280G of the Internal Revenue Code. World Access will not be entitled to a tax deduction for the amounts determined to be excess parachute payments, which will increase World Access' taxable income or reduce its taxable loss, if applicable, by the amount of any excess parachute payments. Excess parachute payments are also subject to a 20% excise tax payable by the 102 116 disqualified individual receiving the payment. Because the calculation of whether the amounts may be determined to be excess parachute payments cannot be made until the effective time of the WorldxChange merger or thereafter, no determination can be made at this time whether any amounts will be determined to be excess parachute payments. Therefore, Long Aldridge & Norman LLP has expressed no opinion with respect to this matter. Limitation on WorldxChange tax attributes. Under the Internal Revenue Code, WorldxChange Communications, Inc., which was formerly known as CTI Merger Co. will succeed to the net operating losses, certain "recognized built-in losses," capital losses, general business credits, minimum tax credits, excess foreign tax credits and other tax attributes of WorldxChange. Use of these tax attributes by World Access is subject to specific limitations under the Internal Revenue Code and provisions of the treasury regulations governing the filing of a consolidated federal income tax return, such as the "separate return limitation year" rules. After an ownership change, the amount of the loss corporation's taxable income for a post-ownership change year that may be offset by the loss corporation's net operating losses arising before the ownership change is annually limited to an amount referred to as the "Section 382 limitation." The Section 382 limitation generally equals the product of (i) the fair market value of the loss corporation's stock immediately before the ownership change, multiplied by (ii) the federal long-term, tax-exempt rate published monthly by the Internal Revenue Service (5.41% for September 2000). WorldxChange and its domestic subsidiaries are members of a "consolidated group" which files a consolidated federal income tax return. The WorldxChange consolidated group, with WorldxChange Communications, Inc., which was formerly known as CTI Merger Co. as WorldxChange's corporate successor will constitute a "loss subgroup" which will undergo a Section 382 ownership change upon the completion of the WorldxChange merger. Utilization of any such loss subgroup's net operating loss carryover, which we refer to as the "pre-change WorldxChange loss subgroup net operating losses," against future World Access consolidated federal taxable income will be subject to an annual loss subgroup Section 382 limitation. An additional limitation may apply under which the pre-change WorldxChange loss subgroup net operating losses can only be used to the extent of the "qualifying separate return limitation year subgroup" members' aggregate, cumulative contribution to World Access consolidated taxable income or the "separate return limitation year limitation." Because the WorldxChange loss subgroup and its separate return limitation year net operating loss subgroup should be treated as co-extensive, and the Section 382 ownership change and separate return limitation year event will occur at the same time, the separate return limitation year limitation should be eliminated with respect to the WorldxChange loss subgroup net operating losses. Limitation on World Access tax attributes. World Access and its domestic subsidiaries are members of a "consolidated group" which files a consolidated federal income tax return. For its taxable year ended December 31, 1999, the World Access consolidated group incurred a consolidated net operating loss, and has a consolidated net operating loss carryover. As such, it constitutes a "loss group." World Access believes that the World Access loss group may have already incurred a Section 382 ownership change in either or both of its 1998 and 1999 taxable years. Thus, the World Access loss group's ability to utilize its own consolidated net operating loss carryover as of December 31, 1999 against its future consolidated federal taxable income may already be subject to an annual loss group Section 382 limitation. If the completion of either or both the WorldxChange merger and the STAR merger does result in an ownership change for the World Access loss group, the amount of the annual loss group Section 382 limitation will depend in part, on future values which cannot be predicted at this time. In the case of successive ownership changes, the applicable pre-ownership change World Access loss group or member's net operating losses will be subject to the lowest amount of Section 382 limitation which results from any of such Section 382 ownership changes. If instead, consummation of either or both the WorldxChange merger and the STAR merger does not result in an ownership change for the World Access loss group, then any existing annual loss group Section 382 limitation for World Access will simply continue to apply. 103 117 EXCHANGE OF WORLDXCHANGE STOCK CERTIFICATES FOR WORLD ACCESS STOCK CERTIFICATES When the WorldxChange merger is completed, World Access' exchange agent will mail to WorldxChange shareholders a letter of transmittal and instructions for use in surrendering WorldxChange stock certificates in exchange for World Access stock certificates. When WorldxChange shareholders deliver their WorldxChange stock certificates to the exchange agent along with an executed letter of transmittal and any other required documents, their WorldxChange stock certificates will be canceled, and WorldxChange shareholders will receive World Access stock certificates representing the number of full shares of World Access common stock to which the WorldxChange shareholder is entitled under the WorldxChange merger agreement. WorldxChange shareholders will receive payment in cash in lieu of any fractional shares of World Access common stock which would have been otherwise issuable in the WorldxChange merger. YOU SHOULD NOT SUBMIT YOUR WORLDXCHANGE STOCK CERTIFICATES FOR EXCHANGE UNLESS AND UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF WORLD ACCESS AND WORLDXCHANGE The shares of World Access common stock to be issued in the WorldxChange merger will be registered under the Securities Act of 1933. These shares will be freely transferable under the Securities Act of 1933, except for shares of World Access common stock issued to any person who is an affiliate of either of World Access or WorldxChange. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under common control with either of World Access or WorldxChange and may include some of their respective officers and directors, as well as their respective principal stockholders. Affiliates may not sell their shares of World Access common stock acquired in the WorldxChange merger except pursuant to: - an effective registration statement under the Securities Act of 1933 covering the resale of those shares; - Rule 145 under the Securities Act of 1933; or - any other applicable exemption under the Securities Act of 1933. Because the WorldxChange merger is a statutory merger in which WorldxChange shareholders will exchange shares for shares of World Access, the WorldxChange merger will be subject to Rule 145. Under Rule 145, any person who is an affiliate of either WorldxChange or World Access as of the time the merger is approved by shareholders will be able to sell World Access shares received in the merger only as follows: - immediately following the merger, in limited quantity through a broker so long as World Access has timely filed all reports required to be filed with the Securities and Exchange Commission for the 12 months preceding the sale of the shares; or - after that person has held the shares for at least 12 months following the closing of the merger, in unlimited quantity, so long as World Access has timely filed all reports required to be filed with the Securities and Exchange Commission for the 12 months preceding the sale of the shares; or - after that person has held the shares for at least 24 months after the closing of the merger, without restriction. ACCOUNTING TREATMENT OF THE WORLDXCHANGE MERGER We intend to account for the WorldxChange merger as a purchase for financial reporting and accounting purposes, under United States generally accepted accounting principles. World Access and WorldxChange have entered into an executive management services agreement, which provides World Access with effective control over the operations and business affairs of WorldxChange. In addition, World Access and WorldxChange have each entered into voting agreements with stockholders representing more than 50% of their respective voting stock, under which these stockholders have agreed to vote in favor of the WorldxChange merger. For more information regarding the voting agreements, please see pages 111 104 118 and 112. Accordingly, the results of operations of WorldxChange have been included in the consolidated financial statements of World Access as of August 1, 2000. The purchase price will be allocated based on the fair values of the assets acquired and the liabilities assumed. Any excess of cost over fair value of the net tangible assets of WorldxChange acquired will be recorded as goodwill and other intangible assets and will be amortized by charges to operations under United States generally accepted accounting principles. These allocations will be made based upon valuations and other studies that have not yet been finalized. REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE WORLDXCHANGE MERGER The WorldxChange merger is subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which prevents transactions from being completed until required information and materials are furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and the appropriate waiting periods end or expire. World Access, WorldxChange and related parties have filed the required information and materials with the Antitrust Division of the Department of Justice and the Federal Trade Commission. The Department of Justice and Federal Trade Commission granted an early termination of the waiting period, effective April 6, 2000. No further action under the Hart-Scott-Rodino Act is required, as long as the WorldxChange merger is completed prior to April 6, 2001. The Antitrust Division of the Department of Justice or the Federal Trade Commission may challenge the WorldxChange merger on antitrust grounds either before or after expiration of the waiting period. Accordingly, at any time before or after the completion of the WorldxChange merger, either the Antitrust Division of the Department of Justice or the Federal Trade Commission could take action under the antitrust laws. Other persons could take action under the antitrust laws, including seeking to enjoin the WorldxChange merger. Additionally, at any time before or after the completion of the WorldxChange merger, notwithstanding that the applicable waiting period expired or ended, any state could take action under the antitrust laws. There can be no assurance that a challenge to the WorldxChange merger under the antitrust laws will not be made or that, if a challenge is made, it would not be successful. Under the German Competition Act, the German Cartel Office must be notified of the WorldxChange merger, and the WorldxChange merger cannot be completed until approved by the German Cartel Office or a one month waiting period has expired. The waiting period starts from the date that the notification is considered by the German Cartel Office to be complete. During the initial one month waiting period, the German Cartel Office may decide to open a further investigation of the transaction. If a further investigation is instituted, the WorldxChange merger may not be completed until a further three month period has expired or the WorldxChange merger has been cleared. At any time during the period, the German Cartel Office may act to block the WorldxChange merger or impose conditions upon its completion. On May 24, 2000, the German Cartel Office approved the WorldxChange merger. Following the completion of the WorldxChange merger, an information filing must be made in Denmark with the national competition authority. The WorldxChange merger is subject to state and federal telecommunications regulatory approvals. All but two of the state regulatory agencies and the Federal Communications Commission require prior notice or approval of the WorldxChange merger. Applications or notices, as required, requesting either approval or providing notification of the WorldxChange merger have been filed on behalf of World Access and WorldxChange in 48 states and at the Federal Communications Commission. The governing legal standard for approval varies from state to state, but approval of the WorldxChange merger generally requires a showing that it is consistent with the public interest. The Federal Communications Commissions has approved the WorldxChange merger. Except for approvals by state and federal authorities having jurisdiction over telecommunications activities conducted by World Access and WorldxChange, World Access and WorldxChange are not aware of any other material governmental or regulatory approval required for completion of the WorldxChange merger, other than the effectiveness of the registration statement of which this joint proxy statement/prospectus is a part, and compliance with applicable corporate laws of Delaware and California. 105 119 RIGHTS OF DISSENTING WORLDXCHANGE SHAREHOLDERS The following provides a summary of the statutory procedure a dissenting WorldxChange shareholder must follow in order to exercise dissenters' rights under Chapter 13 of the California General Corporation Law. This is a summary of the material aspects of dissenters' rights under California law and is qualified in its entirety by reference to the full text of Chapter 13 of the California law. A copy of Chapter 13 of the California law is attached as Annex G to this joint proxy statement/prospectus and is incorporated by reference into this document. Failure to comply with the procedures set forth in California law will result in the loss or waiver of dissenters' rights. Therefore, this discussion and Chapter 13 of the California law should be reviewed carefully by any WorldxChange shareholder who wishes to exercise statutory dissenters' rights or who wishes to preserve the right to do so. If the WorldxChange merger is completed, only WorldxChange shareholders owning shares on the date for the determination of shareholders entitled to vote on or consent to the WorldxChange merger are entitled to dissenters' rights. Such WorldxChange shareholders must not vote their shares in favor of the WorldxChange merger and must comply with the provisions and procedures of Chapter 13 of the California law to be entitled to require WorldxChange to purchase for cash at their fair market value the WorldxChange shares owned by such shareholder. The fair market value of the WorldxChange shares will be determined as of the day before the first announcement of the terms of the proposed WorldxChange merger, excluding any appreciation or depreciation resulting from the merger but adjusted for any stock split, reverse stock split or share dividend that becomes effective after the announcement. A failure to vote against the WorldxChange merger will not constitute a waiver of dissenters' rights set forth in Chapter 13 of the California law. Any WorldxChange shares as to which dissenters' rights are exercised will not be converted into the right to receive shares of World Access common stock in the merger. The merger agreement provides that WorldxChange will not be the surviving corporation in the WorldxChange merger. Under California law, the surviving corporation will assume WorldxChange's obligations under Chapter 13 of the California law. To qualify as a dissenting share under California law, shares of WorldxChange stock must satisfy each of the following requirements: - the shares of WorldxChange stock must have been outstanding on the record date; - the shares of WorldxChange stock must not have been voted in favor of the WorldxChange merger; - the holder of the shares of WorldxChange stock must make a written demand that WorldxChange repurchase such shares of WorldxChange stock at fair market value; and - the holder of the shares of WorldxChange stock must submit share certificates for endorsement. WorldxChange is required within ten days after the date of the approval of the merger by the required WorldxChange shareholder vote or consent to mail a notice of the approval of the merger to each shareholder who has not voted to approve and adopt the WorldxChange merger, together with: - a copy of Sections 1300 through 1304 of Chapter 13 of the California law; - a statement of the price determined by WorldxChange to represent the fair market value of the dissenting WorldxChange shares; and - a brief description of the procedure to be followed if the shareholder desires to exercise dissenters' rights. The statement of price by WorldxChange constitutes an offer by WorldxChange to purchase all properly dissenting shares at the stated amount. In order to exercise dissenters rights, shareholders must send a written demand to WorldxChange that WorldxChange repurchase their dissenting shares. WorldxChange must receive this demand within 30 days after the date on which notice of the approval of the WorldxChange merger by the outstanding shares of WorldxChange stock is mailed to dissenting shareholders. The demand must state the number and class of 106 120 shares held of record that the shareholder demands that WorldxChange purchase, and a statement of what the dissenting shareholder claims to be the fair market value of the dissenting shares as of the day before the announcement of the proposed merger. The statement of fair market value in this demand by the dissenting shareholder constitutes an offer by the shareholder to sell the shares at this price to WorldxChange. In addition, within 30 days after the date on which notice of the approval by the outstanding shares was mailed to shareholders, the dissenting shareholder must also submit to WorldxChange at its principal office or the office of its transfer agent share certificates representing any dissenting shares that the dissenting shareholder demands that WorldxChange purchase, so that the dissenting shares may either be stamped or endorsed with the statement that the shares are dissenting shares or may be exchanged for certificates of appropriate denomination so stamped or endorsed. If the dissenting shareholder and WorldxChange agree that the shares qualify as dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed upon price plus the legal rate of interest on judgments from the date of the agreement. This amount is to be paid to the dissenting shareholder within the later of 30 days after the date of the agreement or 30 days after any statutory or contractual conditions to the closing of the WorldxChange merger are satisfied or waived, subject to surrender by the dissenting shareholder of his, her or its certificates representing the dissenting shares to WorldxChange unless provided otherwise by agreement. Any agreement between WorldxChange and a shareholder fixing the fair market value of any dissenting shares will be filed with the secretary of WorldxChange. If the dissenting shareholder and WorldxChange fail to agree upon the fair market value of the dissenting shares or whether the shares qualify as dissenting shares, the dissenting shareholder may file a complaint in California superior court of the proper county within six months after the date on which notice of the approval of the WorldxChange merger is mailed to shareholders requesting that the court determine the fair market value of the dissenting shares and, if applicable, whether the shares qualify as dissenting shares. The costs and expenses of the action, including reasonable compensation to the appraisers, will be fixed and assessed or apportioned as the court considers equitable. However, if the appraisal exceeds the price offered by WorldxChange, then WorldxChange would be required to pay the costs, including, in the discretion of the court, attorneys' fees, fees of expert witnesses and interest at a legal rate on the judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is 125 percent of the price offered by WorldxChange. Under the provisions of Chapter 5 of the California law and Section 1306 of the California law, a California corporation is legally prohibited from purchasing shares of stock through the payment of cash or other property, even if all dissenters' rights conditions are fulfilled, unless the corporation satisfies particular financial conditions. Due to these legal restrictions, neither WorldxChange nor the surviving corporation in the WorldxChange merger may be legally able to repurchase all or any dissenting shares of the dissenting shareholders for cash. To the extent that WorldxChange is prohibited from making cash payments to holders of dissenting shares who exercise and perfect their dissenters' rights of their fair market value, unpaid dissenting shareholders will become creditors of WorldxChange for the unpaid amount plus interest at the legal rate on judgments until the date of payment. The rights of unpaid dissenting shareholders, however, will be subordinate to the rights of all other creditors of WorldxChange in any liquidation proceeding, with the unpaid debt to be payable when permissible under the provisions of Chapter 5. If any shareholder who demands the purchase of his, her or its shares under Chapter 13 of the California law fails to perfect, or effectively withdraws or loses his, her or its right to such purchase, the shares of that holder will be converted into a right to receive the applicable merger consideration in accordance with the WorldxChange merger agreement. 107 121 Dissenting shares lose their status as dissenting shares if: - the WorldxChange merger is abandoned, in which case WorldxChange must pay on demand to any dissenting shareholder who has initiated proceedings in good faith under Chapter 13 of the California law all necessary expenses incurred in these proceedings and reasonable attorney's fees; - the shares are transferred prior to their submission for the required endorsement or are surrendered for conversion into shares of another class in accordance with the amended and restated articles of incorporation of WorldxChange; - the dissenting shareholder and WorldxChange do not agree upon the status of the shares as dissenting shares or do not agree on the purchase price of the shares, but neither WorldxChange nor the shareholder files a complaint or intervenes in a pending action within six months after mailing the notice of approval of the WorldxChange merger; or - with WorldxChange's consent, the shareholder delivers to WorldxChange a written withdrawal of the shareholder's demand for purchase of his, her or its shares. Except as expressly limited by provisions of California law pertaining to dissenters' rights, holders of dissenting shares continue to have all of the rights and privileges incident to their shares until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw the demand for payment of the fair market value of dissenting shares unless WorldxChange consents to the request for withdrawal. FAILURE TO FOLLOW THE STEPS REQUIRED BY CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF THE RIGHTS, IN WHICH EVENT A SHAREHOLDER WILL BE ENTITLED TO RECEIVE THE APPLICABLE MERGER CONSIDERATION IN EXCHANGE FOR THOSE DISSENTING SHARES IN ACCORDANCE WITH THE WORLDXCHANGE MERGER AGREEMENT. BECAUSE OF THE COMPLEXITY OF THE PROVISIONS OF CHAPTER 13, WORLDXCHANGE SHAREHOLDERS WHO ARE CONSIDERING OBJECTING TO THE WORLDXCHANGE MERGER SHOULD CONSULT THEIR OWN LEGAL ADVISORS. INTERESTS OF WORLDXCHANGE'S DIRECTORS, OFFICERS AND SHAREHOLDERS IN THE WORLDXCHANGE MERGER WorldxChange officers, directors and shareholders may have interests in the merger that are different from or in addition to those of the other shareholders of WorldxChange, as follows: - World Access is obligated under the WorldxChange merger agreement to cause Walter Anderson, WorldxChange's Chairman of the board, or another person designated by Mr. Anderson, to be elected to the World Access board. - In the WorldxChange merger, the WorldxChange shares beneficially owned by WorldxChange executive officers (including common stock issuable upon conversion of the preferred stock owned beneficially by directors Walter Anderson and Tom Cirrito) and directors as of September 7, 2000 will be converted into a total of 25,144,433 shares of World Access with a total value of approximately $226,299,897, assuming a per share value of the World Access common stock of $9.00. In addition, these officers and directors held options and warrants that were exercisable within 60 days of October 1, 2000 to purchase a total of 828,950 shares of WorldxChange common stock at exercise prices ranging between $.67 and $11.00. To the extent these options are not exercised before the merger, these options will carry over and be exercisable for World Access common stock, with the exercise price and number of shares applicable to each option adjusted based on the exchange ratio. - Roger Abbott, WorldxChange's Chief Executive Officer and a director, and Edward Soren, WorldxChange's Executive Vice President and a director, have agreed with World Access not to sell shares of World Access common stock received by them in the WorldxChange merger for a period of six months after the WorldxChange merger is completed. However, World Access has agreed to permit Roger Abbott to sell up to $30 million worth of the World Access shares he receives in the WorldxChange merger beginning immediately after the WorldxChange merger is 108 122 completed. In addition, World Access has agreed to allow Mr. Soren to sell up to 750,000 of the World Access shares received by him in the merger beginning immediately after the WorldxChange merger is completed. - Under his employment agreement with WorldxChange, Patrick Aelvoet, WorldxChange's Chief Financial Officer, will be entitled to a $25,000 bonus upon completion of the WorldxChange merger. He is also entitled to a $50,000 severance payment if, after the WorldxChange merger, his employment with WorldxChange is terminated without cause and without at least 90 days' advance notice. In addition, if Mr. Aelvoet's employment with WorldxChange is involuntarily terminated within 12 months after the WorldxChange merger, all of his unvested options to purchase World Access common stock will become immediately fully vested and remain so until the earlier of one year following such termination or ten years from the applicable grant date. Mr. Aelvoet has options to purchase a total of 350,000 shares of WorldxChange common stock at exercise prices ranging from $5.72 to $11.00 per share. As of October 1, 2000, 105,626 of these options were vested and 244,374 options were unvested. Unless their vesting is accelerated as described above, these unvested options will vest at varying rates each calendar quarter. - WorldxChange directors Sen. Paul Laxalt and Dann Angeloff each have options to purchase 57,500 shares of WorldxChange common stock at $10.00 per share. As of October 1, 2000, a total of 56,458 of these options were vested. Following the WorldxChange merger, all of these unvested options will immediately fully vest and remain exercisable for one year following the completion of the merger. 109 123 PRINCIPAL SHAREHOLDERS OF WORLDXCHANGE The following table sets forth information regarding beneficial ownership of WorldxChange's common stock as of October 1, 2000 by the following: - each person who is known by WorldxChange to own beneficially 5% or more of the outstanding shares of WorldxChange's common stock; - each of WorldxChange's directors; - each of WorldxChange's Chief Executive Officer and its next four most highly compensated executive officers whose total compensation for fiscal 1999 was at least $100,000; and - all of WorldxChange's directors and executive officers as a group. Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares of WorldxChange's common stock shown as beneficially owned by them, subject to community property laws where applicable, and are located at WorldxChange's principal offices at 9999 Willow Creek Road, San Diego, California 92131. Shares of common stock subject to options or warrants exercisable, or securities convertible, within 60 days of October 1, 2000 are deemed outstanding for the purpose of computing the percentage ownership of the person holding those options, warrants or securities, but are not deemed outstanding for computing the percentage ownership of any other person.
TOTAL SHARES PERCENTAGE NAME BENEFICIALLY OWNED OWNED - ---- ------------------ ---------- Roger B. Abbott(2)(3)....................................... 14,984,087 35.2% Edward S. Soren(3).......................................... 7,311,812 17.2 Walter Anderson(4).......................................... 11,799,750 25.9 Tom Cirrito(5).............................................. 5,222,561 12.3 Eric G. Lipoff(6)........................................... 277,820 * Christopher Bantoft(7)...................................... 0 * Patrick M. Aelvoet(7)....................................... 105,626 * Dann V. Angeloff(7)......................................... 56,458 * Paul Laxalt(7).............................................. 56,458 * All directors and executive officers as a group (10 persons)(2)(3)(4)(5)(6)(7)................................ 38,879,091 84.5
- --------------- * Less than 1%. (1) Percentage calculation is based upon 42,613,954 shares outstanding. (2) All shares, other than (i) 1,000,000 shares as to which Mr. Abbott, WorldxChange's Chief Executive Officer and a director, has sole voting power pursuant to a voting trust agreement with Mr. Soren (see note 3 below), (ii) 81,176 shares that are held directly by Mr. Abbott, and (iii) 81,176 shares that are held directly by Mr. Abbott's spouse, Rosalind Abbott, are jointly held by Mr. Abbott and Ms. Abbott as community property. (3) Includes 1,000,000 shares of common stock as to which Mr. Abbott has sole voting power and Mr. Soren has sole investment power pursuant to the terms of a voting trust agreement between Mr. Abbott and Mr. Soren. (4) The record owner of these shares is Gold & Appel Transfer, S.A. Includes 170,000 shares issuable upon the exercise of a warrant held by Gold & Appel Transfer, S.A. Under a power of attorney from Gold & Appel Transfer, S.A., Mr. Anderson, the Chairman of the board of WorldxChange, has sole investment power over these shares and as a result may be deemed to be the beneficial owner of these shares. Mr. Anderson, however, disclaims beneficial ownership of these shares. Also includes a total of 6,893,937 shares of common stock issuable upon conversion of the WorldxChange Series A 110 124 Convertible Preferred Stock and WorldxChange Series B Convertible Preferred Stock held by Gold & Appel Transfer, S.A. The address for each of Walter Anderson and Gold & Appel Transfer, S.A. is c/o Gold & Appel Transfer, S.A., Omar Hodge Building, Wickhams Cay, Road Town, Tortula, British Virgin Islands. (5) All of these shares are owned of record by Atocha, L.P., of which Tom Cirrito, a WorldxChange director, is a general partner. As a result, Mr. Cirrito may be deemed to have beneficial ownership of these shares. The address for each of Tom Cirrito and Atocha, L.P. is c/o Atocha, L.P., 6429 Georgetown Pike, McLean, Virginia 22101. Also includes a total of 1,388,889 shares of common stock issuable upon conversion of the WorldxChange Series B Convertible Preferred Stock held by Atocha. (6) Includes a total of 250,000 shares issuable pursuant to options that were exercisable as of October 1, 2000 or within 60 days of such date. (7) Represents shares issuable pursuant to options that were exercisable as of October 1, 2000, or within 60 days of that date. Mr. Bantoft resigned from WorldxChange as of May 31, 2000. DESCRIPTION OF THE WORLDXCHANGE MERGER AGREEMENT World Access and WorldxChange entered into the original WorldxChange merger agreement on February 11, 2000. On May 23, 2000, the parties amended the original WorldxChange merger agreement to delete the provisions relating to the possible payment by World Access to the WorldxChange shareholders of contingent shares after the completion of the WorldxChange merger and to make the necessary conforming changes. On August 1, 2000, World Access and WorldxChange again amended the WorldxChange merger agreement to reflect the fact that the parties entered into a management services agreement and to eliminate the minimum World Access common stock price condition to completion of the WorldxChange merger. The original WorldxChange merger agreement, as amended, is referred to in this joint proxy statement/prospectus as the WorldxChange merger agreement. This is only a summary of the material terms of the WorldxChange merger agreement and may not contain all of the information that is important to you. World Access and WorldxChange urge you to read the WorldxChange merger agreement carefully and in its entirety. Description of the WorldxChange merger consideration For a description of the consideration that each WorldxChange stockholder will receive in the WorldxChange merger, please see page . Representations and warranties contained in the WorldxChange merger agreement World Access and WorldxChange each made representations and warranties in the WorldxChange merger agreement regarding aspects of their respective businesses, financial condition, structure and other facts pertinent to the WorldxChange merger, including: - corporate existence, organization, standing, authority and capitalization - financial statements; - compliance with applicable laws and required licenses and permits; - absence of conflicts between each party's obligations under the WorldxChange merger agreement and its charter, bylaws, and material contracts, and applicable law; - absence of pending or threatened suits, actions or other proceedings not already disclosed in the WorldxChange merger agreement; - the filing of tax returns and payment of taxes; 111 125 - consents and regulatory approvals required to complete the WorldxChange merger; and - required approvals by the respective boards of directors and stockholders. WorldxChange's conduct of business before completion of the WorldxChange merger WorldxChange has agreed that until the completion of the WorldxChange merger, it will conduct its business in the ordinary course and substantially in accordance with past practice. WorldxChange also agreed that until the completion of the WorldxChange merger, it would conduct business in compliance with specific restrictions relating to: - the issuance, redemption, reclassification, combination or split of any of its capital stock; - employees and employee benefits and remuneration; - the issuance of dividends or other distributions on its capital stock; - the modification of its certificate of incorporation or bylaws; - the acquisition of assets or other entities; - the sale of assets; - the incurrence of new indebtedness; - capital expenditures and other investments; - entering into contracts that would restrict World Access from engaging in business in particular geographic areas after the completion of the WorldxChange merger; - changing its accounting policies and procedures; and - the settlement of litigation. No other negotiations involving WorldxChange Until the WorldxChange merger is completed, WorldxChange has agreed that it will not permit any of its agents and representatives to, directly or indirectly take any of the following actions without World Access' written consent: - solicit any inquiries regarding an acquisition proposal; - participate in any discussions or negotiations regarding an acquisition proposal; or - disclose any confidential information with respect to an acquisition proposal. WorldxChange also agreed that it would cause its agents and representatives to, immediately discontinue any discussions or negotiations regarding an acquisition proposal in effect on February 11, 2000. Treatment of WorldxChange stock options and warrants After completion of the WorldxChange merger, each outstanding WorldxChange stock option or warrant will be automatically converted into an option to purchase the number of shares of World Access common stock as is equal to the number of shares of WorldxChange common stock covered under the WorldxChange stock option or warrant multiplied by 0.6583 at a per share price equal to the exercise price of the WorldxChange option or warrant divided by 0.6583. Each newly issued World Access stock option will contain terms substantially similar to the terms of the original STAR stock option or warrant. Board of directors and officers of World Access World Access and WorldxChange agreed that, immediately following the completion of the WorldxChange merger, World Access will elect a WorldxChange designee to the World Access board of directors. The WorldxChange designee will be Walter Anderson, or a person designated by Gold & Appel Transfer S.A. and acceptable to World Access. Gold & Appel S.A. is a shareholder of WorldxChange. 112 126 Conditions to completion of the WorldxChange merger Each party's obligations to complete the WorldxChange merger is subject to the satisfaction or waiver of each of the following material conditions: - the WorldxChange merger agreement and the WorldxChange merger must be approved by the required vote of the stockholders of World Access and WorldxChange; - this joint proxy statement/prospectus must have been declared effective by the Securities and Exchange Commission, and must not be subject to a stop order suspending the effectiveness of this joint proxy statement/prospectus; and - World Access and WorldxChange must have entered into an escrow agreement governing the terms and conditions of the holding and release of the shares of World Access common stock issued in the WorldxChange merger. - each of the representations and warranties of the other party must be true and correct as of February 11, 2000 and as of the date the WorldxChange merger is completed except where any failure to be true and correct results from any act of World Access performed under the management services agreement between World Access and WorldxChange or would not have a material adverse effect on the other party; - each party must perform or comply with its agreements and covenants required by the WorldxChange merger agreement, except that WorldxChange will be deemed to have satisfied this condition even if it has not performed or complied with its agreements and covenants if the failure to do so is due to WorldxChange's performance of its obligations under the management services agreement between World Access and WorldxChange; and - each party must obtain all consents and approvals required by the WorldxChange merger, except where the failure to obtain the consent or approval would not have a material adverse effect on the other party or if the failure results from acts performed by World Access under the management services agreement between World Access and WorldxChange. Additionally, World Access' obligations to complete the WorldxChange merger are subject to the satisfaction or waiver of the following conditions before completion of the WorldxChange merger: - WorldxChange must have complied with all procedures and requirements applicable to it under the dissenters' rights chapter of the California General Corporation Law, the period for exercising dissenters' rights under the California General Corporation Law must have expired and fewer than 1% of the shares of WorldxChange capital stock shall have exercised dissenters' rights with respect to the WorldxChange merger; and - all shares of WorldxChange preferred stock will have been voted in favor of the WorldxChange merger agreement, and the shares will have been deemed converted into not more than 8,282,829 shares of WorldxChange common stock. Termination of the WorldxChange merger agreement The WorldxChange merger agreement may be terminated at any time prior to completion of the WorldxChange merger by either party for any of the following reasons: - by mutual written consent; - if the other party fails to comply in any material respects with any of its covenants or agreements in the WorldxChange merger agreement and fails to cure the failure within 30 days after receipt of notice of breach. However, the non-breaching party may not terminate the WorldxChange merger agreement if the breaching party is using reasonable efforts to cure the breach, and World Access may not terminate the WorldxChange merger agreement if WorldxChange's breach is because of 113 127 acts of World Access performed under the management services agreement between World Access and WorldxChange; - if the other party has breached any of its representations or warranties, which breach has not been cured within 30 days after receipt of written notice of the breach. However, the non-breaching party may not terminate the WorldxChange merger agreement as long as the breaching party is using reasonable efforts to cure the breach, and World Access may not terminate the WorldxChange merger agreement if WorldxChange's breach is because of acts of World Access performed under the management services agreement between World Access and WorldxChange; - if the WorldxChange merger is not completed before December 31, 2000, except that the right to terminate the WorldxChange merger agreement is not available to the party whose action or failure to act has been the cause of or resulted in the failure of the WorldxChange merger to occur on or before December 31, 2000; or - if the WorldxChange merger agreement fails to receive the requisite vote for approval by the stockholders of World Access or WorldxChange, in each case upon the taking of the vote. Extension, waiver and amendment of the WorldxChange merger agreement The WorldxChange merger agreement may be amended by World Access and WorldxChange at any time before completion of the WorldxChange merger. However, following stockholder approval, no amendment may be made that requires further approval by the stockholders. World Access and WorldxChange may extend the time for the performance of any of the obligations or other acts of the other party under the WorldxChange merger agreement, waive any inaccuracies of the other party's representations and warranties and waive compliance with any of the agreements or conditions of the other party contained in the WorldxChange merger agreement. Post-closing indemnification; escrowed shares After the completion of the WorldxChange merger, World Access will be entitled to indemnification from and against any and all losses incurred by World Access, its successors or assigns, and their respective officers, employees, consultants and agents as a result of any of the following: - a breach of any representation or warranty of WorldxChange in the WorldxChange merger agreement; - a breach of any representation or warranty of WorldxChange in the certificate to be provided by WorldxChange at the closing with respect to the truth, accuracy and fulfillment of representations, warranties and covenants of WorldxChange; - a breach prior to the completion of the WorldxChange merger of any covenant or agreement of WorldxChange contained in the WorldxChange merger agreement; or - the imposition of the suspended $17.6 million dollar fine, or other monetary penalty, imposed in connection with or related to a matter involving WorldxChange before the California Public Utilities Commission. However, World Access will only be entitled to indemnification if the imposition arises out of wrongful acts or omissions of WorldxChange which occur after the effective date of the order related to the matter and before the completion of the WorldxChange merger. WorldxChange will not have to indemnify World Access for losses incurred because of acts of World Access performed under the management services agreement between World Access and WorldxChange. All claims for indemnification must be asserted no later than one year following the completion of the WorldxChange merger. No claim may be made, except in limited circumstances, until the amount of each loss in excess of $150,000 exceeds $3.0 million in the aggregate, at which time World Access may claim indemnification for the amount of losses, in each case net of $150,000, in excess of $3.0 million. 114 128 The merger agreement contemplates that World Access and WorldxChange will enter into an escrow agreement at the closing of the merger. Under this escrow agreement, a total of 2,453,385 shares of the World Access shares to be issued to WorldxChange shareholders in the merger will be escrowed as security for potential post-closing indemnification claims of World Access as described above. These escrowed shares will reduce the shares to be distributed to each WorldxChange shareholder immediately after the merger on a pro rata basis. The escrowed shares will constitute World Access's sole source of recovery for any indemnification claims. Under the escrow agreement, shares released from escrow to pay indemnification claims of World Access will be valued at $20.38 per share. Any shares remaining not released to World Access as of the first anniversary of the closing of the merger, or that are valued in excess of any indemnification claims of World Access that may be pending at that time, will be released to the WorldxChange shareholders on a pro rata basis. Upon approval of the WorldxChange merger agreement and the transactions contemplated by the WorldxChange merger agreement by the WorldxChange shareholders, Edward S. Soren, a shareholder of WorldxChange, will serve as the attorney-in-fact and agent of the WorldxChange shareholders with authority to take any actions permitted to be taken by the WorldxChange shareholders under the WorldxChange merger agreement and the escrow agreement, including those related to indemnification. WORLDXCHANGE SERVICES, VOTING AND PARTICIPATION AGREEMENTS This section of the joint proxy statement/prospectus describes agreements related to the WorldxChange merger agreement, including the World Access stockholders' voting and stock transfer restriction agreement, the WorldxChange shareholders' voting and stock transfer restriction agreements, the escrow agreement, the World Access -- WorldxChange services agreement and the Foothill Capital Corporation participation agreement. While World Access and WorldxChange believe that these descriptions cover the material terms of these agreements, these summaries may not contain all of the information that is important to you. World Access voting agreement On February 11, 2000, WorldxChange and certain World Access stockholders, including Armstrong International Telecommunications, Inc., WorldCom Network Services, Inc., The 1818 Fund III, L.P., John D. Phillips, Walter J. Burmeister, W. Tod Chmar Geocapital V, L.P., Geocapital Advisors, L.P., Geocapital Investors V, L.P., Gilbert Global Equity Partners, L.P., Gilbert Global Equity Partners (Bermuda), L.P. and Resurgens Partners, LLC, entered into a voting and stock transfer restriction agreement, pursuant to which each World Access stockholder agreed to vote all of its shares of World Access capital stock, whether owned beneficially or of record, as well as any other shares of World Access capital stock such World Access stockholder acquires prior to the completion of the WorldxChange merger, in favor of the WorldxChange merger and the adoption and approval of the WorldxChange merger agreement. Each World Access stockholder also agreed to vote against any action or agreement that would result in a material breach of any covenant, representation or warranty of World Access contained in the WorldxChange merger agreement. Further, each World Access stockholder agreed not to, except in limited circumstances, sell, hypothecate, transfer, pledge, encumber, assign or otherwise dispose of any of its shares of World Access capital stock prior to the termination of the voting and stock transfer restriction agreement. The voting and stock transfer restriction agreement terminates upon the first to occur of: - the termination of the WorldxChange merger agreement in accordance with the termination provisions of the WorldxChange merger agreement, - the completion of the WorldxChange merger and - October 31, 2000. As of the World Access record date, the World Access stockholders that entered into the voting and stock transfer restriction agreement owned shares of World Access capital stock representing approximately % of the voting stock of World Access voting together as a single class. 115 129 WorldxChange voting agreements World Access has entered into separate voting and stock transfer restriction agreements with the following WorldxChange shareholders: Tom Cirrito; Roger B. Abbott and Rosalind Abbott, whose shares of WorldxChange capital stock are owned jointly; Walter Anderson; and Edward S. Soren. Each voting and stock transfer restriction agreement is substantially similar and contains the following provisions: - each WorldxChange shareholder must vote all of its shares of WorldxChange capital stock (whether owned beneficially or of record), as well as any other shares of WorldxChange capital stock acquired prior to the completion of the WorldxChange merger, in favor of the WorldxChange merger and the adoption and approval of the WorldxChange merger agreement; - each WorldxChange shareholder must vote against any action or agreement that would result in a material breach of any covenant, representation or warranty of WorldxChange contained in the WorldxChange merger agreement; - subject to exceptions designed to ensure that the same number of shares of WorldxChange capital stock remain subject to the restrictions and obligations set forth in the voting and stock transfer restriction agreements, no WorldxChange shareholder may: - sell, transfer, or otherwise dispose of any shares of WorldxChange capital stock or options to acquire shares, - trade or take any position, hedge or otherwise, with respect to shares of WorldxChange capital stock or options to acquire such shares, - enter into any voting arrangement with respect to shares of WorldxChange capital stock or options to acquire such shares or - take any action that would make any of such WorldxChange shareholder's representations or warranties untrue to a material extent or have the effect of preventing or materially impeding the WorldxChange shareholder from performing any of its obligations; - except for Edward S. Soren, Roger B. Abbott and Rosalind Abbott (as described below), until six months following the completion of the WorldxChange merger, no WorldxChange shareholder may (i) transfer or enter into any contract or understanding with respect to the transfer of any of the shares of World Access common stock to be received by the shareholder in the WorldxChange merger or (ii) trade or take any position, hedge or otherwise, with respect to the shares of World Access common stock received by the shareholder in the WorldxChange merger; and - each voting and stock transfer restriction agreement terminates upon the first to occur of (i) the termination of the WorldxChange merger agreement in accordance with its termination provisions Because the above-referenced shareholders hold a significant number of WorldxChange stock, there is a greater likelihood that the WorldxChange merger will be approved. The WorldxChange voting agreements represent approximately an aggregate of 35,440,940 WorldxChange capital stock, which is approximately 83.2% of the voting stock of WorldxChange. Executive management services agreement with WorldxChange World Access has entered into an Executive Management Services Agreement with WorldxChange under which World Access will manage the operations and business affairs of WorldxChange as if World Access and WorldxChange had already completed the WorldxChange merger. The agreement calls for World Access to serve as the exclusive agent for WorldxChange to provide all management services required for the operation and management of WorldxChange. World Access has the authority, to the fullest extent permitted by law, to take all actions and make all decisions on behalf of WorldxChange in the operation and management of WorldxChange's day to day business affairs. World Access may contract with third parties to perform the management services. WorldxChange will reimburse World Access, on a monthly basis, for all expenses incurred by World Access on behalf of WorldxChange. WorldxChange is 116 130 obligated to provide and furnish World Access with any reasonable assistance and/or information necessary for World Access to perform the services under the agreement. The agreement will terminate on the first to occur of the following: - the parties terminate the WorldxChange merger agreement; - the completion of the WorldxChange merger; - World Access gives WorldxChange 15 days notice or WorldxChange materially breaches the services agreement; or - World Access materially breaches the services agreement. Foothill Capital Corporation participation agreement On February 11, 2000, World Access entered into a participation agreement with Foothill Capital Corporation under which WorldxChange can borrow money. A participation agreement is an agreement that establishes the terms under which an additional lender, referred to as a participant and in this case World Access, provides a portion of the funds to be borrowed under a loan arrangement to a lead lender. In this participation agreement, Foothill is the lead lender and will act as agent for World Access in dispersing the funds and in administering and collecting the loan. The Foothill participation agreement allows World Access to advance up to $45.0 million to WorldxChange. The terms of the World Access loan are governed by the terms of an existing loan arrangement between Foothill and WorldxChange. Advances by World Access under the Foothill agreement are structured as a term loan which bears interest at a rate of 11% per annum and matures on February 11, 2001. Both the term loan and the existing indebtedness to Foothill under the loan arrangement are secured by a security interest in all personal property of WorldxChange. The participation interest of World Access in the term loan is a last-out participation, which means that at any time after an acceleration by Foothill of the maturity of the obligations under the loan arrangement, or the failure of WorldxChange to repay such obligations in full upon the obligations stated maturity, all amounts collected or received by Foothill will be applied first to the repayment of all principal, interest and costs owing to Foothill, and then, to repayment of amounts owing to World Access. World Access elected to participate in this facility instead of loaning directly to WorldxChange in order to establish a stronger security position related to these borrowings. Under the Foothill loan, participant lenders have a first lien on essentially all the assets of WorldxChange. If for any reason the WorldxChange merger was not consummated, World Access fully expected to be repaid and wanted to provide its stockholders the maximum security available related to this loan. World Access has no business relationship with Foothill other than it's participation in this loan. As of October 1, 2000, WorldxChange owes $69.2 million under the Foothill loan, including $35.7 million advanced by World Access. World Access expects the entire $45.0 million in bridge funds to be advanced to WorldxChange prior to the consummation of the WorldxChange merger. These funds are being used to finance operating losses expected to be incurred by WorldxChange prior to the merger date as well as to make permanent investments in working capital that are required to support WorldxChange's growth. Upon consummation of the merger, World Access intends to forgive this loan and, as a result will account for this $45.0 million as additional purchase price. 117 131 INFORMATION REGARDING WORLDXCHANGE WorldxChange is a global telecommunications company that specializes in providing high-quality, low-cost domestic and international telecommunications services. WorldxChange has established operations in North America, Europe and the Pacific Rim. WorldxChange's global facilities include 43 switches located in major metropolitan areas in ten countries. Switches are devices that direct calls and record billing information. WorldxChange connects its switches with a network of owned and leased undersea and land-based cables. WorldxChange's services currently include international and domestic long distance telephone service, pre-paid calling card services, operator services, and Internet access. WorldxChange markets these services through direct mail, independent agents, direct sales and media advertising. WorldxChange currently serves customers in the United States, Australia, Belgium, Canada, France, Germany, Guatemala, The Netherlands, New Zealand and the United Kingdom. Services WorldxChange provides a variety of retail telecommunication and information services to residential and commercial customers, including international and domestic long distance telephone service and pre-paid calling card services, operator services and Internet access. WorldxChange also provides wholesale and resale services to carrier customers. Retail services WorldxChange offers international and domestic long distance telephone service and pre-paid calling card services in all of its primary geographic markets, including the United States, Australia, Belgium, Canada, France, Germany, The Netherlands, New Zealand and the United Kingdom. In addition, WorldxChange offers Internet access service in the United States, The Netherlands, New Zealand, and the United Kingdom. Each of these services is described in more detail below. International and domestic long distance telephone service. International and domestic long distance telephone service is accessed from a customer's billing location, such as the home or office. In North America, Germany, Australia and New Zealand, customers who have subscribed to WorldxChange's service may access the WorldxChange network by dialing a prefix. U.S. customers who have subscribed to WorldxChange's service may use the service by dialing "1+," and U.S. customers who have not subscribed must dial a seven-digit code. Most of WorldxChange's U.S. residential customers use the seven-digit access code. WorldxChange's international and domestic long distance telephone service generally enables customers to call to any destination. Calling card services. WorldxChange sells pre-paid calling card services in most of the countries in which it operates. In these countries, customers access WorldxChange's calling card service by dialing a national toll-free number or a local access number. Internet access services. WorldxChange introduced its Internet access service, known as "wxc.net", in June 1999. Customers access WorldxChange's Internet service by dialing a local or toll-free number. This service is offered to residential and commercial customers for a fixed monthly price. Other retail services. WorldxChange also provides the other retail services described below. These services currently account for a relatively small portion of WorldxChange's revenues and are currently provided as ancillary offerings. - Toll-free service. WorldxChange provides domestic toll-free service to customers in most of the countries in which it operates. Toll-free customers in the United States also may obtain an enhanced feature known as "follow me" service, under which toll-free calls are automatically forwarded to alternate numbers until answered. - Directory assistance. WorldxChange provides its U.S. and Canadian long distance customers with nationwide directory assistance service 24 hours a day. 118 132 - Dedicated access service. This service provides customers with a dedicated, leased transmission line that connects the customer's business directly to our network. This service is marketed to high-volume customers in the United States, Germany and the United Kingdom and can be used for voice, data, video and Internet access. - Operator services. In the United States, WorldxChange offers 24-hour operator service to customers that have pre-selected the WorldxChange service. In addition, alternative operator services are offered, predominately for U.S. bound calls originating from countries outside the United States. Wholesale services Carrier services. WorldxChange sells long distance transmission capacity to carriers through a direct sales force in the United States, Australia, Canada, New Zealand and the United Kingdom. These customers, which include some of the largest carriers in the world, may purchase capacity to carry traffic where they do not have their own routes, where they require additional or reserve capacity, or where WorldxChange is able to provide more favorable pricing. These carrier customers use WorldxChange transmission capacity to provide service to their customers. Other wholesale services. WorldxChange sells transmission capacity to customers that offer their own branded products and services such as private label calling cards. In addition, WorldxChange also sells transmission capacity to resellers for subsequent sale of long distance services to their customers. The WorldxChange network As of October 1, 2000, WorldxChange's network consisted of: - 43 switches in ten countries; - long-term rights to use on-land cable capacity in the United States; - seven satellite earth stations at locations in the United States and abroad; and - an international transmission network consisting of direct ownership interests and long-term rights to use the following undersea cables: Americas-I APCN Atlantic Crossing Cantat 3 Canus 1 Columbus II F.L.A.G. Guam-Philippines HAW-5 Jasuraus PacRim East Pan American PTAT Taino-Caribe Tasman 2 TAT-12/TAT-13 TPC-5 UK-Belgium 6 UK-Germany 6 UK-Japan UK-Netherlands 12 119 133 WorldxChange also has arrangements to connect with the telecommunications networks of large telecommunications carriers in each of Australia, Belgium, Canada, Chile, France, Germany, Guatemala, The Netherlands, New Zealand and the United Kingdom, as well as arrangements to connect with the networks of major carriers in the United States. Costs of call origination, transmission and termination The major components of WorldxChange's costs include the cost of origination, transmission and termination. Origination and termination. In general, WorldxChange pays a per-minute fee to originate and terminate calls. WorldxChange can reduce the costs of its U.S. calls by having a direct connection with the applicable local telephone companies, which allows WorldxChange to carry a larger portion of each call on its network. WorldxChange can reduce these costs outside North America by connecting with the large national carriers. In addition, these connections allow WorldxChange to provide network access through prefix code dialing and to transport calls on its network originating in a greater number of locations. Transmission. WorldxChange currently uses a combination of direct ownership interests in undersea cables, long-term rights to use on-land and undersea cables, leased lines and arrangements with other carriers, to manage its transmission costs. WorldxChange usually tries to acquire ownership interests in long-term rights to use undersea cables and/or that connect cities with substantial calling traffic between them. However, WorldxChange has used leased lines in regions where long-term rights of use are either too expensive or if WorldxChange believes prices for long-term rights of use will decline, or where long-term rights of use are not available. In some cases, WorldxChange uses specialized equipment to further increase the capacity of the cables on which it has long-term rights of use. Other. In addition to the cost of origination, transmission and termination, the other costs of the WorldxChange network relate primarily to switching and related equipment, WorldxChange's Internet access equipment and network management and related software. Network operations North America. WorldxChange monitors and maintains the North American portion of its network from a centralized network operations center in San Diego, which operates 24 hours a day. Overseas operations. Currently, each of the foreign WorldxChange operating subsidiaries monitors its own domestic switching and network functions. WorldxChange's San Diego network operation center monitors the intercontinental, intercountry and intracountry portions of the WorldxChange network. Information systems. WorldxChange's information systems provide vital operating information and statistics. These information systems are relied upon to monitor carrier traffic volumes and patterns and price schedules and are used to respond quickly to changes in these traffic volumes, patterns and prices and assist in routing calls to their destination in the least expensive manner. WorldxChange has installed a wide area network linking all its switch sites, which coordinates the use of WorldxChange's systems. North American network WorldxChange has switches in each of the ten cities listed below that are connected with the WorldxChange network. Chicago Montreal Vancouver Dallas New York City Washington D.C. Los Angeles San Francisco Miami Toronto
120 134 WorldxChange connects the North American portion of its network with other regions of the world through interests on the Americas-I, Atlantic Crossing, Canus 1, Columbus II, HAW-5, Taino-Caribe and TPC-5 undersea cables. U.S. network. Prior to March 1999, WorldxChange leased most of its on-land cables from MCI WorldCom. As those leases expired, they were converted to long-term rights of use covering the same capacity. These new arrangements also allow additional capacity to be added in the future. In February 1999, WorldxChange entered into a five-year lease with Level 3 Communications providing additional capacity to carry calls, which is commonly referred to as transmission capacity. This lease is convertible into a long-term right of use at the end of the lease. European network WorldxChange connects the European portion of its network with other regions of the world through interests on the Atlantic Crossing, Cantat 3, Columbus-II, F.L.A.G., PTAT, TAT-12/TAT-13, UK-Belgium 6, UK-Germany 6 and UK-Netherlands 12 undersea cables. ACC Acquisition. In November 1999, WorldxChange acquired the operations of ACC Corp. in France, Germany and the United Kingdom, and a switch in Italy. This acquisition expanded WorldxChange's presence in these key European markets. WorldxChange is in the process of integrating the operations and network equipment into its existing operations and network. No assurance can be given that this integration can or will be successful. Pacific Rim network WorldxChange has a total of nine switches in Australia. WorldxChange connects the Asia Pacific portion of its network with other regions of the world through interests on the APCN, Jasuraus, F.L.A.G., Guam-Philippines, PacRim East, Tasman 2, TPC-5 and US-Japan undersea cables. Latin America network WorldxChange has a switch in Guatemala City, Guatemala and Santiago, Chile. WorldxChange connects the Latin American portion of its network through an ownership interest in the Pan American undersea cable, as well as via satellite services. Network hardware and software North America. WorldxChange uses switches throughout its North American network. These switches enable WorldxChange to handle large, simultaneous call volumes, provide high quality service to customers and connect with local carriers. During the fourth quarter of 1998, WorldxChange experienced technical problems with a new switch that it installed in New York. The problems included the failure of the switch to record billing information for calls. WorldxChange worked with the vendor of the switch to fix the problems and has implemented new procedures to detect any similar problems that may arise with this switch or similar switches in the future. However, there can be no assurance that WorldxChange will not experience additional problems with its switching equipment in the future. Overseas operations. WorldxChange uses both switches assembled by WorldxChange and purchased from outside vendors in markets outside of North America. The switches assembled by WorldxChange are personal computer-based devices designed to route calls and provide customer service and billing functions. Shortly before WorldxChange acquired ACC Corp.'s U.K. operations, ACC introduced a new billing system in the United Kingdom that has not performed properly, resulting in delaying billing and billing inaccuracies. WorldxChange has installed its own billing system in place of the faulty ACC system in the United Kingdom. However, there can be no assurance that this replacement billing system will not also experience problems. 121 135 Least cost routing. WorldxChange uses a combination of hardware and software to route a call over the most cost-efficient route available at the time the call is placed. Prices for various destinations fluctuate daily. WorldxChange uses routing software to frequently revise routing tables, including accounting for fluctuations in currency exchange rates, as the cost of routes changes. WorldxChange employs a group of employees based in San Diego who focus on monitoring the routing of calls and seeking to minimize transmission costs. In addition to the monitoring performed by WorldxChange's San Diego-based team, a limited amount of the monitoring is performed in each of the countries in which WorldxChange operates. Internet network WorldxChange provides Internet access from its network. Internet customers dial an access number, which connects the customer over the WorldxChange network to WorldxChange's server in Los Angeles, which ultimately connects the customer to the Internet. WorldxChange monitors its Internet network from its San Diego network operations center. Termination arrangements WorldxChange terminates calling traffic through a number of routing alternatives. These alternatives include resale arrangements, operating agreements and other termination arrangements as described below. Resale arrangements provide WorldxChange with multiple options to route traffic through switches in various destination countries. These arrangements generally involve terminating traffic through a third party. For example, WorldxChange does not have operations in Afghanistan. If one of its customers wishes to place a call to Afghanistan, WorldxChange can pass the call on to a third party carrier by purchasing some of the excess capacity on that carrier's network. The carrier would then terminate the call in Afghanistan either directly or through another carrier with which it has a relationship. During a typical month, WorldxChange may purchase capacity from more than 80 vendors. WorldxChange pays per-minute charges to use much of this capacity, which subjects WorldxChange to potential price increases. In addition, since WorldxChange generally obtains this capacity on a short-term basis, it may experience service cancellations. WorldxChange's vendor contracts provide that rates are subject to change after notice periods varying from one to 30 days. The pricing of termination services depends on such factors as the volume of call traffic and the time of day. The Federal Communications Commission or foreign regulatory agencies may assert that some of WorldxChange's call termination practices do not comply with current international settlement rules and policies, such as current international simple resale rules. WorldxChange could face sanctions, including forfeitures, if the Federal Communications Commission were to find that some of WorldxChange's termination arrangements violate Federal Communications Commission rules. Sales and marketing WorldxChange uses a number of marketing channels to reach customers. These channels include direct mail, independent sales agents, multilevel marketing, a direct sales force, affinity groups, the Internet and media advertising. This multi-faceted approach allows WorldxChange to customize its marketing for specific geographic markets and services. United States WorldxChange uses several channels to market its services to U.S. customers, including direct mail, its recently introduced "xPectations ML" multi-level marketing program, direct sales and other channels such as affinity programs, the Internet and media advertising. These channels are described below. Direct mail. WorldxChange has developed a number of different direct mail programs, each designed to appeal to a particular market segment. Direct mail is used principally to market services to residential and commercial customers who have not pre-subscribed to WorldxChange's service. 122 136 Multilevel marketing. In October 1998, WorldxChange introduced its xPectations ML marketing program in the United States. This program involves the marketing by independent representatives of WorldxChange long distance service, as well as Internet access and prepaid calling card services, to potential customers. These representatives also seek to recruit additional xPectations ML representatives who will in turn market WorldxChange services to their contacts. Program representatives earn commissions based on revenues collected by WorldxChange from new customers that they sign up, as well as based on revenues collected from customers signed up by other representatives that they recruit to the program. WorldxChange also uses the Internet to enhance the xPectations ML program. xPectations ML representatives can obtain their own Web site, which WorldxChange hosts. This allows representatives to use a professionally-designed Web site to market the xPectations ML program to potential customers while allowing WorldxChange to retain control over the advertising content on the site. Direct sales. WorldxChange employs a direct sales force in the United States. This direct sales force primarily markets WorldxChange prepaid calling cards to residential and commercial customers. They also sell excess transmission capacity to carrier and other wholesale customers. The direct sales approach is used for these services because they are more complex and usually have a longer sales cycle. Other channels. WorldxChange also uses affinity programs, the Internet and media advertising to market its services in the United States. Under the affinity programs, WorldxChange partners with other companies and organizations to introduce and sell WorldxChange services. WorldxChange's Internet marketing strategy includes the recent introduction of the "Virtual PIN" program under which customers are able to purchase and recharge prepaid calling cards exclusively through the WorldxChange website, which may be accessed at www.worldxchange.com. Europe WorldxChange's marketing activities vary from country to country and are based on aspects of WorldxChange's marketing programs used throughout the world. For example, WorldxChange is in the process of beginning the process of implementing the xPectations ML program in Europe, and WorldxChange has commenced direct mailing campaigns modeled after its U.S. direct mail programs. Marketing activities vary by the kind of service WorldxChange is selling and the kind of customer WorldxChange is targeting within a particular country. For example, in the United Kingdom, WorldxChange markets its residential long distance services through affinity programs and direct mail programs. Direct sales and independent agents are used to generate commercial long distance business in the United Kingdom, direct sales are used to generate resale and carrier and other business there, and independent agents are used to market WorldxChange's calling card services there. In The Netherlands WorldxChange uses direct mail, affinity programs, direct sales and independent agents to market its residential and commercial long distance services. WorldxChange also uses direct sales, independent agents and limited media advertising to market other services in The Netherlands, including its resale and carrier services. In Belgium, WorldxChange relies on direct mail and independent agents to market its residential long distance services and direct sales to market its long distance service to commercial customers as well as sales of excess capacity to carrier and other wholesale customers there. In addition, independent agents also market WorldxChange's long distance services to Belgian commercial customers. WorldxChange is in the process of establishing a sales and marketing program in France and Germany. In France, WorldxChange is promoting its residential long distance service, which currently requires customers to dial a prefix, through independent agents and direct mail. WorldxChange uses direct sales to market calling card services and direct sales and independent agents to market commercial long distance services, which require the use of a four-digit access code, in France. WorldxChange is marketing its calling card services in Germany primarily through independent agents and, to a lesser extent, through 123 137 affinity programs. WorldxChange also has conducted direct mailing campaigns in both France and Germany. The Pacific Rim WorldxChange's marketing strategy in Australia and New Zealand uses direct mailing, independent agents, affinity programs and media advertising to reach potential residential long distance customers. WorldxChange relies on direct sales and independent agents to market its long distance service to commercial customers and direct sales to reach calling card and carrier and other wholesale customers. Worldwide operations U.S. headquarters operations WorldxChange's senior management directs WorldxChange's operations and those of its foreign operating subsidiaries and develops and oversees the implementation of its overall business strategy from WorldxChange's San Diego headquarters. Headquarters personnel currently perform centralized financial services for WorldxChange's foreign operating subsidiaries, including financial planning and analysis and cost control. WorldxChange's San Diego-based senior management also coordinate the acquisition of additional transmission capacity, either leased or purchased, based on the growth of traffic volumes in each market and helps arrange financing and vendor discounts on behalf of WorldxChange's foreign operating subsidiaries. In addition, headquarters personnel perform worldwide treasury functions for WorldxChange's foreign operating subsidiaries, including managing cash flows between the foreign operating subsidiaries for the transmission of traffic between them as well as the allocation of working capital. Headquarters personnel also manage the expansion of the WorldxChange network, which includes determining whether to acquire additional capacity for existing operations and integrating foreign operating subsidiaries into WorldxChange's network. Headquarters personnel also coordinate traffic routing over the network, which involves the programming of WorldxChange's switches to transport international calls over the route which is most likely to result in the lowest-cost transmission without sacrificing quality. Non-U.S. operations Each of WorldxChange's foreign operating subsidiaries is a limited liability company that is directly or indirectly wholly- or majority-owned by WorldxChange. WorldxChange's significant operating subsidiaries are briefly discussed below. WorldxChange has additional subsidiaries in other countries, but the operations of these subsidiaries are not significant. Australian operations WorldxChange's Australian operating subsidiary provides local service and international and domestic long distance service to residential and commercial customers and sells excess transmission capacity to other carrier customers. Calling card services are also provided. Current commercial customers in Australia include multinational corporations, large national companies, as well as small and medium-sized businesses. Belgian operations WorldxChange's Belgian operating subsidiary provides domestic and international long distance and calling card services to residential and commercial customers. It also sells excess transmission capacity to other telecommunications carriers. Dutch operations WorldxChange's Dutch operating subsidiary provides local service and domestic and international long distance service to residential and commercial customers and call shops. Commercial customers include 124 138 small and medium-sized businesses. This operating subsidiary also has reseller, carrier and other wholesale customers. French operations WorldxChange's French operating subsidiary provides local service, domestic and international long distance and calling card services to residential and commercial customers. It also sells excess transmission capacity to other telecommunications carriers. German operations WorldxChange's German operating subsidiary provides local service, domestic and international long distance and calling card services to residential and commercial customers. It also sells excess transmission capacity to other telecommunications carriers. New Zealand operations WorldxChange's New Zealand operating subsidiary provides domestic and international long distance services to residential and commercial customers, as well as toll-free services. U.K. operations WorldxChange's U.K. operating subsidiary provides local service and domestic and international long distance service to residential and commercial customers and other carriers in the United Kingdom, as well as calling card services. Current commercial customers include small and medium-sized businesses. Employees As of October 1, 2000, WorldxChange employed approximately 876 people, including officers, administrative and sales personnel, of which 786 were full-time employees and 90 were part-time employees. Properties WorldxChange's principal offices are located at 9999 Willow Creek Road, San Diego, California, where WorldxChange occupies approximately 36,100 square feet under a lease that expires on August 31, 2002. WorldxChange also maintains a 24,300 square-foot office at 9775 Businesspark Avenue, San Diego, California, which houses WorldxChange's human resources, technical and certain other corporate functions. This lease expires on July 31, 2002. WorldxChange leases all of the facilities in which its switches are installed. These leases are generally multi-year leases. In addition, our foreign operating subsidiaries lease facilities for their respective corporate offices and switch sites. Legal proceedings In May 1997, the California Public Utilities Commission issued an order revoking WorldxChange's authority to provide intrastate calling service in California and imposing other fines and penalties, including, among other things, a $19.6 million fine, against WorldxChange based on the California Public Utilities Commission's finding that WorldxChange had violated California laws and regulations requiring WorldxChange to obtain prior consumer authorization before switching consumers' long distance carriers. WorldxChange has paid $2.0 million of the $19.6 million fine, with the balance suspended so long as WorldxChange is not found to have committed any future violations of statutes or California Public Utilities Commission directives. Under the California Public Utilities Commission's order, the sanctions and fines are binding on any successor to WorldxChange, unless the California Public Utilities Commission orders otherwise. WorldxChange has requested that, in connection with its approval of the 125 139 WorldxChange merger, the California Public Utilities Commission agree that the prohibition on intrastate calling service in California currently imposed on WorldxChange not be extended to apply to World Access or any of its subsidiaries other than WorldxChange. The California Public Utilities Commission has not yet responded to this request. WorldxChange has implemented a number of policies and procedures designed to help reduce the likelihood of future allegations of the kind leading to the California Public Utilities Commission's order. However, there can be no assurance that additional allegations of wrongdoing will not be brought against WorldxChange in the future or that, if such allegations are made, that they would not result in substantial expense and/or liability to WorldxChange. For example, if such allegations were to be made in California and WorldxChange were found to have violated statutes or any California Public Utilities Commission directives, WorldxChange would be subject to paying the $17.6 million portion of the California Public Utilities Commission fine that is currently suspended, as well as potentially other fines and penalties, which could be substantial. If WorldxChange were required to pay the suspended portion of the California Public Utilities Commission fine and/or any such additional fines or penalties, WorldxChange's business would be harmed. In September 1995, the California Attorney General notified WorldxChange that it was investigating alleged violations by WorldxChange of certain consumer protection laws. WorldxChange commenced negotiations for a settlement with the California Attorney General, but these negotiations were terminated in 1997 in connection with the California Public Utilities Commission proceedings described above without any settlement agreement. It is possible that the California Attorney General could reopen its investigation of WorldxChange or commence a lawsuit against WorldxChange based on the same or new or additional allegations of wrongdoing by WorldxChange. If an investigation were to be reopened or a lawsuit were to be commenced, WorldxChange would be forced to respond and defend itself, which could result in significant expense and diversion of WorldxChange's management's time and resources. In addition, WorldxChange could incur significant liability pursuant to a settlement or adverse judicial ruling in connection with any proceedings. WorldxChange was also notified in September 1995 by the attorneys general of five other states that they were investigating alleged violations by WorldxChange of certain consumer protection laws. WorldxChange settled these allegations by paying an aggregate amount of $475,000 and, without admitting liability, consenting to civil injunctions. WorldxChange is a party, from time to time, to legal and administrative proceedings, claims and inquiries that arise in the ordinary course of its business, as well as to other litigation, some of which proceedings, claims and inquiries involve claims for substantial amounts of damages. Although the ultimate outcome of these proceedings, claims and inquiries is uncertain, WorldxChange does not believe that any of these proceedings, claims or inquiries will materially harm WorldxChange's business. 126 140 WORLDXCHANGE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with WorldxChange's financial statements, the notes thereto and the other financial data included elsewhere in this joint proxy statement/prospectus. Overview General WorldxChange is a global telecommunications company that specializes in providing high-quality, low-cost domestic and international telecommunications services. WorldxChange has established operations in North America, Europe and the Pacific Rim. WorldxChange's global facilities include switches located in major metropolitan areas in ten countries. Revenues WorldxChange obtains its revenues from providing international and domestic telecommunication services to retail and wholesale customers. WorldxChange's retail revenues are derived from usage generated by residential and commercial customers. WorldxChange's wholesale revenues are composed of revenues generated from sales to other U.S. and foreign telecommunications carriers and resellers. Revenues are derived mainly from the number of minutes, or fractions of minutes, used by WorldxChange's customers and billed by WorldxChange and are recognized upon completion of the calls, as well as, to a lesser extent, from recurring monthly fees that WorldxChange recognizes when services are provided. Prices for long distance calls have decreased substantially in many of the markets that WorldxChange serves due to increased competition and to cost reductions associated with technological advancements. As a consequence, WorldxChange has experienced and expects to continue to experience declining revenues per minute in these markets. WorldxChange's revenues have increased from $331.7 million in fiscal 1997 to $421.6 million in fiscal 1999. WorldxChange's total retail revenues have grown from $139.7 million in fiscal 1997 to $212.0 million in fiscal 1999. WorldxChange's foreign retail revenues have increased from $28.1 million in fiscal 1997 to $69.4 million in fiscal 1999. WorldxChange has achieved its retail growth primarily through the use of direct mail marketing campaigns in Europe, the U.S. and Australia, as well as through agent sales. The following table reflects percentages of total revenue from WorldxChange's North American and non-North American operations and by type of customer for fiscal 1997, 1998, and 1999 and the nine months ended June 30, 1999 and 2000:
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, JUNE 30, -------------------- ------------ 1997 1998 1999 1999 2000 ---- ---- ---- ---- ---- Retail: North America................................... 34% 31% 34% 31% 28% Outside North America........................... 8 17 16 18 29 --- --- --- --- --- Total Retail................................. 42 48 50 49 57 Carrier: North America................................... 46 40 41 41 28 Outside North America........................... 3 2 3 4 13 --- --- --- --- --- Total Carrier................................ 49 42 44 45 41 Operator Services................................. 9 10 6 6 2 --- --- --- --- --- Total Revenues............................... 100% 100% 100% 100% 100% === === === === ===
In November 1999, WorldxChange purchased the European operations of ACC Corp, which is referred to in this discussion as ACC Europe. The acquisition of ACC Europe has been accounted for 127 141 using the purchase method of accounting. Accordingly, the results of ACC Europe's operations have been included from the date of acquisition, November 4, 1999. The increase in revenues outside North America during the nine months ended June 30, 2000 has been primarily attributable to this purchase. Cost of services (exclusive of depreciation and amortization) Cost of services, exclusive of depreciation and amortization, referred to as "cost of services", is WorldxChange's largest expense and consists of both variable and fixed costs. Variable costs include costs associated with the origination and termination of calls. Virtually all calls WorldxChange carries must be originated and terminated by a local carrier. Variable costs also include the cost of transmitting calls using the long distance facilities of other carriers, which WorldxChange uses if it cannot carry the traffic over its own network. These local and long distance carriers charge on a per minute basis. WorldxChange's fixed costs consist of leased point-to-point cable capacity, which typically requires fixed monthly payments regardless of usage. Because the cost of leased lines is fixed, transmitting a greater portion of WorldxChange's traffic over the leased lines reduces its incremental marginal transmission costs. Accordingly, once certain volume levels are reached, leased line capacity can be more cost-effective than capacity acquired from other long distance carriers. Capitalized costs associated with WorldxChange's ownership interests in cables and long-term rights of use in cables or other facilities are expensed in depreciation and amortization and are therefore not accounted for as part of cost of services. To the extent WorldxChange's expanded use of its interests in cables or long-term rights of use in cables or other facilities reduces its utilization of leased lines and the facilities of other long distance carriers, WorldxChange believes the increase in depreciation expense associated with its interests in cables or long-term rights of use in cables or other facilities will be offset by a decrease in its variable and fixed cost of services. Selling, general and administrative expenses WorldxChange's selling, general and administrative expenses consist of commissions paid to its independent agents and direct sales force, advertising and promotional costs, direct mail expenses, employee compensation, occupancy, insurance, professional fees, bad debt expense, expenses relating to customer service operations and the costs related to maintaining and supporting its systems. As WorldxChange starts operations in new markets, it incurs significant start-up costs associated with establishing a supporting infrastructure, particularly for hiring and training of personnel, leasing office space and paying various fees in conjunction with its business. As WorldxChange increases its sales and marketing efforts and commences operations in new markets, WorldxChange expects that its sales and marketing expenses will increase. Depreciation and amortization expenses Depreciation and amortization expenses consist of depreciation of all fixed assets and computer equipment, as well as amortization of the fixed costs associated with WorldxChange's: - owned and leased switching platforms, which have been capitalized and are being amortized over their estimated useful lives or the term of the lease, which is typically five to seven years; and - Interests in cables or long-term rights of use in cables or other facilities interests in international undersea and on-land fiber-optic cable systems, which are being amortized over their estimated useful lives, which is typically 20 years. 128 142 WorldxChange expects depreciation and amortization expenses to increase significantly as a result of the amortization of the $70.2 million of goodwill and $17.0 million of customer list recorded in association with its purchase of ACC Europe. Customer list is amortized over five years and goodwill is amortized over 20 years. Interest expense Interest expense principally consists of interest payable on WorldxChange's revolving credit agreement, subordinated notes, notes payable and capital leases. As WorldxChange incurs additional indebtedness to expand its operations, it expects interest expense to increase. Income taxes As of September 30, 1999, WorldxChange has net operating loss carryforwards available for federal, state, and foreign tax purposes of approximately $74.2 million, $45.0 million and $55.0 million, respectively. The federal net operating loss carryforwards will begin expiring in 2007, and the state net operating loss carryforwards began to expire in 1999 and will continue to expire through 2003, unless previously utilized. The Canadian and Netherlands net operating loss carryforwards, in the amounts of $6.2 million and $5.5 million, respectively, will begin expiring in 2003. WorldxChange's other foreign net operating loss carryforwards carry forward indefinitely. The realization of future domestic benefits from net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code if certain cumulative changes occur in its equity ownership. WorldxChange has not recognized any income tax benefit in its historical financial statements because it believes the realization of the deferred tax asset is uncertain. See Note 7 to Consolidated Financial Statements. Results of operations Nine months ended June 30, 2000 compared to nine months ended June 30, 1999 Revenues. Total revenues increased by 39.3% to $423.9 million in the first nine months of fiscal 2000 from $304.3 million for the first nine months of fiscal 1999. The increase in revenues was primarily attributable to revenues from ACC Europe, which WorldxChange acquired in November 1999, and continued internal growth in WorldxChange's retail and carrier revenues, offset by a decrease in operator services revenues in North America. In North America, revenues increased by 3.4% to $246.1 million for the first nine months of fiscal 2000 from $238.0 million for the first nine months of fiscal 1999. The increase was primarily attributable to an increase in WorldxChange's retail revenue from $93.8 million in the first nine months of fiscal 1999 to $120.8 million for the same period of fiscal 2000. This increase in revenue is attributable to WorldxChange's multilevel marketing program which was initiated in October 1998 and its expanded sales and marketing efforts for its calling card products. The multilevel marketing program was initiated to augment WorldxChange's direct mail marketing efforts and provide an additional retail sales distribution channel. Operator services revenue declined 58.2% to $7.4 million for the first nine months of fiscal 2000 from $17.7 million for the first nine months of fiscal 1999. WorldxChange made a strategic decision during the latter part of fiscal 1999 to reduce both marketing and sales effort in the operator services market. WorldxChange's North American carrier revenues declined 6.8% to $117.9 million for the first nine months of fiscal 2000 from $126.5 million for the first nine months of fiscal 1999. In the Pacific Rim, revenues decreased by 11.2%, to $38.2 million for the first nine months of fiscal 2000 from $43.0 million for the first nine months of fiscal 1999. This decline was primarily attributable to the loss of WorldxChange's largest reseller customer, which accounted for approximately 9.0% of this region's revenues. This reseller was acquired by a competitor and the competitor began to migrate the reseller's customer traffic off WorldxChange's network in October 1998. The balance of the reduction was due to decreases in pricing resulting from competitive pricing pressures and declining costs. 129 143 In Europe, revenues increased by 499.6% for the first nine months of fiscal 2000 to $139.7 million from $23.3 million for the same period of fiscal 1999, primarily due to the acquisition of ACC Europe. Cost of services. Cost of services increased by 41.6% to $337.8 million for the first nine months of fiscal 2000 from $238.6 million for the same nine months in fiscal 1999 and, as a percentage of revenue, increased to 79.7% from 78.4%, respectively. Cost of services as a percentage of revenue increased primarily as a result of higher costs associated with North American carrier revenues and increased leased network capacity in Europe. Retail revenues have lower costs than those associated with carrier revenues. ACC Europe's costs are lower because the percentage of its revenues that are retail revenues is greater than the comparable percentage for WorldxChange excluding ACC Europe. North America cost of services as a percentage of revenues increased from 83.3% in the first nine months of fiscal 1999 to 85.8% in the first nine months of fiscal 2000. The increase was associated with a increase in carrier revenue costs, partially offset by a higher revenue mix of retail revenues. Cost of services as a percentage of revenues remained constant in the Pacific Rim. In Europe, excluding ACC Europe, cost of services as a percentage of revenues increased from 78.3% for the first nine months of fiscal 1999 to 90.3% for the same period of fiscal 2000. This increase was due to additional costs associated with obtaining interconnection with the telecommunications networks of dominant local carriers in various countries and meeting their minimum capacity level requirements, as well as expansion of WorldxChange's European network infrastructure. Selling, general and administrative expenses. Selling, general and administrative expenses increased by 40.3% to $124.0 million for the first nine months of fiscal 2000 from $88.4 million for the same period in fiscal 1999 and, as a percentage of revenues, increased from 29.1% to 29.3%. The increase in selling, general and administrative expenses was due to the purchase of ACC Europe, increased spending in Europe and direct costs associated with increases in revenues. These expenses in Europe, excluding ACC Europe, increased from $13.8 million for the first nine months of fiscal 1999 to $20.2 million for the first nine months of fiscal 2000. This increase was due to increased sales, operations and back office infrastructure to support sales growth and the expansion into new markets in Europe. Selling, general and administrative expenses in the Pacific Rim remained relatively flat. Selling, general and administrative expenses in North America decreased to $56.6 million for the first nine months of fiscal 2000 from $57.5 million for the same period of fiscal 1999. The decrease in these expenses in North America was due to a decrease in promotional spending. As a percentage of revenue, North America selling, general and administrative expenses decreased to 20.7% in the first nine months of fiscal 2000, from 21.0% in the first nine months of fiscal 1999. Included in selling, general and administrative expenses was bad debt expense of $15.2 million for the first nine months of fiscal 2000 and $11.0 million for the same period in fiscal 1999. The increase in bad debt expense was attributable to an increase in revenue. Bad debt expense as a percentage of revenue remained consistent at 3.6% in the first nine months of fiscal 2000 as compared to the first nine months of fiscal 1999. Management has enhanced its account monitoring and reporting systems designed to reduce bad debt exposure and allow for timely identification, follow-up and mitigation of potential risk customers. WorldxChange expects selling, general and administrative expenses to continue to grow as revenues increase and as it continues to expand into new markets and build infrastructure. Depreciation and amortization expenses. Depreciation and amortization expenses increased to $35.1 million for the first nine months of fiscal 2000 from $12.4 million in the first nine months of fiscal 1999. The increase in depreciation and amortization was due to the amortization relating to $87.2 million of intangible assets recorded in association with the purchase of ACC Europe and $12.2 million of goodwill recorded in association with the purchase of a minority interest in WorldxChange's Australian operations and increased depreciation associated with the build-out of network and supporting infrastructure. Interest expense. Interest expense increased by 81.6% to $22.7 million for the first nine months of fiscal 2000 from $12.5 million in the first nine months of fiscal 1999. The increase was primarily due to the debt associated with the purchase of ACC Europe and the on-land fiber optic capacity. 130 144 Fiscal 1999 compared to fiscal 1998 Revenues. Total revenues for fiscal 1999 increased by 5.7% to $421.6 million from $398.9 million for fiscal 1998. The increase in revenues was primarily associated with an increase in European and North American retail revenues, which was partially offset by a decrease in operator services revenues in North America. In North America, revenues increased for fiscal 1999 by 4.9% to $337.5 million from $321.8 million in fiscal 1998. The increase in revenue was primarily attributable to increased retail and carrier revenues offset by a decline in operator services revenue. Retail revenues increased 15.3% from $123.5 million in fiscal 1998 to $142.4 in fiscal 1999. This increase in retail revenue is attributable to increased promotional spending and the introduction of WorldxChange's multilevel marketing program. In October 1998, WorldxChange initiated a multilevel marketing program to augment its direct mail marketing efforts and provide an added retail sales distribution channel. Also contributing to the increase in retail revenue was WorldxChange's expanded sales and marketing efforts for its calling card products. Revenue derived from operator services decreased 43.5% from $40.5 million for fiscal 1998 to $22.9 million for fiscal 1999. The decline in operator services revenues was due to WorldxChange's strategic decision to reduce marketing efforts in the operator services market. WorldxChange's North American carrier revenues increased 9.1% to $172.0 million for fiscal 1999 from $157.7 million for fiscal 1998. In the Pacific Rim, revenues decreased by 4.8%, to $55.6 million for fiscal 1999 from $58.4 million for fiscal 1998. This decline was primarily attributable to the loss of WorldxChange's largest reseller customer, which accounted for approximately 23% of this region's revenues. This reseller was acquired by a competitor, and the competitor began to migrate the reseller's customer traffic off WorldxChange's network in October 1998. A substantial portion of the reduction in revenues attributable to the reseller was offset by increased retail revenue generated through direct mail and agent sales. In Europe, revenues increased by 52.4% for fiscal 1999 to $28.5 million from $18.7 million for the same period of fiscal 1998, primarily due to increases in retail revenues. Retail revenues increased due to geographic expansion in the region and increased direct mail campaigns in the region. Cost of services. Cost of services increased by 14.3% to $328.3 million fiscal 1999 from $287.3 million for fiscal 1998 and, as a percentage of revenue, increased to 77.9% from 72.0%. Cost of services as a percentage of revenue increased primarily as a result of increasing costs associated with carrier revenues. Carrier revenues as a percentage of total revenues increased for fiscal 1999 compared to fiscal 1998. These revenues have higher costs than those from retail and operator services revenues. Cost of services as a percentage of revenues increased in North America from 75.7% for fiscal 1998 to 81.6% for fiscal 1999. Cost of services as a percentage of revenues decreased in the Pacific Rim from 77.0% for fiscal 1998 to 72.8% for fiscal 1999. Cost of services as a percentage of revenues increased in Europe from 84.5% for fiscal 1998 to 88.1% for fiscal 1999. This increase was due to additional costs associated with the expansion of WorldxChange's European network infrastructure. Selling, general and administrative expenses. Selling, general and administrative expenses increased by 8.0% to $124.1 million for 1999 from $115.0 million for fiscal 1998 and, as a percentage of revenues, increased from 28.8% to 29.4%. The increase was primarily due to increased spending in Europe and the Pacific Rim, offset in part by reduced general and administrative spending in North America. These expenses in Europe increased from $10.8 million for fiscal 1998 to $21.2 million for fiscal 1999. This increase was due to increased sales, operations and back office infrastructure to support sales growth and the expansion into new markets in Europe. Selling, general and administrative expenses in the Pacific Rim increased by 6.0% to $21.3 million for fiscal 1999 from $20.1 million for fiscal 1998. This increase was due to growth in the supporting infrastructure and increased staffing levels in customer service in WorldxChange's Pacific Rim markets. Selling, general and administrative expenses in North America decreased to $81.5 million for fiscal 1999 from $84.1 million for fiscal 1998. The decline in these expenses in North America was due to WorldxChange's efforts to streamline its North American operations by reducing personnel costs and overall spending. Included in selling, general and administrative expenses was bad debt expense of $15.2 million for fiscal 1999 and fiscal 1998. Bad debt expense as a percentage of 131 145 revenue decreased to 3.6% in fiscal 1999 from 3.8% in fiscal 1998. Bad debt expense as a percentage of revenue has improved as management has enhanced its account monitoring and reporting systems designed to reduce bad debt exposure and allow for timely identification, follow-up and mitigation of potential risk customers. Depreciation and amortization expenses. Depreciation and amortization expenses increased by 43.6% to $17.7 million for fiscal 1999 from $12.3 million of fiscal 1998. The increase in depreciation and amortization was due to the continued build-out of WorldxChange's network and supporting infrastructure. Interest expense. Interest expense increased by 41.3% to $16.9 million for fiscal 1999 from $11.9 million in fiscal 1998. The increase was primarily due to interest associated with the subordinated promissory notes issued between May and August of 1998. Fiscal 1998 compared to fiscal 1997 Revenues. Total revenues for fiscal 1998 increased by 20.3% to $398.9 million from $331.7 million for fiscal 1997. Growth in revenues during 1998 was attributable primarily to an increase in traffic volume, offset in part by a decline in average carrier prices. Total revenues for fiscal 1998 were also negatively impacted by WorldxChange's inability to bill for certain calls during the period due to technical difficulties with a newly installed switch. In North America, WorldxChange's revenues for fiscal 1998 increased by 10.3% to $321.8 million, primarily as a result of substantial increases in sales of residential and operator services. Revenues from residential customers increased by 13.5% to $116.1 million for fiscal 1998 from $102.3 million for fiscal 1997. The increase in residential revenues was due to increased promotional spending in late fiscal 1997, which stimulated growth in the first half of fiscal 1998. Revenues from operator services increased by 51.7% to $40.5 million for fiscal 1998 from $26.7 million for fiscal 1997. Revenues from carrier and commercial customers were relatively stable. In the Pacific Rim, revenues increased by 139.3% to $58.4 million for fiscal 1998 from $24.4 million for fiscal 1997, reflecting significant increases in the usage of WorldxChange's services by residential and commercial customers. In Europe, revenues increased by 19.9% to $18.7 million for fiscal 1998 from $15.6 million for fiscal 1997, reflecting significant increases in the usage of WorldxChange's services by residential and commercial customers. Cost of services. Cost of services increased by 22.2% to $287.3 million for fiscal 1998 from $235.0 million for fiscal 1997 and, as a percentage of revenues, increased to 72.0% for fiscal 1998 from 70.9% for fiscal 1997. Cost of services increased as a percentage of revenues as a result of higher costs associated with carrier revenues. In addition, during the fourth quarter of fiscal 1998, WorldxChange experienced technical problems with a newly installed switch. The problems included the failure of the switch to record billing information for certain calls. As a result, WorldxChange was unable to bill for all of its calls. This resulted in WorldxChange's incurring costs for calls with no corresponding revenues, which increased overall costs. Selling, general and administrative expenses. In fiscal 1998, selling, general and administrative expenses increased by 1.3% to $115.0 million from $113.5 million for fiscal 1997 and, as a percentage of revenue, decreased to 28.8% for fiscal 1998 from 34.2% for fiscal 1997. A significant portion of the increase in spending was directly related to the increase in revenues, as marketing and sales expenses increased due to increases in commissions, marketing, and other related expenses. Selling, general and administrative expenses, as a percentage of revenue, declined primarily due to a reduction in bad debt expense. Bad debt expense was $15.2 million in fiscal 1998 compared to $22.3 million for fiscal 1997. Bad debt expense as a percentage of revenue decreased to 3.8% for fiscal 1998 from 6.7% in fiscal 1997. The reduction in bad debt expense was due to WorldxChange increasing its efforts in the initial review for credit approval for new customers and has enhanced its account-monitoring and reporting systems designed to reduce its bad 132 146 debt exposure and allow for timely recognition of risk customers. Furthermore, WorldxChange increased the number and quality of its credit and collection staff worldwide. Depreciation and amortization expenses. Depreciation and amortization expenses increased by 41.4% to $12.3 million for fiscal 1998 from $8.7 million for fiscal 1997. This increase was due to the expansion of WorldxChange's network and capital deployed as it entered new markets. Interest expense. Interest expense increased by 36.8% to $11.9 million in fiscal 1998 from $8.7 million in fiscal 1997. The increase in interest was due to the increase in the level of debt and capital lease obligations WorldxChange incurred in order to fund its network expansion. Liquidity and capital resources As a consequence of the rapid expansion of WorldxChange's business and its historical capital constraints, WorldxChange has incurred cumulative net losses from inception in 1991 through June 30, 2000. These losses and associated negative cash flows resulted primarily from start-up costs, marketing expenses and capital expenditures required to build and deploy its network. WorldxChange has utilized cash provided from financing activities to fund losses and capital expenditures. The sources of this cash have primarily been private placement equity offerings, the issuance of subordinated debt, capital lease and vendor financing and WorldxChange's revolving credit facility. For the nine-month period ending June 30, 2000, WorldxChange's net cash used in operating activities was $37.9 million, primarily consisting of a net loss of $96.6 million, offset by an increase in operating working capital deficit of $12.1 million and $50.3 million of non-cash charges consisting of the provision for bad debts and depreciation and amortization. Cash used in investing activities totaled $60.9 million, which was primarily for the purchase of ACC Europe. Cash provided by financing activities consisted primarily of the net private placement equity offering totaling $48.7 million and increased net borrowings of $40.8 million, offset by debt and capital lease payments of $21.8 million. As of June 30, 2000 WorldxChange had approximately $6.9 million in cash and cash equivalents. For fiscal 1999, cash used in operating activities was $31.5 million, primarily composed of a net loss of $63.9 million, offset by an increase in operating working capital and non-cash charges relating to the provision for bad debt and depreciation and amortization. Cash used in investing activities, primarily capital expenditures, totaled $27.6 million in fiscal 1999. Cash provided by financing activities amounted to $76.3 million, primarily consisting of the receipt of $101.6 million in private placement equity offerings, offset by repayments of subordinated debt, certain notes payable and capital lease obligations. As of September 30, 1999, WorldxChange had $38.0 million in cash and cash equivalents. As of September 30, 1998, WorldxChange had approximately $20.9 million in cash and cash equivalents. WorldxChange's net cash used in operating activities was $31.7 million in fiscal 1998, primarily caused by a net loss of $27.5 million and a decrease in operating working capital of $28.0 million, offset by $27.5 million of non-cash charges consisting of the provision for bad debts and depreciation and amortization. Cash used for investing activities totaled $12.0 million in fiscal 1998, which was for capital expenditures. The capital expenditures primarily consisted of purchases associated with the expansion of WorldxChange's network, computers, and general equipment. Net cash provided by financing activities totaled $60.5 million for fiscal 1998, which consisted of $55.2 million in proceeds from the issuance of subordinated debt, $10.0 million from a private placement equity offering and a $0.7 million increase in WorldxChange's revolving credit facility, offset by $5.3 million in the repayment of debt and capital lease obligations. Net cash used in operating activities for fiscal 1997 was $7.2 million and net cash used in investing activities, principally capital expenditures, was $10.9 million for fiscal 1997. WorldxChange financed these capital expenditures primarily with long-term debt. Net cash provided by financing activities for fiscal 1997 was $18.8 million. In October 1997, the California Public Utilities Commission issued its final order which imposed a $19.6 million fine against WorldxChange, $2.0 million of which was charged against earnings in fiscal 1997 and was paid in April 1998 and the remainder of which is suspended by the California Public Utilities 133 147 Commission subject to WorldxChange's refraining from committing any violations of statutes or California Public Utilities Commission directives. See "Information Regarding WorldxChange -- Legal Proceedings". Capital expenditures, including assets acquired by incurring capital lease obligations, for fiscal 1997, 1998 and 1999 totaled $19.4 million, $22.4 million, and $81.0 million, respectively. Capital expenditures, including assets acquired by incurring capital lease obligations, for the nine-month period ended June 30, 2000 totaled approximately $32.5 million. The following table lists capital expenditures by type (in $ millions):
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, JUNE 30, ----------------------- ----------- 1997 1998 1999 2000 ----- ----- ----- ----------- Telecommunications equipment and cables.............. $13.7 $15.4 $62.0 $26.0 Computer equipment and software...................... 3.0 2.7 7.6 4.0 Office furniture, equipment and vehicles............. 2.5 2.6 4.8 1.6 Leasehold improvements............................... .2 1.7 6.6 .9 ----- ----- ----- ----- Total...................................... $19.4 $22.4 $81.0 $32.5 ===== ===== ===== =====
Pursuant to the WorldxChange merger agreement, WorldxChange is subject to restrictions in making capital expenditures and other investments until the completion of the merger. WorldxChange expects to incur an additional $7.0 million in capital expenditures prior to the completion of the WorldxChange merger. WorldxChange expects to fund these expenditures through vendor or other third party financing. WorldxChange has utilized capital lease and vendor financing to assist in financing the building of its network, systems and infrastructure. As of June 30, 2000, the balance of capital lease financing obligations totaled $47.2 million, primarily relating to the lease of its switching platforms in North America. In addition, as of June 30, 2000 WorldxChange had outstanding $41.0 million vendor financed note payables relating to various fiber optic cable acquisitions. WorldxChange has a billing and collection services agreement with Zero Plus Dialing Incorporated. Under this services agreement, WorldxChange has the ability to sell receivables, subject to full recourse provisions, to Zero Plus Dialing. At June 30, 2000 WorldxChange was not contingently liable for any amounts under the recourse provisions of the services agreement. In March 1997, WorldxChange entered into its credit facility, which consists of an accounts receivable-based revolving credit facility and a term loan. In February 2000, the credit facility was amended to increase the maximum borrowing capacity, add a bridge loan, extend the maturity date of the revolving credit agreement and term loan and reduce the interest rate charge. The credit facility allows WorldxChange to borrow up to a maximum of $65.0 million, subject to restrictions and borrowing base limitations. The maximum available borrowing base under the revolving credit agreement is $30.0 million and is determined as a specified percentage of eligible accounts receivable. The balance outstanding on the revolving credit agreement is reduced by the application of payments received on collections of accounts receivable. The accounts receivable revolving credit facility had an outstanding balance of approximately $27.8 million at June 30, 2000, and $2.2 million available for borrowing pursuant to the borrowing base limitations. This facility bears interest at the prime rate plus 1.75% and is repaid through collections of accounts receivable. The term loan was issued in the amount of $5.0 million, which at June 30, 2000 had an outstanding balance of approximately $3.8 million, bears interest at the prime rate plus 5.00% and requires monthly reductions of principal of $300,000 plus interest. The bridge loan has a maximum borrowing availability of $30.0 million, bears interest at 11% and matures on February 11, 2001. The maturity date may be extended until October 1, 2003 by the bridge loan participant. As part of the amended agreement and the WorldxChange merger agreement, World Access agreed to participate in the bridge loan and agreed to fund the $30.0 million under the agreements. As of June 30, 2000, the outstanding balance on the bridge loan was $35.7 million and $9.3 million was available for borrowing. In total as of June 30, 2000, WorldxChange had $67.3 million borrowed under the credit facility and $11.5 million available for borrowing. 134 148 In May 2000, the credit facility was amended to increase the maximum borrowing capacity to $80.0 million. The $15.0 million increase in the borrowing capacity consists of an additional $15.0 million under the bridge loan, under the same terms and conditions. The revolving credit agreement and the term loan with Foothill totaling $67 million on June 30, 2000 matures on October 1, 2000, unless both the $55 million of subordinated promissory notes due November 30, 2000 and the $53 million of ACC Europe acquisition notes due December 28, 2000 are retired prior to October 1, 2000, in which case the revolving credit agreement and the term loans with Foothill mature October 1, 2003. As of June 30, 2000, WorldxChange was in compliance with the restrictive covenants under the credit facility. WorldxChange's obligations under the credit facility are secured by a first position in substantially all of its assets. In January 2000, WorldxChange secured a $15 million loan commitment from Gold & Appel, which is an affiliate of Walter Anderson, a WorldxChange director. Any borrowings under this loan commitment will bear interest at 15% and is payable on December 31, 2000. As of June 30, 2000, WorldxChange had no borrowings outstanding associated with this commitment. In fiscal 1997, WorldxChange sold a 40% interest in WorldxChange Pty. Ltd., its Australian operating subsidiary, to an affiliate of the Asian Infrastructure Fund. The proceeds of approximately $9.0 million from this sale were used to finance working capital requirements and the expansion of this operating subsidiary. In September 1999, WorldxChange issued 1,554,763 shares of its common stock to the Asian Infrastructure Fund in exchange for the 40% interest in WorldxChange Pty. Ltd. The acquisition was accounted for under the purchase method of accounting at a value of $17.1 million or $11.00 per share. From May through August 1998, WorldxChange issued and sold subordinated promissory notes in the aggregate principal amount of $55.0 million. These notes bear interest at the rate of 12.5% per annum, provide for quarterly payments of interest only and mature on November 30, 2000. These notes provide the lender the right to require WorldxChange to use 35% of the net proceeds from any private placement or public offering of its common stock to repay the notes. The balance of these notes at September 30, 1999 and June 30, 2000 was $45.2 million. In September 1998, WorldxChange sold 788,127 shares of its common stock in a private placement at a price of $12.69 per share for total proceeds of $10.0 million. In December 1998, WorldxChange sold 871,087 shares of its common stock in a private placement at a price of $11.48 per share for total proceeds of $10.0 million. In March 1999, WorldxChange sold 3,000,000 shares of its common stock in a private placement at a price of $10.00 per share for total proceeds of $30.0 million. In June 1999, WorldxChange sold 2,727,270 shares of its common stock in a private placement at a price of $11.00 per share for total proceeds of $30.0 million. The offerings raised a total of $80.0 million. The proceeds from these private placements were used for network expansion, to pay for direct mail campaigns and other marketing activities, to repay subordinated debentures, and to prepay a portion of WorldxChange's subordinated promissory notes and for other corporate purposes. In August 1999, WorldxChange entered into an agreement to sell 30,000 shares of its Series A Convertible Preferred Stock in a private placement for total proceeds of $30.0 million. These shares are convertible into 2,727,270 shares of WorldxChange's common stock. Prior to the conversion of these shares, WorldxChange is obligated to pay the holder of these shares an annual dividend equal to 4% of the face amount of these shares. These dividends are declared and accrued monthly. WorldxChange entered into two agreements during fiscal 1999 for the acquisition of the right to use land-based fiber optic cable systems for a total price of $45.0 million. The vendors have agreed to finance 90% of the commitment at 12% interest, with monthly principal and interest payments over a five year amortization period. As of June 30, 2000, WorldxChange had acquired approximately $37.8 million from Level 3, leaving $7.2 million to be ordered. On November 4, 1999, WorldxChange acquired the outstanding shares of certain European subsidiaries of ACC Corp, a subsidiary of AT&T. The operations of these subsidiaries are located in the United Kingdom, Germany, France and Italy. As part of this transaction, WorldxChange also acquired 135 149 from ACC Corp a switch located in the United States and certain long-term rights of use in a transatlantic telecommunications cable system. The $113 million purchase price for this transaction was composed of $60 million cash and a $53 million, 12% per annum interest rate note due on or before December 28, 2000. WorldxChange financed $50 million of the cash payment through the issuance in November 1999 of 50,000 shares of Series B Convertible Preferred Stock to two existing shareholders for $50 million. These shares are convertible into 5,555,550 shares of WorldxChange's common stock. Prior to the conversion of these shares, WorldxChange is obligated to pay the holder of these shares an annual dividend equal to 4% of the face amount of these shares. These dividends are declared and accrued monthly. Prior to WorldxChange acquiring ACC Corp.'s U.K. operations, ACC implemented a new billing system in the United Kingdom that did not function properly, resulting in delayed billings and billings containing errors which had to be manually corrected. The billing has been delayed as much as 75 days. This has resulted in up to approximately $20.0 million in receivables being collected up to 75 days later than under normal terms. Due to this delay in collections, WorldxChange was forced to pay vendors late, negatively impacting the relationships and requiring WorldxChange to incur late payment fees and interest charges of approximately $500,000 with vendors. WorldxChange was able to accurately estimate billing amounts and reflect these amounts in the applicable quarterly operating results. WorldxChange believes that it will be able to satisfy its operating cash requirements through the maturity date of its credit facility from a combination of cash and cash equivalents on hand, the proceeds of equity offerings, availability under WorldxChange's vendor financing arrangements, its secured credit facility, outstanding loan commitment, financing of WorldxChange's European receivables and from cash advances from World Access. Under the WorldxChange merger agreement, WorldxChange will need World Access' consent to incur debt or raise additional proceeds from equity offerings, and there can be no assurance that any additional debt or equity proceeds can or will be raised. If the WorldxChange merger is not completed by the maturity of the credit facility, WorldxChange will need to raise additional capital to pay, or will need to restructure, its obligations in connection with the ACC Europe acquisition and the subordinated promissory notes described above. No assurance can be given that additional capital will be raised or that the obligations can or will be restructured. The table below summarizes WorldxChange's financial commitments as they relate to capital expenditures, secured and unsecured loans and notes, and the credit facility. Below is a table summarizing capital expenditures, commitments, and debt obligations, which were discussed in detail above, as of June 30, 2000 (in thousands):
DUE DUE WITHIN AFTER 1 YEAR 1 YEAR ---------- --------- Commitments to acquire capital assets Land based fiber optic cable from Level 3................. $ 7,200 $ -- Other estimated capital expenditures Telecommunication equipment and cables................. 5,600 -- Computer equipment and software........................ 900 -- Other.................................................. 500 -- -------- ------- 14,200 -- Existing debt obligations Unsecured subordinated note due December 2000............. 53,000 -- Secured subordinated note................................. 45,200 -- Other secured notes....................................... 21,532 38,447 Credit facility........................................... 67,288 -- Capital leases............................................ 14,805 32,382 -------- ------- $201,825 $70,829 ======== =======
136 150 Market risk The carrying value of cash and cash equivalents approximates fair value due to the short-term, highly liquid nature of the cash equivalents, which have maturities of three months or less. Interest rate fluctuations would not have a significant effect on the fair market value of cash equivalents held by WorldxChange. At June 30, 2000 WorldxChange had outstanding debt, excluding capital lease obligations, in the amount of $225.5 million, of which $193.9 million is fixed interest debt. Variable rate debt of $27.8 million carries adjustable interest rates at the prime rate plus 1.75%, and the remaining $3.8 million carries an adjustable rate at prime plus 5.0%. A one percentage point change in the interest rate would change interest payments by approximately $29,100 per month. Foreign currency exposure While an increasing amount of WorldxChange's revenues will be denominated in non-U.S. currencies, a disproportionate portion of its expenditures, including interest, will be denominated in U.S. dollars. In addition, the assets and liabilities of WorldxChange's non-U.S. subsidiaries are generally denominated in local currencies. Accordingly, WorldxChange may be subject to significant foreign currency exchange risks. In addition, WorldxChange may in the future acquire interests in entities that operate in countries where the expatriation or conversion of currency is restricted. WorldxChange currently does not hedge against foreign currency exchange risks, but may in the future. WorldxChange's exposure is diversified among a broad basket of currencies. At September 30, 1999 WorldxChange's largest net asset exposures, which is defined as foreign currency assets less foreign currency liabilities, were as follows: FOREIGN CURRENCY EXPOSURES IN MILLIONS OF U.S. DOLLARS Euro-based currencies......................... $3,749 British Pounds Sterling....................... 1,056 Australian Dollars............................ 920 Canadian Dollars.............................. 503 Other......................................... 61
WorldxChange prepared sensitivity analyses to determine the impact of hypothetical changes in foreign currency exchange rates on WorldxChange's results of operations and cash flows. The foreign currency rate analysis assumed that each foreign currency rate would change by 10% in the same direction relative to the U.S. Dollar. However, these analyses did not include the potential impact on sales levels or local currency prices. Based on the result of these analyses, a 10% adverse change in foreign currency rates from September 30, 1999 levels would not materially affect WorldxChange's results of operations or cash flows. Euro conversion On January 1, 1999, several member countries of the European Union established fixed conversion rates and adopted the euro as their new common legal currency. Since that date, the euro has traded on currency exchanges, although the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. During the transition period, parties can elect to pay for goods and services and transact business using either the euro or a legacy currency. Between January 1, 2002 and July 1, 2002, the participating countries will introduce euro currency coins and withdraw all legacy currencies. The euro conversion may affect cross-border competition by creating cross-border price transparency. WorldxChange is assessing its pricing and marketing strategy in order to insure that it remains competitive in a broader European market. In addition, WorldxChange is reviewing whether certain existing contracts will need to be modified. WorldxChange's currency risks and risk management for operations in participating countries may be reduced as the legacy currencies now trade at a fixed exchange rate against 137 151 the euro. WorldxChange will continue to evaluate issues involving introduction of the euro. However, based on current information and assessments, WorldxChange does not expect that the euro conversion will have a material adverse effect on its results of operations or financial condition. Seasonality WorldxChange's European and Australian operations experience seasonality during the summer seasons of those regions, which results in decreased customer calling volumes. Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. In June 1999, SFAS No. 133 was amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS 133. As a result of this amendment, SFAS No. 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In accordance with SFAS No. 133, an entity is required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gain and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. WorldxChange does not expect the adoption of this standard to have a material effect on its consolidated financial position or results of operations. On December 3, 1999, the Securities and Exchange Commission staff issued SAB No. 101, Revenue Recognition in Financial Statements. The SAB spells out four basic criteria that must be met before companies can record revenue. These are: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the seller's price to the buyer is fixed or determinable; and (iv) collectibility is reasonably assured. Many of the examples in the SAB address situations that give rise to the potential for recording revenue prematurely. They include transactions subject to uncertainties regarding customer acceptance, including rights to refunds and extended payment terms, and require continuing involvement by the seller. In March 2000, the SEC issued SAB 101A -- Amendment: Revenue Recognition in Financial Statements, that delays the implementation date of certain provisions of SAB 101. Management does not believe the adoption of SAB 101 would have a material impact on WorldxChange's operations. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25. The Interpretation poses and answers 20 separate questions dealing with APB 25 implementation practice issues. The Interpretation will be applied prospectively to new awards, modifications to outstanding awards, and changes in employee status on or after July 1, 2000, except as follows: (i) requirements related to the definition of an employee apply to new awards granted after December 15, 1998; (ii) modifications that directly or indirectly reduce the exercise price of an award apply to modifications made after December 15, 1998; and (iii) modifications to add a reload feature to an award apply to modifications made after January 12, 2000. Financial statements for periods prior to July 1, 2000 will not be affected. Management does not expect the adoption of Interpretation No. 44 to have a material effect on its consolidated financial position or results of operations. 138 152 WORLDXCHANGE SELECTED CONSOLIDATED FINANCIAL DATA In the table below, WorldxChange provides you with selected consolidated financial data of WorldxChange. The selected consolidated financial data as of September 30, 1998 and 1999 and for each of the three years in the period ended September 30, 1999 are derived from WorldxChange's audited consolidated financial statements included elsewhere in this joint proxy statement/prospectus. The selected consolidated financial data as of September 30, 1995, 1996 and 1997 and for the years ended September 30, 1995 and 1996 are derived from WorldxChange's audited consolidated financial statements that are not contained herein. The selected consolidated financial data as of June 30, 2000 and for the nine-month periods ended June 30, 1999 and 2000 are derived from WorldxChange's unaudited consolidated financial statements included elsewhere in this joint proxy statement/prospectus, which, in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of such information. When you read this selected consolidated financial data, it is important that you also read the section titled "WorldxChange Management's Discussion and Analysis of Financial Condition and Results of Operations" and WorldxChange's consolidated financial statements and the related notes thereto included elsewhere in this joint proxy statement/prospectus.
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, ---------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ ------- ------- (IN MILLIONS) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues................... $101.7 $183.9 $331.7 $398.9 $421.6 $304.3 $423.9 Cost of services (exclusive of depreciation and amortization)............ 64.5 127.9 235.0 287.3 328.3 238.6 337.8 ------ ------ ------ ------ ------ ------ ------ Gross profit............... 37.2 56.0 96.7 111.6 93.3 65.7 86.1 Selling, general & administrative........... 38.6 64.5 113.5 115.0 124.1 88.4 124.0 Depreciation and amortization............. 3.1 7.0 8.7 12.3 17.7 12.4 35.1 ------ ------ ------ ------ ------ ------ ------ Operating loss............. (4.5) (15.5) (25.5) (15.7) (48.5) (35.1) (73.0) Interest expense........... 3.3 5.7 8.7 11.9 16.9 12.5 22.8 Other expense, net......... (0.2) 0.6 3.4 1.4 0.6 0.2 0.8 Minority interest.......... (0.2) (0.2) (0.5) (1.5) (2.3) (1.8) -- ------ ------ ------ ------ ------ ------ ------ Net loss................... $ (7.4) $(21.6) $(37.1) $(27.5) $(63.7) $(46.0) $(96.6) ====== ====== ====== ====== ====== ====== ====== OTHER DATA: EBITDA(1).................. $ (1.4) $ (8.5) $(16.8) $ (3.3) $(30.9) $(22.7) $(37.9) Cash provided by (used in) operating activities..... 2.6 7.6 (7.2) (31.7) (31.5) (4.5) (37.9) Cash used in investing activities............... (4.9) (3.0) (10.9) (12.0) (27.6) (25.1) (60.9) Cash provided by (used in) financing activities..... 3.5 (2.3) 18.8 60.5 76.3 46.9 67.7 Capital expenditures....... 24.3 8.7 19.4 22.4 81.0 57.8 32.5 GEOGRAPHIC DATA: Net revenues: North America............ $100.9 $171.4 $291.7 $321.8 $337.5 $238.0 $246.0 Pacific Rim.............. 0.3 7.5 24.4 58.4 55.6 43.0 38.2 Europe................... 0.5 5.0 15.6 18.7 28.5 23.3 139.7 ------ ------ ------ ------ ------ ------ ------ Total.................... $101.7 $183.9 $331.7 $398.9 $421.6 $304.3 $423.9 ====== ====== ====== ====== ====== ====== ======
139 153
AS OF SEPTEMBER 30, AS OF JUNE 30, ---------------------------------------------- --------------- 1995 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ --------------- (IN MILLIONS) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents...... $ 1.4 $ 3.4 $ 4.3 $ 20.9 $ 38.0 $ 6.9 Working capital (deficit)...... (15.1) (35.4) (50.4) (37.0) (37.2) (307.3) Total assets................... 55.2 62.8 103.7 120.1 235.0 430.4 Short-term debt and capital lease obligations............ 13.5 15.7 9.5 20.3 20.4 201.8 Long-term debt, net of current portion...................... 24.9 24.7 49.2 99.3 129.7 70.8 Minority interest.............. -- 0.3 8.8 7.3 -- -- Total shareholders' deficit.... (8.6) (32.0) (68.9) (89.6) (35.1) (95.9)
- --------------- (1) EBITDA as used in this joint proxy statement/prospectus is operating loss plus depreciation and amortization expense and is presented because WorldxChange believes that the information is commonly used in the telecommunications industry as one measure of a company's operating performance and historical ability to service debt. EBITDA from continuing operations is not determined in accordance with generally accepted accounting principles, is not indicative of cash provided by operating activities, should not be used as a measure of operating income and cash flows from operations as determined under generally accepted accounting principles and should not be considered in isolation or as an alternative to, or to be more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. EBITDA, as calculated by WorldxChange, may not be comparable to similarly titled measures reported by other companies and could be misleading unless all companies and analysts calculate EBITDA in the same manner. The following table reconciles WorldxChange's net loss to EBITDA:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, ------------------------ --------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ Net loss......................................... $(37.1) $(27.5) $(63.9) $(46.0) $(96.6) Net interest expense............................. 8.7 12.0 16.9 12.5 22.7 Other expense, net............................... 3.4 1.4 .7 .2 .8 Minority interest................................ (.5) (1.5) (2.3) (1.8) -- Depreciation and amortization.................... 8.7 12.3 17.7 12.4 35.2 ------ ------ ------ ------ ------ EBITDA........................................... $(16.8) $ (3.3) $(30.9) $(22.7) $(37.9) ====== ====== ====== ====== ======
140 154 COMPARISON OF THE RIGHTS OF HOLDERS OF WORLD ACCESS COMMON STOCK AND WORLDXCHANGE COMMON STOCK This section of the joint proxy statement/prospectus summarizes differences between the World Access common stock and WorldxChange common stock. These differences arise from differences between the Delaware law and the California law, and between the corporate charters and bylaws of World Access and WorldxChange. WorldxChange stockholders should read the full text of each state's corporate statute and each companies' respective corporate charters and bylaws for a more complete understanding of the differences between World Access common stock and WorldxChange common stock. For information on how to obtain these documents, see "Where You Can Find More Information" on the inside front cover page of this joint proxy statement/prospectus. The rights of World Access' stockholders are governed by its certificate of incorporation, as amended, its bylaws and the laws of the State of Delaware. The rights of WorldxChange's shareholders are currently governed by its articles of incorporation, as amended and restated, its bylaws, as amended and restated, and California law. Upon completion of the WorldxChange merger, the WorldxChange shareholders will become World Access stockholders, and the WorldxChange shareholders' rights will be governed by World Access' certificate of incorporation, as amended, its bylaws and Delaware law. Pursuant to the Voting and Share Transfer Restriction Agreements referred to on page 112, the holders of WorldxChange's preferred stock have agreed to vote in favor of the WorldxChange merger. Under the applicable certificates of determination of preferences with respect to each series of preferred stock, if the holder of shares of the series of preferred stock votes to approve a merger or other business combination transaction involving WorldxChange, the holder is deemed to have converted all of the holder's shares of the series into shares of WorldxChange common stock immediately prior to consummation of the transaction. Accordingly, no separate discussion of the rights of the holders of the WorldxChange preferred stock is provided. Comparison of authorized and outstanding capital stock The authorized capital stock of World Access consists of 160,000,000 shares, of which 150,000,000 shares are common stock of $.01 par value per share, and 10,000,000 shares of which are preferred stock of $.01 par value per share. Note, however, that pursuant to this joint proxy statement/prospectus, the World Access stockholders are being asked to approve an amendment to the World Access certificate of incorporation which would increase the number of shares of common stock World Access is authorized to issue to 290,000,000. As of October 1, 2000, 73,254,336 shares of World Access common stock were outstanding, and 613,905 shares of World Access preferred stock were outstanding. The authorized capital stock of WorldxChange currently consists of 110,000,000 shares, of which 100,000,000 shares shall be common stock of no par value, and 10,000,000 shares of which shall be preferred stock of no par value. As of October 1, 2000, 42,613,954 shares of WorldxChange common stock were outstanding, and 30,000 shares of WorldxChange preferred stock were outstanding. Comparison of classes of common stock World Access and WorldxChange each have one class of common stock issued and outstanding. Holders of World Access common stock and holders of WorldxChange common stock are each entitled to one vote for each share held. Comparison of requirements for special meeting of shareholders Under Delaware law, special meetings of stockholders may be called by a corporation's board of directors or such person or persons as may be authorized by the corporation's certificate of incorporation or bylaws. World Access' certificate of incorporation provides that special meetings of stockholders may be called by the board of directors or by any officer instructed by the board of directors. Under California law, a special meeting of shareholders may be called by the board of directors, the chairman of the board, the president or the holders of shares entitled to cast not less than 10% of the votes 141 155 at the meeting or additional persons provided in the articles or bylaws. WorldxChange's bylaws also provide that the Chief Executive Officer may call a special meeting of shareholders. Comparisons of requirements for action by written consent in lieu of shareholders' meeting Under both California and Delaware law, shareholders may execute an action by written consent in lieu of a shareholder meeting. Both California and Delaware law permit a corporation in its charter to eliminate such actions by written consent. Pursuant to World Access' certificate of incorporation, World Access stockholders may not take action without a meeting by written consent except for preferred stockholders. WorldxChange's articles of incorporation do not eliminate shareholder actions by written consent. Elimination of the ability of stockholders to act by written consent could lengthen the amount of time required to take stockholder actions, since certain actions by written consent are not subject to the minimum notice requirement of a stockholders' meeting. The elimination of stockholder actions by written consents, however, could deter hostile takeover attempts. A holder or group of holders controlling a majority interest of World Access' common stock would not be able to amend World Access' certificate of incorporation, World Access' bylaws or remove directors pursuant to a stockholder action by written consent, but instead, would have to call a stockholders' meeting and observe the notice periods determined by the World Access board pursuant to World Access' bylaws prior to attempting to obtain approval of any such actions. Comparison of record date for determining shareholders The World Access bylaws provide that the World Access board of directors may fix a record date that: - in the case of determination of the stockholders entitled to vote at any meeting of stockholders or adjournment of any meeting, may not be more than 60 days or less than ten days before the date of the meeting; and - in the case of any other action, may not be more than 60 days before the action. Furthermore, the World Access bylaws provide that if the World Access board of directors does not fix a record date in the manner described above, then: - the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders will be at the close of business on the day next after the day that notice is given, or, if notice is waived, at the close of business on the day after the day that the meeting is held; and - the record date for determining stockholders for any other purpose will be at the close of business on the day the World Access board of directors adopt the related resolution. The WorldxChange bylaws provide that the board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion or exchange of shares. The record date will not be more than 60 days or less than ten days before the date of any meeting, or more than 60 days before any other event for the purposes of which it is fixed. When a record date is fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting, to receive any report, to receive a dividend, distribution or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise may be provided in the articles of incorporation or bylaws. Comparison of procedures to nominate directors The World Access bylaws require that board nominations be made by the board of directors or a stockholder who gives timely notice to the secretary of the company. To give timely notice, a stockholder's 142 156 nomination notice must be received by the secretary of World Access at least 120 days before the one-year anniversary of the date of the proxy statement in connection with the previous year's annual meeting of stockholders. A nominating stockholder's notice must be received by World Access no later than the close of business on the tenth day following the earlier of: - the day on which notice of the upcoming meeting was mailed or given to the World Access stockholders; or - the day on which public disclosure of the date of the upcoming meeting was made by World Access if: - no annual meeting was held in the previous year; - the date of the upcoming annual meeting has changed by more than 30 days from the date set forth in the previous year's proxy statement; or - the upcoming meeting is not an annual meeting. Under WorldxChange's bylaws, at any meeting of shareholders, a person may be a candidate for election to WorldxChange's board only if the person is nominated: - by or at the direction of WorldxChange's board; - by any nominating committee or person appointed by WorldxChange's board; or - by a shareholder of record entitled to vote at the meeting who complies with the notice procedures and has given timely notice of the nomination in writing to WorldxChange's secretary. To be timely, a shareholder's notice must be delivered to the Secretary no later than the close of business on the 60th day or earlier than the close of business on the 90th day before the meeting; provided, however, that if less than 70 days notice of the date of the meeting is given by WorldxChange, notice by the shareholder to be timely must be delivered no later than the 10th day after the day on which public announcement of the date of the meeting is first made by WorldxChange. Comparison of number of directors The World Access amended certificate of incorporation and bylaws provide that the World Access board of directors may not have less than three nor more than 12. The exact number of directors will be determined from time to time by the World Access board of directors. Note, however, that in connection with joint proxy statement/prospectus, World Access is seeking approval by its stockholders of an amendment to its certificate of incorporation that would increase the maximum number of directors to 15. Under WorldxChange's articles of incorporation, the number of members of the board of directors must be at least five, and not more than nine, unless changed by an amendment to the articles of incorporation or by a bylaw duly adopted by approval of the outstanding shares of WorldxChange. There are currently seven members of WorldxChange's board of directors. Comparison of classified board of directors Delaware law provides that a corporation may divide its board of directors into various classes with staggered terms of office under its certificate of incorporation or bylaws. World Access' board of directors is currently divided into three classes, as nearly equal in size as possible, with one class being elected annually. Directors are elected to a term of three years and until their successors are elected and qualified. You should note that, in connection with this joint proxy statement/prospectus, World Access is seeking the approval of its stockholders to an amendment to the certificate of incorporation of World Access which would eliminate World Access' staggered board of directors. If this amendment is approved, directors would be elected annually to a term of one year. At an annual meeting in which a quorum is present, the persons receiving a plurality of the votes cast would be elected as the directors. WorldxChange's board of directors is not divided into classes. 143 157 Comparison of procedures for the removal of directors Under Delaware law a director may be removed, with or without cause, by the holders of a majority of the outstanding shares then entitled to vote thereon unless: - the corporation has a classified board of directors, in which case a director may be removed only with cause unless the certificate of incorporation provides otherwise, or - the corporation has cumulative voting, in which case, if less than the entire board is to be removed, no director may be removed without cause if the number of votes cast against the removal would be sufficient to elect the director under cumulative voting. World Access' bylaws provide for removal of directors only for cause. Under California law, any director or the entire board of directors may be removed without cause with the approval of a majority of the outstanding shares entitled to vote thereon. However, no individual director may be removed, unless the entire board is removed, if the number of votes cast against the removal would be sufficient to elect the director under cumulative voting, whether or not the corporation's articles of incorporation or bylaws do not otherwise provide for cumulative voting. A corporation's board of directors may remove for cause by declaring vacant the office of a director who has been: - declared of unsound mind by an order of court or - convicted of a felony. Comparison of board of directors vacancies Under Delaware law, vacancies and newly created directorships may be filled by vote of a majority of the directors then in office, even though less than a quorum, unless: - otherwise provided in the corporation's certificate of incorporation or bylaws, or - the certificate of incorporation directs that a particular class is to elect a director, in which case the majority of directors elected by the class, or a sole remaining director elected by the class, will fill such vacancy. World Access' bylaws provide that vacancies on the World Access board of directors and newly created directorships resulting from an increase in the authorized number of members of the board of directors may be filled only by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Unless otherwise provided in a corporation's articles of incorporation or bylaws, under California law, any vacancy on a board of directors, other than one created by removal of a director, may be filled by approval of the remainder of the corporation's board of directors. Even if the number of remaining directors is less than a quorum, a vacancy may be filled by the unanimous written consent of the directors then in office or by the affirmative vote of a majority of the directors at a meeting held pursuant to notice or waivers of notice or by a sole remaining director. Unless the articles of incorporation or a bylaw adopted by the shareholders provide that the board may fill vacancies occurring in the board by reason of the removal of directors, such vacancies may be filled only with the approval of a majority of the outstanding shares entitled to vote thereon. WorldxChange's bylaws provide that vacancies in the WorldxChange board of directors, except for a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director. A vacancy created by the removal of a director by the shareholders or by court order may be filled only by a vote of the shareholders at a duly held meeting at which a quorum is present. Comparison of notice requirements of special meetings of the board of directors The World Access bylaws provide that the chairman of the board, the vice-chairman of the board, the president or a majority of directors then in office may call special meetings of the board of directors. The 144 158 bylaws do not require a specific notice period, but only require that the notice provide sufficient time for the convenient assembly of directors. Special meetings of the WorldxChange board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president or the secretary, or by any two directors, or by one or more shareholders holding not less than 25% of any series of preferred stock of the corporation. Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone or by telegraph or mail, charges prepaid, addressed to him or her at his or her address as it is shown upon the records of the corporation or, if it is not so shown on the records or is not readily ascertainable, at the place at which meetings of the directors are regularly held. In case the notice is mailed or telegraphed, it should be deposited in the United States mail or delivered to the telegraph company in the place in which the principal executive office of the corporation is located at least forty-eight hours prior to the time of the holding of the meeting. In case the notice is delivered, personally or by telephone, it should be delivered at least twenty-four hours before the time of the meeting. The mailing, telegraphing or delivery, personally or by telephone, as above provided, should be due, legal and personal notice to each director. Comparison of procedures for an amendment of certificate of incorporation and bylaws The World Access amended certificate of incorporation imposes a super-majority voting requirement with respect to particular amendments. Any amendment to the classified board provisions of the certificate of incorporation, or any proposed change to the certificate or bylaws which is inconsistent with the provision, requires the vote of holders of at least 75% of the voting power of all shares entitled to vote in the election of directors, voting as a single class. The World Access bylaws may be amended by the board of directors or stockholders of World Access. WorldxChange's articles of incorporation requires the approval of 66 2/3% of the combined voting power of its shareholders to amend any provisions of Article Eight, which deals with amendments, Article Four, which deals with cumulative voting, or Article Five, which deals with the election and term of directors. Comparison of notice requirements of stockholder's meetings World Access' bylaws provide that notice of a special meeting of stockholders must be timely given in writing not less than ten days or more than 60 days before to the meeting. The notice must state the purposes for which the meeting is called. The World Access bylaws require that board nominations be made by the board of directors or a stockholder who gives timely notice to the secretary of the company. To be timely, a stockholder's nomination notice must be received by World Access at least 120 days before the one-year anniversary of the date of the proxy statement in connection with the previous year's annual meeting of stockholders. A nominating stockholder's notice must be received by World Access no later than the close of business on the tenth day following the earlier of: - the day on which notice of the upcoming meeting was mailed or given to the World Access stockholders; or - the day on which public disclosure of the date of the upcoming meeting was made by World Access if: - no annual meeting was held in the previous year; - the date of the upcoming annual meeting has changed by more than 30 days from the date contemplated in the previous year's proxy statement; or - the upcoming meeting is not an annual meeting. The bylaws of WorldxChange provide that upon request in writing that a special meeting of shareholders be called for any proper purpose, notice will be given to shareholders entitled to vote that a 145 159 meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 or more than 60 days after receipt of the request. The notice will specify the general nature of the business to be transacted at the meeting, and no other business may be transacted at the meeting. Comparison of stockholder approval of business combinations World Access is subject to Section 203(a) of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the time that the stockholder became an interested stockholder, with exceptions, unless: - before such time, the board of directors of the corporation approved either the business combination or the transactions that resulted in the stockholder becoming an interested stockholder; - upon consummation of the transactions that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (a) by persons who are directors and also officers and (b) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - at or after such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203(c)(3) defines "business combinations" to include: - any merger or consolidation involving the corporation and (a) any interested stockholder, or (b) any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation, DGCL Section 203(a) is not applicable to the surviving entity; - any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation involving the interested stockholder, with exceptions; - any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits, with exceptions, provided by or through the corporation. California law requires that holders of common stock receive common stock of the surviving company or parent company in a merger of the corporation with the holder of more than 50% but less than 90% of the target's or its affiliate's common stock unless all of the target company's shareholders consent to the transaction. This provision of California law may have the effect of making a "cash-out" merger by a majority shareholder more difficult to accomplish. Although Delaware law does not parallel California law in this respect, under some circumstances Section 203 provides similar protection to stockholders against coercive two-tiered bids for a corporation in which the stockholders are not treated equally. Comparison of inspection of shareholder list Both Delaware and California law allow any shareholder to inspect and copy the shareholder list for a purpose reasonably related to the person's interest as a shareholder. Delaware law provides for inspection rights as to a list of stockholders entitled to vote at a meeting within a ten day period preceding a 146 160 stockholders' meeting for any purpose germane to the meeting. California law provides, in addition, for an absolute right to inspect and copy the corporation's shareholder list by persons holding an aggregate of 5% or more of the corporation's voting shares, or shareholders holding an aggregate of 1% or more of the shares who have made certain filings with the Securities and Exchange Commission. World Access' bylaws mirror the Delaware statutory provisions with respect to inspection of shareholder lists. WorldxChange's bylaws mirror the California statutory provisions with respect to inspection of shareholder lists. Comparison of dividends and repurchases of shares Delaware law permits a corporation to declare and pay dividends out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. In addition, Delaware law generally provides that a corporation may redeem or repurchase its shares only if the capital of the corporation is not impaired and the redemption or repurchase would not impair the capital of the corporation. Under California law, a corporation may not make any distribution to its shareholders unless either: - the corporation's retained earnings immediately prior to the proposed distribution equal or exceed the amount of the proposed distribution; or - immediately after giving effect to the distribution, the corporation's assets exclusive of goodwill, capitalized research and development expenses and deferred charges, would be at least equal to 1 1/4 times its liabilities and the corporation's current assets would be at least equal to its current liabilities or 1 1/4 times its current liabilities if the average pre-tax and pre-interest expense earnings for the preceding two fiscal years were less than the average interest expense for such years. The tests are applied to California corporations on a consolidated basis. Comparison of dissolution rights Under Delaware law, unless the board of directors approves the proposal to dissolve, the dissolution must be unanimously approved by all the shareholders entitled to vote thereon. Only if the dissolution is initially approved by the board of directors may the dissolution be approved by a simple majority of the outstanding shares of the corporation's stock entitled to vote. In the event of such a board-initiated dissolution, Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority (greater than a simple majority) voting requirement in connection with dissolutions. World Access' amended certificate of incorporation contains no supermajority voting requirement. Under California law, shareholders holding 50% or more of the total voting power may authorize a corporation's dissolution, with or without the approval of the corporation's board of directors, and this right may not be modified by the articles of incorporation. 147 161 COMPARATIVE PER SHARE MARKET PRICE DATA FOR WORLD ACCESS, STAR AND WORLDXCHANGE The World Access common stock is traded on the Nasdaq National Market under the symbol "WAXS," and the STAR common stock is traded on the Nasdaq National Market under the symbol "STRX." WorldxChange's capital stock has no established public trading market, and therefore has no public market price. The following table sets forth, for the calendar quarters indicated, the high and low sale prices per share of World Access common stock and STAR common stock as reported on the Nasdaq National Market.
WORLD ACCESS STAR COMMON STOCK COMMON STOCK -------------------- -------------------- HIGH LOW HIGH LOW ------- ------- ------- ------- Year Ended December 31, 1998: First Quarter............................. $33.500 $21.625 $28.047 $13.906 Second Quarter............................ 40.000 25.375 37.375 19.375 Third Quarter............................. 30.938 18.750 23.000 9.688 Fourth Quarter............................ 24.750 12.000 18.000 7.125 Year Ended December 31, 1999: First Quarter............................. 22.750 6.375 15.750 9.625 Second Quarter............................ 14.375 7.500 11.875 7.438 Third Quarter............................. 16.188 10.313 8.438 5.250 Fourth Quarter............................ 22.250 10.313 8.797 4.688 Year Ending December 31, 2000: First Quarter............................. 26.875 17.250 8.375 5.500 Second Quarter............................ 20.000 9.250 5.688 1.813 Third Quarter............................. 11.375 5.344 3.250 2.468 Fourth Quarter (through October 5)........ 5.690 5.190 1.880 1.660
The following table sets forth the closing prices per share of World Access common stock and STAR common stock as reported on the Nasdaq National Market on (i) December 20, 1999, the business day preceding public announcement that World Access and STAR had signed a letter of intent to merge and (ii) October 5, 2000, the last full trading day for which closing prices were available at the time of the printing of this joint proxy statement/prospectus. This table also sets forth the equivalent price per share of STAR common stock on those dates. The equivalent price per share is equal to the closing price of a share of World Access common stock on that date multiplied by .386595, the number of shares of World Access common stock to be issued in exchange for each share of STAR common stock, assuming no adjustment to the exchange ratio as provided for in the STAR merger agreement in connection with the PT-1 sale.
WORLD ACCESS STAR COMMON EQUIVALENT PER COMMON STOCK STOCK SHARE PRICE ------------ ------------ -------------- December 20, 1999.............................. $8.875 $20.500 $7.925 October 5, 2000................................ 1.656 5.250 2.030
STAR and World Access believe that the STAR common stock presently trades on the basis of the value of the World Access common stock expected to be issued in exchange for the STAR common stock in the STAR merger, discounted primarily for the uncertainties associated with the STAR merger. Apart from the publicly disclosed information concerning World Access which is included in, or incorporated by reference into, this joint proxy statement/prospectus, World Access cannot state with certainty what factors account for changes in the market price of the World Access common stock. 148 162 STAR stockholders are advised to obtain current market quotations for World Access common stock and STAR common stock. No assurance can be given as to the market prices of World Access common stock or STAR common stock at any time before the completion of the STAR merger or as to the market price of World Access common stock at any time after the completion of the STAR merger. World Access and STAR have never paid cash dividends on their respective shares of capital stock. Pursuant to the STAR merger agreement, STAR has agreed not to pay cash dividends pending the consummation of the STAR merger without the written consent of World Access. 149 163 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Condensed Combined Financial Statements of World Access give effect to several transactions, under seven different scenarios, that World Access has completed or are currently contemplated as follows: Scenario 1: World Access acquires STAR, WorldxChange and TelDaFax. Scenario 2: World Access acquires STAR and WorldxChange. Scenario 3: World Access acquires STAR and TelDaFax. Scenario 4: World Access acquires WorldxChange and TelDaFax. Scenario 5: World Access acquires STAR. Scenario 6: World Access acquires WorldxChange. Scenario 7: World Access acquires TelDaFax.
The Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1999 also give effect to: - the FaciliCom acquisition; - the Comm/Net acquisition; - the LDI acquisition; and - the acquisition of 33.03% of TelDaFax as if each of the acquisitions had occurred on January 1, 1999. The Unaudited Pro Forma Condensed Combined Balance Sheets as of June 30, 2000 under all seven scenarios gives effect to the STAR, WorldxChange and TelDaFax acquisitions as if each acquisition had occurred on June 30, 2000. The Unaudited Pro Forma Condensed Combined Statements of Operations for the six months ended June 30, 2000 under all seven scenarios also give effect to the LDI acquisition and the acquisition of 33.03% of TelDaFax as if the acquisitions had occurred on January 1, 1999. On June 14, 2000, World Access entered into a definitive agreement pursuant to which it agreed to acquire a majority share in TelDaFax in a series of transactions. TelDaFax is a facilities-based provider of bundled fixed line, wireless, Internet and e-Commerce services to business and residential customers in Germany. World Access acquired a 33.03% interest in TelDaFax held by the Apax funds by issuing World Access common stock at an exchange ratio of 1.025 shares of World Access for each share of TelDaFax on September 21, 2000. World Access intends to make a tender offer for all of the remaining shares of TelDaFax at the same exchange ratio. World Access also will contribute certain of its German businesses to TelDaFax in exchange for newly issued TelDaFax shares. The completion of the tender offer and the contribution of the German businesses is subject to acquisitions by World Access in the transactions of no less than 50.1% of the fully diluted shares outstanding of TelDaFax on a pro forma basis, regulatory approvals, including antitrust approval in Germany, and the approval of the shareholders of World Access. The closing of the tender offer and the contribution will occur simultaneously. The transactions are anticipated to close around the end of the third quarter. Concurrent with the transactions, World Access intends to apply for listing on one or more European stock exchanges, including the Neuer Markt in Germany. The pro forma adjustments are based upon currently available information and upon assumptions that the management of World Access believes are reasonable. Each of the acquisition transactions above has been accounted for using the purchase method of accounting. The adjustments recorded in the Unaudited Pro Forma Condensed Combined Financial Statements represent the preliminary determination of these adjustments based upon available information. The total estimated purchase price of the transaction has been allocated on a preliminary basis to assets and liabilities based on management's estimate of their fair values. There can be no assurance that the actual adjustments will not differ significantly from the pro forma adjustments reflected in the Unaudited Pro Forma Condensed Combined Financial Statements. On a combined basis, the networks and operations of all three companies contain redundant switching equipment, facilities and personnel. World Access will eliminate these redundant assets and significantly 150 164 reduce the headcount of the combined company in an effort to realize cost synergies. Implementing this process includes the write-down of switching and transmission equipment taken out of service, the write-off of certain leasehold improvements, establishing provisions for lease commitments remaining on certain facilities with no future use, employee termination benefits and other related costs. To the extent that these items relate to World Access facilities and personnel, World Access will record a restructuring charge in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. All other costs relate to facilities and personnel of the acquired enterprises, and, accordingly, will be treated as purchase price in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. In connection with World Access' August 1, 2000 consolidation of WorldxChange, management committed to such a consolidation plan. Although the plan has been approved, management is still in the process of quantifying the specific costs of the plan. Currently, management's best estimate of the costs attributable to World Access facilities and personnel is in the range of $30.0 million to $50.0 million. This charge has been excluded from the pro-forma financial statements. A range has not been established for costs associated with WorldxChange facilities and personnel. Consolidation plans remain under development for the STAR and TelDaFax integrations. Such plans indicate that consolidation activities associated with the STAR transactions will not materially involve World Access facilities or personnel; however, consolidation plans related to TelDaFax transaction are too preliminary to estimate an impact. During the third quarter of 2000, World Access has incurred approximately $35.0 million in additional selling, general and administrative expenses. The major categories of such costs include costs associated with billing system migration issues, re-branding efforts and increases in reserves for doubtful accounts. The first two items relate to the WorldxChange integration. None of these charges are reflected in the pro forma financial statements. The Unaudited Pro Forma Condensed 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 Condensed Combined Financial Statements should be read in conjunction with the historical consolidated financial statements of World Access, LDI, STAR, WorldxChange and TelDaFax and the related notes thereto. See "Incorporation of Documents by Reference" and "Available Information." 151 165 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA PRO FORMA WORLD ACCESS WORLD STAR AND STAR ACCESS(28) STAR(1) ADJUSTMENTS COMBINED ---------- --------- ----------- ------------ ASSETS Cash and equivalents(2(i)).................................. $ 172,479 $131,884 $ -- $ 304,363 Short-term investments...................................... 160,211 1,756 -- 161,967 Restricted cash............................................. 31,095 -- -- 31,095 Accounts and notes receivable............................... 264,678 99,810 -- 364,488 Prepaid expenses and other current assets................... 38,491 22,023 -- 60,514 Net assets held for sale.................................... 41,465 -- -- 41,465 ---------- --------- --------- ---------- Total Current Assets................................... 708,419 255,473 -- 963,892 ---------- --------- --------- ---------- Property and equipment...................................... 151,609 264,380 (94,000)(2) 321,989 Investment in TelDaFax...................................... 130,851 -- -- 130,851 Goodwill and other intangibles.............................. 1,080,797 3,968 (1,764)(4) 1,312,235 233,144(2) 11,900(2) (15,810)(6) Other assets................................................ 79,185 4,767 -- 83,952 ---------- --------- --------- ---------- Total Assets........................................... $2,150,861 $ 528,588 $ 133,470 $2,812,919 ========== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt............................................. $ 57,033 $ 86,680 $(55,685)(6) $ 88,028 Accounts payable............................................ 246,436 104,507 (21,789)(6) 329,154 Other accrued liabilities................................... 151,328 107,689 3,000(2) 260,794 (1,223)(6) ---------- --------- --------- ---------- Total Current Liabilities.............................. 454,797 298,876 (75,697) 677,976 ---------- --------- --------- ---------- Long-term debt.............................................. 257,946 55,398 -- 313,344 Other long-term liabilities................................. 10,336 32,744 -- 43,080 ---------- --------- --------- ---------- Total Liabilities...................................... 723,079 387,018 (75,697) 1,034,400 ---------- --------- --------- ---------- Minority interests.......................................... -- -- -- -- Stockholders' Equity (Deficit): Preferred stock............................................. 6 -- -- 6 Common stock................................................ 732 58 (58)(5) 1,027 227(2) 68(6) Additional paid in capital.................................. 1,601,862 366,304 (366,304)(5) 1,952,304 279,484(2) 8,139(2) 62,819(6) Deferred compensation....................................... -- (1,399) 1,399(5) -- Notes receivable from shareholders.......................... -- (3,856) 3,856(5) -- Accumulated other comprehensive loss........................ (12,239) (8,017) 8,017(5) (12,239) Accumulated deficit......................................... (162,579) (211,520) 211,520(5) (162,579) ---------- --------- --------- ---------- Total Stockholders' Equity (Deficit)................... 1,427,782 141,570 209,167 1,778,519 ---------- --------- --------- ---------- Total Liabilities and Stockholders' Equity............. $2,150,861 $ 528,588 $ 133,470 $2,812,919 ========== ========= ========= ========== PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE WORLDXCHANGE TELDAFAX WORLDXCHANGE(10) ADJUSTMENTS COMBINED (20) ---------------- ------------ ------------- -------- ASSETS ASSETS Cash and equivalents(2(i)).................................. $ 6,913 $ -- $ 311,276 $ 26,408 Short-term investments...................................... -- -- 161,967 -- Restricted cash............................................. -- -- 31,095 -- Accounts and notes receivable............................... 103,172 (2,201)(17) 465,459 42,427 Prepaid expenses and other current assets................... 32,566 -- 93,080 30,625 Net assets held for sale.................................... -- -- 41,465 -- --------- --------- ---------- ------- Total Current Assets................................... 142,651 (2,201) 1,104,342 99,460 --------- --------- ---------- ------- Property and equipment...................................... 193,494 (6,500)(11) 455,983 65,281 (68,000)(11) 15,000(11) Investment in TelDaFax...................................... -- -- 130,851 -- Goodwill and other intangibles.............................. 90,162 (76,327)(13) 1,912,412 15,811 548,172(11) 41,300(11) (3,130)(15) Other assets................................................ 4,105 (38,192)(11) 49,865 13,027 --------- --------- ---------- -------- Total Assets........................................... $ 430,412 $ 410,122 $3,653,453 $193,579 ========= ========= ========== ======== LIABILITIES AND STOCKH LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt............................................. $ 201,825 $ (2,201)(17) $ 246,247 $ 7,260 (38,192)(11) (3,213)(15) Accounts payable............................................ 23,682 (792)(15) 352,044 73,688 Other accrued liabilities................................... 224,478 3,000(11) 488,272 9,626 --------- --------- ---------- -------- Total Current Liabilities.............................. 449,985 (41,398) 1,086,563 90,574 --------- --------- ---------- -------- Long-term debt.............................................. 70,829 (11,596)(15) 372,577 19,320 Other long-term liabilities................................. 5,547 -- 48,627 347 --------- --------- ---------- -------- Total Liabilities...................................... 526,361 (52,994) 1,507,767 110,241 --------- --------- ---------- -------- Minority interests.......................................... -- -- -- 888 Stockholders' Equity (Deficit): Preferred stock............................................. 30,000 (30,000)(14) 6 -- Common stock................................................ 148,056 (148,056)(14) 1,339 84,309 298(11) 14(15) Additional paid in capital.................................. -- 336,686(11) 2,319,159 7,737 17,712(11) 12,457(15) Deferred compensation....................................... -- -- -- -- Notes receivable from shareholders.......................... (1,937) 1,937(14) -- -- Accumulated other comprehensive loss........................ (12,900) 12,900(14) (12,239) 47 Accumulated deficit......................................... (259,168) 259,168(14) (162,579) (9,643) --------- --------- ---------- -------- Total Stockholders' Equity (Deficit)................... (95,949) 463,116 2,145,686 82,450 --------- --------- ---------- -------- Total Liabilities and Stockholders' Equity............. $ 430,412 $ 410,122 $3,653,453 $193,579 ========= ========= ========== ======== PRO FORMA WORLD ACCESS, STAR, WORLDXCHANGE TELDAFAX AND TELDAFAX ADJUSTMENTS COMBINED ----------- ------------------ ASSETS Cash and equivalents(2(i)).................................. $ -- $ 337,684 Short-term investments...................................... -- 161,967 Restricted cash............................................. -- 31,095 Accounts and notes receivable............................... -- 507,886 Prepaid expenses and other current assets................... -- 123,705 Net assets held for sale.................................... -- 41,465 -------- ---------- Total Current Assets................................... -- 1,203,802 -------- ---------- Property and equipment...................................... (24,000)(21) 497,264 Investment in TelDaFax...................................... (130,851)(21) -- Goodwill and other intangibles.............................. (12,430)(23) 2,270,762 321,969(21) 33,000(21) Other assets................................................ -- 62,892 -------- ---------- Total Assets........................................... $187,688 $4,034,720 ======== ========== LIABILITIES AND STOCKH Short-term debt............................................. $ -- $ 253,507 Accounts payable............................................ -- 425,732 Other accrued liabilities................................... 5,000(21) 502,898 -------- ---------- Total Current Liabilities.............................. 5,000 1,182,137 -------- ---------- Long-term debt.............................................. -- 391,897 Other long-term liabilities................................. -- 48,974 -------- ---------- Total Liabilities...................................... 5,000 1,623,008 -------- ---------- Minority interests.......................................... -- 888 Stockholders' Equity (Deficit): Preferred stock............................................. -- 6 Common stock................................................ (84,309)(24) 1,571 232(21) Additional paid in capital.................................. (7,737)(24) 2,584,065 264,906(21) Deferred compensation....................................... -- -- Notes receivable from shareholders.......................... -- -- Accumulated other comprehensive loss........................ (47)(24) (12,239) Accumulated deficit......................................... 9,643(24) (162,579) -------- ---------- Total Stockholders' Equity (Deficit)................... 182,688 2,410,824 -------- ---------- Total Liabilities and Stockholders' Equity............. $187,688 $4,034,720 ======== ==========
152 166 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLDXCHANGE WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS ---------------- -------- ----------- ------------ ---------------- ------------ Service revenues....................... $570,279 $236,915 $(25,683)(7) $781,511 $280,586 $(19,477)(16) Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)..................... 500,355 209,303 (25,683)(7) 683,975 225,269 (19,477)(16) Selling, general and administrative.... 59,430 39,492 -- 98,922 80,584 -- Depreciation and amortization.......... 41,618 18,480 735(3) 55,308 25,756 11,046(12) (6,715)(3) (3,306)(12) 1,190(3) 4,130(12) Restructuring and other special charges............................... (3,995) -- -- (3,995) -- -- -------- -------- -------- -------- -------- -------- Total operating expenses......... 597,408 267,275 (30,473) 834,210 331,609 (7,607) -------- -------- -------- -------- -------- -------- Operating loss................... (27,129) (30,360) 4,790 (52,699) (51,023) (11,870) Interest and other income.............. 12,996 7,687 -- 20,683 -- -- Interest and other expense............. (29,789) (7,154) 1,223(6) (35,720) (17,096) 901(15) Loss on investment in TelDaFax......... (2,874) -- -- (2,874) -- -- Foreign exchange loss.................. 117 -- -- 117 -- -- -------- -------- -------- -------- -------- -------- Loss from continuing operations before income taxes and minority interests....................... (46,679) (29,827) 6,013 (70,493) (68,119) (10,969) Provision (benefit) for income taxes... (754) (7,277) 2,767(8) (5,264) -- 32(18) -------- -------- -------- -------- -------- -------- Loss from continuing operations before minority interest........ (45,925) (22,550) 3,246 (65,229) (68,119) (11,001) Minority interest...................... -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- Loss from continuing operations...................... (45,925) (22,550) 3,246 (65,229) (68,119) (11,001) Preferred stock dividends.............. (1,163) -- -- (1,163) (1,600) -------- -------- -------- -------- -------- -------- Loss from continuing operations available to common stockholders.................... $(47,088) $(22,550) $ 3,246 $(66,392) $(69,719) $(11,001) ======== ======== ======== ======== ======== ======== Loss per common share from continuing operations: Basic................................. $ (0.82) ======== Diluted............................... $ (0.82) ======== Weighted average shares outstanding: Basic................................. 57,658 ======== Diluted............................... 57,658 ======== PRO FORMA WORLD ACCESS, PRO FORMA STAR AND WORLD ACCESS, STAR, WORLDXCHANGE TELDAFAX WORLDXCHANGE AND COMBINED TELDAFAX(20) ADJUSTMENTS TELDAFAX COMBINED ------------- ------------ ----------- ------------------- Service revenues....................... $1,042,620 $150,036 $(2,772)(25) $1,189,884 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)..................... 889,767 126,302 (2,772)(25) 1,013,297 Selling, general and administrative.... 179,506 27,807 -- 207,313 Depreciation and amortization.......... 92,934 12,253 7,359(22) 113,446 (2,400)(22) 3,300(22) Restructuring and other special charges............................... (3,995) -- -- (3,995) ---------- -------- ------- ---------- Total operating expenses......... 1,158,212 166,362 5,487 1,330,061 ---------- -------- ------- ---------- Operating loss................... (115,592) (16,326) (8,259) (140,177) Interest and other income.............. 20,683 885 -- 21,568 Interest and other expense............. (51,915) (788) -- (52,703) Loss on investment in TelDaFax......... (2,874) -- 2,874 -- Foreign exchange loss.................. 117 -- -- 117 ---------- -------- ------- ---------- Loss from continuing operations before income taxes and minority interests....................... (149,581) (16,229) (5,385) (171,195) Provision (benefit) for income taxes... (5,232) (6,676) (369)(26) (12,277) ---------- -------- ------- ---------- Loss from continuing operations before minority interest........ (144,349) (9,553) (5,016) (158,918) Minority interest...................... -- 851 -- 851 ---------- -------- ------- ---------- Loss from continuing operations...................... (144,349) (8,702) (5,016) (158,067) Preferred stock dividends.............. (2,763) -- -- (2,763) ---------- -------- ------- ---------- Loss from continuing operations available to common stockholders.................... $ (147,112) $ (8,702) $(5,016) $ (160,830) ========== ======== ======= ========== Loss per common share from continuing operations: Basic................................. $ (1.04)(9)(19)(27) ========== Diluted............................... $ (1.04)(9)(19)(27) ========== Weighted average shares outstanding: Basic................................. 154,858(9)(19)(27) ========== Diluted............................... 154,858(9)(19)(27) ==========
153 167 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA WORLD ACCESS WORLD ACCESS STAR STAR AND STAR WORLDXCHANGE WORLDXCHANGE (28) (1) ADJUSTMENTS COMBINED (10) ADJUSTMENTS ---------------- -------- ----------- ------------ ---------------- ------------ Service revenues....................... $1,019,553 $616,469 $(17,949)(7) $1,618,073 $ 607,035 $(25,601)(16) Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)................... 903,325 537,895 (17,949)(7) 1,423,271 477,317 (25,601)(16) Selling, general and administrative... 146,231 108,246 -- 254,477 193,070 Depreciation and amortization......... 97,517 29,635 3,122(3) 119,225 43,304 8,768(12) (13,429)(3) (6,611)(12) 2,380(3) 8,260(12) Merger expense........................ -- 1,867 -- 1,867 -- Restructuring and other special charges............................. 44,187 -- -- 44,187 -- -- ---------- -------- -------- ---------- --------- -------- Total operating expenses......... 1,191,260 677,643 (25,876) 1,843,027 713,691 (15,184) ---------- -------- -------- ---------- --------- -------- Operating loss................... (171,707) (61,174) 7,927 (224,954) (106,656) (10,417) Interest and other income.............. 10,822 6,701 -- 17,523 -- -- Interest and other expense............. (58,208) (8,614) -- (66,822) (25,385) 1,230(15) Loss on investment in TelDaFax......... (990) -- -- (990) -- -- Foreign exchange loss.................. (2,369) (3,471) -- (5,840) -- -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations before income taxes and minority interests....................... (222,452) (66,558) 7,927 (281,083) (132,041) (9,187) Provision (benefit) for income taxes... (6,999) (11,041) 4,530(8) (13,510) -- (172)(18) ---------- -------- -------- ---------- --------- -------- Loss from continuing operations before minority interest........ (215,453) (55,517) 3,397 (267,573) (132,041) (9,015) Minority interest...................... -- -- -- -- 1,614 -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations...................... (215,453) (55,517) 3,397 (267,573) (130,427) (9,015) Preferred stock dividends.............. (2,461) -- -- (2,461) (784) -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations available to common stockholders.................... $ (217,914) $(55,517) $ 3,397 $ (270,034) $(131,211) $ (9,015) ========== ======== ======== ========== ========= ======== Loss per common share from continuing operations: Basic................................. $ (4.30) ========== Diluted............................... $ (4.30) ========== Weighted average shares outstanding: Basic................................. 50,634 ========== Diluted............................... 50,634 ========== PRO FORMA WORLD ACCESS, PRO FORMA STAR AND WORLD ACCESS, STAR, WORLDXCHANGE TELDAFAX TELDAFAX WORLDXCHANGE AND COMBINED (20) ADJUSTMENTS TELDAFAX COMBINED ------------- ------------ ----------- ------------------- Service revenues....................... $2,199,507 $364,039 $ (8,914)(25) $2,554,632 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)................... 1,874,987 304,810 (8,914)(25) 2,170,883 Selling, general and administrative... 447,547 48,758 -- 496,305 Depreciation and amortization......... 172,946 18,369 15,493(22) 208,608 (4,800)(22) 6,600(22) Merger expense........................ 1,867 -- 1,867 Restructuring and other special charges............................. 44,187 -- -- 44,187 ---------- -------- -------- ---------- Total operating expenses......... 2,541,534 371,937 8,379 2,921,850 ---------- -------- -------- ---------- Operating loss................... (342,027) (7,898) (17,293) (367,218) Interest and other income.............. 17,523 2,469 -- 19,992 Interest and other expense............. (90,977) (2,171) -- (93,148) Loss on investment in TelDaFax......... (990) -- 990 -- Foreign exchange loss.................. (5,840) -- -- (5,840) ---------- -------- -------- ---------- Loss from continuing operations before income taxes and minority interests....................... (422,311) (7,600) (16,303) (446,214) Provision (benefit) for income taxes... (13,682) (3,830) (738)(26) (18,250) ---------- -------- -------- ---------- Loss from continuing operations before minority interest........ (408,629) (3,770) (15,565) (427,964) Minority interest...................... 1,614 774 -- 2,388 ---------- -------- -------- ---------- Loss from continuing operations...................... (407,015) (2,996) (15,565) (425,576) Preferred stock dividends.............. (3,245) -- -- (3,245) ---------- -------- -------- ---------- Loss from continuing operations available to common stockholders.................... $ (410,260) $ (2,996) $(15,565) $ (428,821) ========== ======== ======== ========== Loss per common share from continuing operations: Basic................................. $ (2.90)(9)(19)(27) ========== Diluted............................... $ (2.90)(9)(19)(27) ========== Weighted average shares outstanding: Basic................................. 147,824(9)(19)(27) ========== Diluted............................... 147,824(9)(19)(27) ==========
154 168 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA PRO FORMA WORLD ACCESS WORLD STAR AND STAR WORLDXCHANGE ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS ------------- --------- ----------- ------------ ---------------- ------------ ASSETS Cash and equivalents(2(i))....... $ 172,479 $ 131,884 $ -- $ 304,363 $ 6,913 $ -- Short-term investments... 160,211 1,756 -- 161,967 -- -- Restricted cash.......... 31,095 -- -- 31,095 -- -- Accounts and notes receivable.............. 264,678 99,810 -- 364,488 103,172 (2,201)(17) Prepaid expenses and other current assets.... 38,491 22,023 -- 60,514 32,566 -- Net assets held for sale.................... 41,465 -- -- 41,465 -- -- ---------- --------- --------- ---------- --------- --------- Total Current Assets........... 708,419 255,473 -- 963,892 142,651 (2,201) ---------- --------- --------- ---------- --------- --------- Property and equipment... 151,609 264,380 (94,000)(2) 321,989 193,494 (6,500)(11) (68,000)(11) 15,000(11) Investment in TelDaFax... 130,851 -- -- 130,851 -- -- Goodwill and other intangibles............. 1,080,797 3,968 (1,764)(4) 1,312,235 90,162 (76,327)(13) 233,144(2) 548,172(11) 11,900(2) 41,300(11) (15,810)(6) (3,130)(15) Other assets............. 79,185 4,767 -- 83,952 4,105 (38,192)(11) ---------- --------- --------- ---------- --------- --------- Total Assets...... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $ 430,412 $ 410,122 ========== ========= ========= ========== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt.......... $ 57,033 $ 86,680 $ (55,685)(6) $ 88,028 $ 201,825 $ (2,201)(17) (38,192)(11) (3,213)(15) Accounts payable......... 246,436 104,507 (21,789)(6) 329,154 23,682 (792)(15) Other accrued liabilities............. 151,328 107,689 3,000(2) 260,794 224,478 3,000(11) (1,223)(6) -- ---------- --------- --------- ---------- --------- --------- Total Current Liabilities...... 454,797 298,876 (75,697) 677,976 449,985 (41,398) Long-term debt........... 257,946 55,398 -- 313,344 70,829 (11,596)(15) Other long-term liabilities............. 10,336 32,744 -- 43,080 5,547 -- ---------- --------- --------- ---------- --------- --------- Total Liabilities...... 723,079 387,018 (75,697) 1,034,400 526,361 (52,994) ---------- --------- --------- ---------- --------- --------- Stockholders' Equity (Deficit): Preferred Stock.......... 6 -- -- 6 30,000 (30,000)(14) Common stock............. 732 58 (58)(5) 1,027 148,056 (148,056)(14) 227(2) 298(11) 68(6) 14(15) Additional paid in capital................. 1,601,862 366,304 (366,304)(5) 1,952,304 -- 336,686(11) 279,484(2) 17,712(11) 8,139(2) 12,457(15) 62,819(6) -- Deferred compensation.... -- (1,399) 1,399(5) -- -- -- Notes receivable from shareholders............ -- (3,856) 3,856(5) -- (1,937) 1,937(14) Accumulated other comprehensive loss...... (12,239) (8,017) 8,017(5) (12,239) (12,900) 12,900(14) Accumulated deficit...... (162,579) (211,520) 211,520(5) (162,579) (259,168) 259,168(14) ---------- --------- --------- ---------- --------- --------- Total Stockholders' Equity (Deficit)........ 1,427,782 141,570 209,167 1,778,519 (95,949) 463,116 ---------- --------- --------- ---------- --------- --------- Total Liabilities and Stockholders' Equity........... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $ 430,412 $ 410,122 ========== ========= ========= ========== ========= ========= PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE COMBINED ------------- ASSETS Cash and equivalents(2(i))....... $ 311,276 Short-term investments... 161,967 Restricted cash.......... 31,095 Accounts and notes receivable.............. 465,459 Prepaid expenses and other current assets.... 93,080 Net assets held for sale.................... 41,465 ---------- Total Current Assets........... 1,104,342 ---------- Property and equipment... 455,983 Investment in TelDaFax... 130,851 Goodwill and other intangibles............. 1,912,412 Other assets............. 49,865 ---------- Total Assets...... $3,653,453 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt.......... $ 246,247 Accounts payable......... 352,044 Other accrued liabilities............. 488,272 ---------- Total Current Liabilities...... 1,086,563 Long-term debt........... 372,577 Other long-term liabilities............. 48,627 ---------- Total Liabilities...... 1,507,767 ---------- Stockholders' Equity (Def Preferred Stock.......... 6 Common stock............. 1,339 Additional paid in capital................. 2,319,159 Deferred compensation.... -- Notes receivable from shareholders............ -- Accumulated other comprehensive loss...... (12,239) Accumulated deficit...... (162,579) ---------- Total Stockholders' Equity (Deficit)........ 2,145,686 ---------- Total Liabilities and Stockholders' Equity........... $3,653,453 ==========
155 169 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLDXCHANGE WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS ---------------- -------- ----------- ------------ ---------------- ------------ Service revenues................... $570,279 $236,915 $ (25,683)(7) $781,511 $280,586 $ (19,477)(16) Operating expenses:................ Cost of services (exclusive of depreciation and amortization shown separately below).......... 500,355 209,303 (25,683)(7) 683,975 225,269 (19,477)(16) Selling, general and administrative................... 59,430 39,492 -- 98,922 80,584 -- Depreciation and amortization...... 41,618 18,480 735(3) 55,308 25,756 11,046(12) (6,715)(3) (3,306)(12) 1,190(3) 4,130(12) Restructuring and other special charges.......................... (3,995) -- -- (3,995) -- -- -------- -------- ----------- -------- -------- ------------ Total operating expenses... 597,408 267,275 (30,473) 834,210 331,609 (7,607) -------- -------- ----------- -------- -------- ------------ Operating loss............. (27,129) (30,360) 4,790 (52,699) (51,023) (11,870) Interest and other income.......... 12,996 7,687 -- 20,683 -- -- Interest and other expense......... (29,789) (7,154) 1,223(6) (35,720) (17,096) 901(15) Loss on investment in TelDaFax..... (2,874) -- -- (2,874) -- -- Foreign exchange loss.............. 117 -- -- 117 -- -- -------- -------- ----------- -------- -------- ------------ Loss from continuing operations before income taxes and minority interests................ (46,679) (29,827) 6,013 (70,493) (68,119) (10,969) Provision (benefit) for income taxes............................ (754) (7,277) 2,767(8) (5,264) -- 32(18) -------- -------- ----------- -------- -------- ------------ Loss from continuing operations............... (45,925) (22,550) 3,246 (65,229) (68,119) (11,001) Preferred stock dividends.......... (1,163) -- -- (1,163) (1,600) -- -------- -------- ----------- -------- -------- ------------ Loss from continuing operations available to common stockholders...... $(47,088) $(22,550) $ 3,246 $(66,392) $(69,719) $ (11,001) ======== ======== =========== ======== ======== ============ Loss per common share from continuing operations: Basic............................ $ (0.82) ======== Diluted.......................... $ (0.82) ======== Weighted average shares outstanding: Basic............................ 57,658 ======== Diluted.......................... 57,658 ======== PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE COMBINED ------------- Service revenues................... $ 1,042,620 Operating expenses:................ Cost of services (exclusive of depreciation and amortization shown separately below).......... 889,767 Selling, general and administrative................... 179,506 Depreciation and amortization...... 92,934 Restructuring and other special charges.......................... (3,995) ------------- Total operating expenses... 1,158,212 ------------- Operating loss............. (115,592) Interest and other income.......... 20,683 Interest and other expense......... (51,915) Loss on investment in TelDaFax..... (2,874) Foreign exchange loss.............. 117 ------------- Loss from continuing operations before income taxes and minority interests................ (149,581) Provision (benefit) for income taxes............................ (5,232) ------------- Loss from continuing operations............... (144,349) Preferred stock dividends.......... (2,763) ------------- Loss from continuing operations available to common stockholders...... $ (147,112) ============= Loss per common share from continuing operations: Basic............................ $ (1.22)(9)(19) ============= Diluted.......................... $ (1.22)(9)(19) ============= Weighted average shares outstanding: Basic............................ 120,173(9)(19) ============= Diluted.......................... 120,173(9)(19) =============
156 170 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLDXCHANGE WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS ---------------- -------- ----------- ------------ ---------------- ------------ Service revenues................. $1,019,553 $616,469 $(17,949)(7) $1,618,073 $ 607,035 $(25,601)(16) Operating expenses:.............. Cost of services (exclusive of depreciation and amortization shown separately below)...... 903,325 537,895 (17,949)(7) 1,423,271 477,317 (25,601)(16) Selling, general and administrative............... 146,231 108,246 -- 254,477 193,070 -- Depreciation and amortization................. 97,517 29,635 3,122(3) 119,225 43,304 8,768(12) (13,429)(3) (6,611)(12) 2,380(3) 8,260(12) Merger expense................. -- 1,867 -- 1,867 -- -- Restructuring and other special charges...................... 44,187 -- -- 44,187 -- -- ---------- -------- -------- ---------- --------- -------- Total operating expenses............... 1,191,260 677,643 (25,876) 1,843,027 713,691 (15,184) ---------- -------- -------- ---------- --------- -------- Operating loss........... (171,707) (61,174) 7,927 (224,954) (106,656) (10,417) Interest and other income........ 10,822 6,701 -- 17,523 -- -- Interest and other expense....... (58,208) (8,614) -- (66,822) (25,385) 1,230(15) Loss on investment in TelDaFax... (990) -- -- (990) -- -- Foreign exchange loss............ (2,369) (3,471) -- (5,840) -- -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations before income taxes and minority interests..... (222,452) (66,558) 7,927 (281,083) (132,041) (9,187) Provision (benefit) for income taxes.......................... (6,999) (11,041) 4,530(8) (13,510) -- (172)(18) ---------- -------- -------- ---------- --------- -------- Loss from continuing operations before minority interest...... (215,453) (55,517) 3,397 (267,573) (132,041) (9,015) Minority interest................ -- -- -- -- 1,614 -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations............. (215,453) (55,517) 3,397 (267,573) (130,427) (9,015) Preferred stock dividends........ (2,461) -- -- (2,461) (784) -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations available to common stockholders.... $ (217,914) $(55,517) $ 3,397 $ (270,034) $(131,211) $ (9,015) ========== ======== ======== ========== ========= ======== Loss per common share from continuing operations: Basic.......................... $ (4.30) ========== Diluted...................... $ (4.30) ========== Weighted average shares outstanding: Basic.......................... 50,634 ========== Diluted........................ 50,634 ========== PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE COMBINED ------------- Service revenues................. $2,199,507 Operating expenses:.............. Cost of services (exclusive of depreciation and amortization shown separately below)...... 1,874,987 Selling, general and administrative............... 447,547 Depreciation and amortization................. 172,946 Merger expense................. 1,867 Restructuring and other special charges...................... 44,187 ---------- Total operating expenses............... 2,541,534 ---------- Operating loss........... (342,027) Interest and other income........ 17,523 Interest and other expense....... (90,977) Loss on investment in TelDaFax... (990) Foreign exchange loss............ (5,840) ---------- Loss from continuing operations before income taxes and minority interests..... (422,311) Provision (benefit) for income taxes.......................... (13,682) ---------- Loss from continuing operations before minority interest...... (408,629) Minority interest................ 1,614 ---------- Loss from continuing operations............. (407,015) Preferred stock dividends........ (3,245) ---------- Loss from continuing operations available to common stockholders.... $ (410,260) ========== Loss per common share from continuing operations: Basic.......................... $ (3.63)(9)(19) ========== Diluted...................... $ (3.63)(9)(19) ========== Weighted average shares outstanding: Basic.......................... 113,149(9)(19) ========== Diluted........................ 113,149(9)(19) ==========
157 171 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR TELDAFAX WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED TELDAFAX(20) ADJUSTMENTS ---------------- --------- ----------- ------------ ------------ ----------- ASSETS Cash and equivalents.............. $ 172,479 $ 131,884 $ -- $ 304,363 $ 26,408 $ -- Short-term investments............ 160,211 1,756 -- 161,967 -- -- Restricted cash................... 31,095 -- -- 31,095 -- -- Accounts and notes receivable..... 264,678 99,810 -- 364,488 42,427 -- Prepaid expenses and other current assets........................... 38,491 22,023 -- 60,514 30,625 -- Net assets held for sale.......... 41,465 -- -- 41,465 -- -- ---------- --------- --------- ---------- -------- -------- Total Current Assets....... 708,419 255,473 -- 963,892 99,460 -- ---------- --------- --------- ---------- -------- -------- Property and equipment............ 151,609 264,380 (94,000)(2) 321,989 65,281 (24,000)(21) Investment in TelDaFax............ 130,851 -- -- 130,851 -- (130,851)(21) Goodwill and other intangibles.... 1,080,797 3,968 (1,764)(4) 1,312,235 15,811 (12,430)(23) 233,144(2) 321,969(21) 11,900(2) 33,000(21) (15,810)(6) Other assets...................... 79,185 4,767 -- 83,952 13,027 -- ---------- --------- --------- ---------- -------- -------- Total Assets............... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $193,579 $187,688 ========== ========= ========= ========== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt................... $ 57,033 $ 86,680 $ (55,685)(6) $ 88,028 $ 7,260 $ -- Accounts payable.................. 246,436 104,507 (21,789)(6) 329,154 73,688 -- Other accrued liabilities......... 151,328 107,689 3,000(2) 260,794 9,626 5,000(21) (1,223)(6) ---------- --------- --------- ---------- -------- -------- Total Current Liabilities.............. 454,797 298,876 (75,697) 677,976 90,574 5,000 Long-term debt.................... 257,946 55,398 -- 313,344 19,320 -- Other long-term liabilities....... 10,336 32,744 -- 43,080 347 -- ---------- --------- --------- ---------- -------- -------- Total Liabilities.......... 723,079 387,018 (75,697) 1,034,400 110,241 5,000 ---------- --------- --------- ---------- -------- -------- Minority interests................ -- -- -- -- 888 -- Stockholders' Equity (Deficit): Preferred Stock................... 6 -- -- 6 -- -- Common stock...................... 732 58 (58)(5) 1,027 84,309 (84,309)(24) 227(2) 232(21) 68(6) Additional paid in capital........ 1,601,862 366,304 (366,304)(5) 1,952,304 7,737 (7,737)(24) 279,484(2) 264,906(21) 8,139(2) 62,819(6) Deferred compensation............. -- (1,399) 1,399(5) -- -- -- Notes receivable from shareholders..................... -- (3,856) 3,856(5) -- -- -- Accumulated other comprehensive loss............................. (12,239) (8,017) 8,017(5) (12,239) 47 (47)(24) Accumulated deficit............... (162,579) (211,520) 211,520(5) (162,579) (9,643) 9,643(24) ---------- --------- --------- ---------- -------- -------- Total Stockholders' Equity (Deficit)................ 1,427,782 141,570 209,167 1,778,519 82,450 182,688 ---------- --------- --------- ---------- -------- -------- Total Liabilities and Stockholders' Equity..... $2,150,861 $ 528,588 $ 133,470 $2,812,919 $193,579 $187,688 ========== ========= ========= ========== ======== ======== PRO FORMA WORLD ACCESS, STAR AND TELDAFAX COMBINED ------------------ ASSETS Cash and equivalents.............. $ 330,771 Short-term investments............ 161,967 Restricted cash................... 31,095 Accounts and notes receivable..... 406,915 Prepaid expenses and other current assets........................... 91,139 Net assets held for sale.......... 41,465 ---------- Total Current Assets....... 1,063,352 ---------- Property and equipment............ 363,270 Investment in TelDaFax............ -- Goodwill and other intangibles.... 1,670,585 Other assets...................... 96,979 ---------- Total Assets............... $3,194,186 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt................... $ 95,288 Accounts payable.................. 402,842 Other accrued liabilities......... 275,420 ---------- Total Current Liabilities.............. 773,550 Long-term debt.................... 332,664 Other long-term liabilities....... 43,427 ---------- Total Liabilities.......... 1,149,641 ---------- Minority interests................ 888 Stockholders' Equity (Deficit): Preferred Stock................... 6 Common stock...................... 1,259 Additional paid in capital........ 2,217,210 Deferred compensation............. -- Notes receivable from shareholders..................... -- Accumulated other comprehensive loss............................. (12,239) Accumulated deficit............... (162,579) ---------- Total Stockholders' Equity (Deficit)................ 2,043,657 ---------- Total Liabilities and Stockholders' Equity..... $3,194,186 ==========
158 172 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED TELDAFAX(20) ---------------- -------- ----------- ------------ ------------ Service revenues................................... $570,279 $236,915 $(25,683)(7) $781,511 $150,036 Operating expenses:................................ Cost of services (exclusive of depreciation and amortization shown separately below)............. 500,355 209,303 (25,683)(7) 683,975 126,302 Selling, general and administrative................ 59,430 39,492 -- 98,922 27,807 Depreciation and amortization...................... 41,618 18,480 735(3) 55,308 12,253 (6,715)(3) 1,190(3) Restructuring and other special charges............ (3,995) -- -- (3,995) -- -------- -------- -------- -------- -------- Total operating expenses.................. 597,408 267,275 (30,473) 834,210 166,362 -------- -------- -------- -------- -------- Operating loss............................ (27,129) (30,360) 4,790 (52,699) (16,326) Interest and other income.......................... 12,996 7,687 -- 20,683 885 Interest and other expense......................... (29,789) (7,154) 1,223(6) (35,720) (788) Loss on investment in TelDaFax..................... (2,874) -- -- (2,874) -- Foreign exchange loss.............................. 117 -- -- 117 -- -------- -------- -------- -------- -------- Loss from continuing operations before income taxes and minority interests..... (46,679) (29,827) 6,013 (70,493) (16,229) Provision (benefit) for income taxes............... (754) (7,277) 2,767(8) (5,264) (6,676) -------- -------- -------- -------- -------- Loss from continuing operations before minority interest....................... (45,925) (22,550) 3,246 (65,229) (9,553) Minority interest.................................. -- -- -- -- 851 -------- -------- -------- -------- -------- Loss from continuing operations........... (45,925) (22,550) 3,246 (65,229) (8,702) Preferred stock dividends.......................... (1,163) -- -- (1,163) -- -------- -------- -------- -------- -------- Loss from continuing operations available to common stockholders.................. $(47,088) $(22,550) $ 3,246 $(66,392) $ (8,702) ======== ======== ======== ======== ======== Loss per common share from continuing operations: Basic............................................ $ (0.82) ======== Diluted.......................................... $ (0.82) ======== Weighted average shares outstanding: Basic............................................ 57,658 ======== Diluted.......................................... 57,658 ======== PRO FORMA WORLD ACCESS, STAR AND TELDAFAX TELDAFAX ADJUSTMENTS COMBINED ----------- ------------ Service revenues................................... $(2,772)(25) $ 928,775 Operating expenses:................................ Cost of services (exclusive of depreciation and amortization shown separately below)............. (2,772)(25) 807,505 Selling, general and administrative................ -- 126,729 Depreciation and amortization...................... 7,359(22) 75,820 (2,400)(22) 3,300(22) Restructuring and other special charges............ -- (3,995) ------- ---------- Total operating expenses.................. 5,487 1,006,059 ------- ---------- Operating loss............................ (8,259) (77,284) Interest and other income.......................... -- 21,568 Interest and other expense......................... -- (36,508) Loss on investment in TelDaFax..................... 2,874 -- Foreign exchange loss.............................. -- 117 ------- ---------- Loss from continuing operations before income taxes and minority interests..... (5,385) (92,107) Provision (benefit) for income taxes............... (369)(26) (12,309) ------- ---------- Loss from continuing operations before minority interest....................... (5,016) (79,798) Minority interest.................................. -- 851 ------- ---------- Loss from continuing operations........... (5,016) (78,947) Preferred stock dividends.......................... -- (1,163) ------- ---------- Loss from continuing operations available to common stockholders.................. $(5,016) $ (80,110) ======= ========== Loss per common share from continuing operations: Basic............................................ $ (0.65)(9)(27) ========== Diluted.......................................... $ (0.65)(9)(27) ========== Weighted average shares outstanding: Basic............................................ 122,826(9)(27) ========== Diluted.......................................... 122,826(9)(27) ==========
159 173 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR TELDAFAX WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED TELDAFAX(20) ADJUSTMENTS ---------------- -------- ----------- ------------- ------------ ----------- Service revenues................... $1,019,553 $616,469 $(17,949)(7) $1,618,073 $364,039 $ (8,914)(25) Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)........ 903,325 537,895 (17,949)(7) 1,423,271 304,810 (8,914)(25) Selling, general and administrative................. 146,231 108,246 -- 254,477 48,758 -- Depreciation and amortization.... 97,517 29,635 3,122(3) 119,225 18,369 15,493(22) (13,429)(3) (4,800)(22) 2,380(3) 6,600(22) Merger expense................... -- 1,867 -- 1,867 -- -- Restructuring and other special charges........................ 44,187 -- -- 44,187 -- -- ---------- -------- -------- ---------- -------- -------- Total operating expenses... 1,191,260 677,643 (25,876) 1,843,027 371,937 8,379 ---------- -------- -------- ---------- -------- -------- Operating loss............. (171,707) (61,174) 7,927 (224,954) (7,898) (17,293) Interest and other income.......... 10,822 6,701 -- 17,523 2,469 -- Interest and other expense......... (58,208) (8,614) -- (66,822) (2,171) -- Loss on investment in TelDaFax..... (990) -- -- (990) -- 990 Foreign exchange loss.............. (2,369) (3,471) -- (5,840) -- -- ---------- -------- -------- ---------- -------- -------- Loss from continuing operations before income taxes and minority interests................ (222,452) (66,558) 7,927 (281,083) (7,600) (16,303) Provision (benefit) for income taxes............................ (6,999) (11,041) 4,530(8) (13,510) (3,830) (738)(26) ---------- -------- -------- ---------- -------- -------- Loss from continuing operations before minority interest........ (215,453) (55,517) 3,397 (267,573) (3,770) (15,565) Minority interest.................. -- -- -- -- 774 -- ---------- -------- -------- ---------- -------- -------- Loss from continuing operations............... (215,453) (55,517) 3,397 (267,573) (2,996) (15,565) Preferred stock dividends........ (2,461) -- -- (2,461) -- -- ---------- -------- -------- ---------- -------- -------- Loss from continuing operations available to common stockholders...... $ (217,914) $(55,517) $ 3,397 $ (270,034) $ (2,996) $(15,565) ========== ======== ======== ========== ======== ======== Loss per common share from continuing operations: Basic............................ $ (4.30) ========== Diluted.......................... $ (4.30) ========== Weighted average shares outstanding: Basic............................ 50,634 ========== Diluted.......................... 50,634 ========== PRO FORMA WORLD ACCESS, STAR AND TELDAFAX COMBINED ------------- Service revenues................... $1,973,198 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)........ 1,719,167 Selling, general and administrative................. 303,235 Depreciation and amortization.... 154,887 Merger expense................... 1,867 Restructuring and other special charges........................ 44,187 ---------- Total operating expenses... 2,223,343 ---------- Operating loss............. (250,145) Interest and other income.......... 19,992 Interest and other expense......... (68,993) Loss on investment in TelDaFax..... -- Foreign exchange loss.............. (5,840) ---------- Loss from continuing operations before income taxes and minority interests................ (304,986) Provision (benefit) for income taxes............................ (18,078) ---------- Loss from continuing operations before minority interest........ (286,908) Minority interest.................. 774 ---------- Loss from continuing operations............... (286,134) Preferred stock dividends........ (2,461) ---------- Loss from continuing operations available to common stockholders...... $ (288,595) ========== Loss per common share from continuing operations: Basic............................ $ (2.49)(9)(27) ========== Diluted.......................... $ (2.49)(9)(27) ========== Weighted average shares outstanding: Basic............................ 115,802(9)(27) ========== Diluted.......................... 115,802(9)(27) ==========
160 174 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA WORLD ACCESS PRO FORMA AND WORLD WORLDXCHANGE WORLDXCHANGE ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED TELDAFAX(20) ---------------- ---------------- ------------ ------------ ------------ ASSETS Cash and equivalents(2(i))......... $ 172,479 $ 6,913 $ -- $ 179,392 $ 26,408 Short-term investments............. 160,211 -- -- 160,211 -- Restricted cash.................... 31,095 -- -- 31,095 -- Accounts and notes receivable...... 264,678 103,172 -- 367,850 42,427 Prepaid expenses and other current assets............................ 38,491 32,566 -- 71,057 30,625 Net assets held for sale........... 41,465 -- -- 41,465 -- ---------- --------- -------- ---------- -------- Total Current Assets........ 708,419 142,651 -- 851,070 99,460 ---------- --------- -------- ---------- -------- Property and equipment............. 151,609 193,494 (6,500)(11) 285,603 65,281 (68,000)(11) 15,000(11) Investment in TelDaFax............. 130,851 -- -- 130,851 -- Goodwill and other intangibles..... 1,080,797 90,162 (76,327)(13) 1,680,974 15,811 548,172(11) 41,300(11) (3,130)(15) Other assets....................... 79,185 4,105 (38,192)(11) 45,098 13,027 ---------- --------- -------- ---------- -------- Total Assets................ $2,150,861 $ 430,412 $412,323 $2,993,596 $193,579 ========== ========= ======== ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt.................... $ 57,033 $ 201,825 $(38,192)(11) $ 217,453 $ 7,260 (3,213)(15) Accounts payable................... 246,436 23,682 (792)(15) 269,326 73,688 Other accrued liabilities.......... 151,328 224,478 3,000(11) 378,806 9,626 ---------- --------- -------- ---------- -------- Total Current Liabilities... 454,797 449,985 (39,197) 865,585 90,574 Long-term debt..................... 257,946 70,829 (11,596)(15) 317,179 19,320 Other long-term liabilities........ 10,336 5,547 -- 15,883 347 ---------- --------- -------- ---------- -------- Total Liabilities........... 723,079 526,361 (50,793) 1,198,647 110,241 ---------- --------- -------- ---------- -------- Minority interests................. 888 Stockholders' Equity (Deficit): Preferred Stock.................... 6 30,000 (30,000)(14) 6 -- Common stock....................... 732 148,056 (148,056)(14) 1,044 84,309 298(11) 14(15) Additional paid in capital......... 1,601,862 -- 336,686(11) 1,968,717 7,737 17,712(11) 12,457(15) Notes receivable from shareholders...................... -- (1,937) 1,937(14) -- -- Accumulated other comprehensive loss.............................. (12,239) (12,900) 12,900(14) (12,239) 47 Accumulated deficit................ (162,579) (259,168) 259,168(14) (162,579) (9,643) ---------- --------- -------- ---------- -------- Total Stockholders' Equity (Deficit).................. 1,427,782 (95,949) 463,116 1,794,949 82,450 ---------- --------- -------- ---------- -------- Total Liabilities and Stockholders' Equity....... $2,150,861 $ 430,412 $412,323 $2,993,596 $193,579 ========== ========= ======== ========== ======== PRO FORMA WORLD ACCESS, WORLDXCHANGE AND TELDAFAX TELDAFAX ADJUSTMENTS COMBINED ----------- ---------------- ASSETS Cash and equivalents(2(i))......... $ -- $ 205,800 Short-term investments............. -- 160,211 Restricted cash.................... -- 31,095 Accounts and notes receivable...... -- 410,277 Prepaid expenses and other current assets............................ -- 101,682 Net assets held for sale........... -- 41,465 -------- ---------- Total Current Assets........ -- 950,530 -------- ---------- Property and equipment............. (24,000)(21) 326,884 Investment in TelDaFax............. (130,851)(21) -- Goodwill and other intangibles..... (12,430)(23) 2,039,324 321,969(21) 33,000(21) Other assets....................... -- 58,125 -------- ---------- Total Assets................ $187,688 $3,374,863 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt.................... $ -- $ 224,713 Accounts payable................... -- 343,014 Other accrued liabilities.......... 5,000(21) 393,432 -------- ---------- Total Current Liabilities... 5,000 961,159 Long-term debt..................... -- 336,499 Other long-term liabilities........ -- 16,230 -------- ---------- Total Liabilities........... 5,000 1,313,888 -------- ---------- Minority interests................. -- 888 Stockholders' Equity (Deficit): Preferred Stock.................... -- 6 Common stock....................... (84,309)(24) 1,276 232(21) Additional paid in capital......... (7,737)(24) 2,233,623 264,906(21) Notes receivable from shareholders...................... -- -- Accumulated other comprehensive loss.............................. (47)(24) (12,239) Accumulated deficit................ 9,643(24) (162,579) -------- ---------- Total Stockholders' Equity (Deficit).................. 182,688 2,060,087 -------- ---------- Total Liabilities and Stockholders' Equity....... $187,688 $3,374,863 ======== ==========
161 175 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ---------------- ------------ ---------------- Service revenues................................ $570,279 $280,586 $ (14,257)(16) $ 836,608 Operating expenses:............................. Cost of services (exclusive of depreciation and amortization shown separately below).... 500,355 225,269 (14,257)(16) 711,367 Selling, general and administrative........... 59,430 80,584 -- 140,014 Depreciation and amortization................. 41,618 25,756 11,046(12) 79,244 (3,306)(12) 4,130(12) Restructuring and other special charges....... (3,995) -- -- (3,995) -------- -------- ------------ --------- Total operating expenses................ 597,408 331,609 (2,387) 926,630 -------- -------- ------------ --------- Operating loss.......................... (27,129) (51,023) (11,870) (90,022) Interest and other income..................... 12,996 -- -- 12,996 Interest and other expense.................... (29,789) (17,096) 901(15) (45,984) Loss on investment in TelDaFax................ (2,874) -- -- (2,874) Foreign exchange loss......................... 117 -- -- 117 -------- -------- ------------ --------- Loss from continuing operations before income taxes and minority interests... (46,679) (68,119) (10,969) (125,767) Provision (benefit) for income taxes.......... (754) -- 32(18) (722) -------- -------- ------------ --------- Loss from continuing operations before minority interest..................... (45,925) (68,119) (11,001) (125,045) Minority interest............................. -- -- -- -- -------- -------- ------------ --------- Loss from continuing operations......... (45,925) (68,119) (11,001) (125,045) Preferred stock dividends..................... (1,163) (1,600) -- (2,763) -------- -------- ------------ --------- Loss from continuing operations available to common stockholders...... $(47,088) $(69,719) $ (11,001) $(127,808) ======== ======== ============ ========= Loss per common share from continuing operations: Basic......................................... $ (0.82) ======== Diluted....................................... $ (0.82) ======== Weighted average shares outstanding: Basic......................................... 57,658 ======== Diluted....................................... 57,658 ======== PRO FORMA WORLD ACCESS, WORLDXCHANGE TELDAFAX AND TELDAFAX TELDAFAX(20) ADJUSTMENTS COMBINED ------------ ----------- ---------------- Service revenues................................ $150,036 $ (2,772)(25) $ 983,872 Operating expenses:............................. Cost of services (exclusive of depreciation and amortization shown separately below).... 126,302 (2,772)(25) 834,897 Selling, general and administrative........... 27,807 -- 167,821 Depreciation and amortization................. 12,253 7,359(22) 99,756 (2,400)(22) 3,300(22) Restructuring and other special charges....... -- -- (3,995) -------- ----------- ------------- Total operating expenses................ 166,362 5,487 1,098,479 -------- ----------- ------------- Operating loss.......................... (16,326) (8,259) (114,607) Interest and other income..................... 885 -- 13,881 Interest and other expense.................... (788) -- (46,772) Loss on investment in TelDaFax................ -- 2,874 -- Foreign exchange loss......................... -- -- 117 -------- ----------- ------------- Loss from continuing operations before income taxes and minority interests... (16,229) (5,385) (147,381) Provision (benefit) for income taxes.......... (6,676) (369)(26) (7,767) -------- ----------- ------------- Loss from continuing operations before minority interest..................... (9,553) (5,016) (139,614) Minority interest............................. 851 -- 851 -------- ----------- ------------- Loss from continuing operations......... (8,702) (5,016) (138,763) Preferred stock dividends..................... -- -- (2,763) -------- ----------- ------------- Loss from continuing operations available to common stockholders...... $ (8,702) $ (5,016) $ (141,526) ======== =========== ============= Loss per common share from continuing operations: Basic......................................... $ (1.14)(19)(27) ============= Diluted....................................... $ (1.14)(19)(27) ============= Weighted average shares outstanding: Basic......................................... 124,355(19)(27) ============= Diluted....................................... 124,355(19)(27) =============
162 176 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED TELDAFAX(20) ---------------- ---------------- ------------ ----------------- ------------ Service revenues....................... $1,019,553 $ 607,035 $(25,601)(16) $1,600,987 $364,039 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below).................. 903,325 477,317 (25,601)(16) 1,355,041 304,810 Selling, general and administrative..................... 146,231 193,070 -- 339,301 48,758 Depreciation and amortization........ 97,517 43,304 8,768(12) 151,238 18,369 (6,611)(12) 8,260(12) Restructuring and other special charges............................ 44,187 -- -- 44,187 -- ---------- --------- -------- ---------- -------- Total operating expenses....... 1,191,260 713,691 (15,184) 1,889,767 371,937 ---------- --------- -------- ---------- -------- Operating loss................. (171,707) (106,656) (10,417) (288,780) (7,898) Interest and other income.............. 10,822 -- -- 10,822 2,469 Interest and other expense............. (58,208) (25,385) 1,230(15) (82,363) (2,171) Loss on investment in TelDaFax......... (990) -- -- (990) -- Foreign exchange loss.................. (2,369) -- -- (2,369) -- ---------- --------- -------- ---------- -------- Loss from continuing operations before income taxes and minority interests........... (222,452) (132,041) (9,187) (363,680) (7,600) Provision (benefit) for income taxes... (6,999) -- (172)(18) (7,171) (3,830) ---------- --------- -------- ---------- -------- Loss from continuing operations before minority interest..... (215,453) (132,041) (9,015) (356,509) (3,770) Minority interest...................... -- 1,614 -- 1,614 774 ---------- --------- -------- ---------- -------- Loss from continuing operations................... (215,453) (130,427) (9,015) (354,895) (2,996) Preferred stock dividends.............. (2,461) (784) -- (3,245) -- ---------- --------- -------- ---------- -------- Loss from continuing operations available to common stockholders................. $ (217,914) $(131,211) $ (9,015) $ (358,140) $ (2,996) ========== ========= ======== ========== ======== Loss per common share from continuing operations: Basic................................ $ (4.30) ========== Diluted.............................. $ (4.30) ========== Weighted average shares outstanding: Basic................................ 50,634 ========== Diluted.............................. 50,634 ========== PRO FORMA WORLD ACCESS, TELDAFAX WORLDXCHANGE AND ADJUSTMENTS TELDAFAX COMBINED ----------- -------------------- Service revenues....................... $ (8,914)(25) $1,956,112 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below).................. (8,914)(25) 1,650,937 Selling, general and administrative..................... -- 388,059 Depreciation and amortization........ 15,493(22) 186,900 (4,800)(22) 6,600(22) Restructuring and other special charges............................ -- 44,187 -------- ---------- Total operating expenses....... 8,379 2,270,083 -------- ---------- Operating loss................. (17,293) (313,971) Interest and other income.............. -- 13,291 Interest and other expense............. -- (84,534) Loss on investment in TelDaFax......... 990 -- Foreign exchange loss.................. -- (2,369) -------- ---------- Loss from continuing operations before income taxes and minority interests........... (16,303) (387,583) Provision (benefit) for income taxes... (738)(26) (11,739) -------- ---------- Loss from continuing operations before minority interest..... (15,565) (375,844) Minority interest...................... -- 2,388 -------- ---------- Loss from continuing operations................... (15,565) (373,456) Preferred stock dividends.............. -- (3,245) -------- ---------- Loss from continuing operations available to common stockholders................. $(15,565) $ (376,701) ======== ========== Loss per common share from continuing operations: Basic................................ $ (3.21)(19)(27) ========== Diluted.............................. $ (3.21)(19)(27) ========== Weighted average shares outstanding: Basic................................ 117,331(19)(27) ========== Diluted.............................. 117,331(19)(27) ==========
163 177 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA PRO FORMA WORLD ACCESS WORLD STAR AND STAR ACCESS(28) STAR(1) ADJUSTMENTS COMBINED ---------- --------- ------------ ------------ ASSETS Cash and equivalents(2(i))................ $ 172,479 $ 131,884 $ -- $ 304,363 Short-term investments.................... 160,211 1,756 -- 161,967 Restricted cash........................... 31,095 -- -- 31,095 Accounts and notes receivable............. 264,678 99,810 -- 364,488 Prepaid expenses and other current assets.................................. 38,491 22,023 -- 60,514 Net assets held for sale.................. 41,465 -- -- 41,465 ---------- --------- ------------ ---------- Total Current Assets............ 708,419 255,473 -- 963,892 ---------- --------- ------------ ---------- Property and equipment.................... 151,609 264,380 (94,000)(2) 321,989 Investment in TelDaFax.................... 130,851 -- -- 130,851 Goodwill and other intangibles............ 1,080,797 3,968 (1,764)(4) 1,312,235 233,144(2) 11,900(2) (15,810)(6) Other assets.............................. 79,185 4,767 -- 83,952 ---------- --------- ------------ ---------- Total Assets.................... $2,150,861 $ 528,588 $ 133,470 $2,812,919 ========== ========= ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt........................... $ 57,033 $ 86,680 $ (55,685)(6) $ 88,028 Accounts payable.......................... 246,436 104,507 (21,789)(6) 329,154 Other accrued liabilities................. 151,328 107,689 3,000(2) 260,794 (1,223)(6) ---------- --------- ------------ ---------- Total Current Liabilities....... 454,797 298,876 (75,697) 677,976 Long-term debt............................ 257,946 55,398 -- 313,344 Other long-term liabilities............... 10,336 32,744 -- 43,080 ---------- --------- ------------ ---------- Total Liabilities............... 723,079 387,018 (75,697) 1,034,400 ---------- --------- ------------ ---------- Stockholders' Equity (Deficit): Preferred Stock........................... 6 -- -- 6 Common stock.............................. 732 58 (58)(5) 1,027 227(2) 68(6) Additional paid in capital................ 1,601,862 366,304 (366,304)(5) 1,952,304 279,484(2) 8,139(2) 62,819(6) Deferred compensation..................... -- (1,399) 1,399(5) -- Notes receivable from shareholders........ -- (3,856) 3,856(5) -- Accumulated other comprehensive loss...... (12,239) (8,017) 8,017(5) (12,239) Accumulated deficit....................... (162,579) (211,520) 211,520(5) (162,579) ---------- --------- ------------ ---------- Total Stockholders' Equity (Deficit)..................... 1,427,782 141,570 209,167 1,778,519 ---------- --------- ------------ ---------- Total Liabilities and Stockholders' Equity.......... $2,150,861 $ 528,588 $ 133,470 $2,812,919 ========== ========= ============ ==========
164 178 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED ---------------- -------- ----------- ------------ Service revenues........................... $570,279 $236,915 $(25,683)(7) $781,511 Operating expenses:........................ Cost of services (exclusive of depreciation and amortization shown separately below)................................... 500,355 209,303 (25,683)(7) 683,975 Selling, general and administrative........ 59,430 39,492 -- 98,922 Depreciation and amortization.............. 41,618 18,480 735(3) 55,308 (6,715)(3) 1,190(3) Restructuring and other special charges.... (3,995) -- -- (3,995) -------- -------- -------- -------- Total operating expenses......... 597,408 267,275 (30,473) 834,210 -------- -------- -------- -------- Operating loss................... (27,129) (30,360) 4,790 (52,699) Interest and other income.................. 12,996 7,687 -- 20,683 Interest and other expense................. (29,789) (7,154) 1,223(6) (35,720) Loss on investment in TelDaFax............. (2,874) -- -- (2,874) Foreign exchange loss...................... 117 -- -- 117 -------- -------- -------- -------- Loss from continuing operations before income taxes and minority interests........................ (46,679) (29,827) 6,013 (70,493) Provision (benefit) for income taxes....... (754) (7,277) 2,767(8) (5,264) -------- -------- -------- -------- Loss from continuing operations before minority interest....... (45,925) (22,550) 3,246 (65,229) Minority interest.......................... -- -- -- -- -------- -------- -------- -------- Loss from continuing operations..................... (45,925) (22,550) 3,246 (65,229) Preferred stock dividends.................. (1,163) -- -- (1,163) -------- -------- -------- -------- Loss from continuing operations available to common stockholders................... $(47,088) $(22,550) $ 3,246 $(66,392) ======== ======== ======== ======== Loss per common share from continuing operations: Basic.................................... $ (0.82) $ (0.75)(9) ======== ======== Diluted.................................. $ (0.82) $ (0.75)(9) ======== ======== Weighted average shares outstanding: Basic.................................... 57,658 88,151(9) ======== ======== Diluted.................................. 57,658 88,151(9) ======== ========
165 179 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED ---------------- -------- ----------- ------------ Service revenues........................... $1,019,553 $616,469 $(17,949)(7) $1,618,073 Operating expenses:........................ Cost of services (exclusive of depreciation and amortization shown separately below)..................... 903,325 537,895 (17,949)(7) 1,423,271 Selling, general and administrative...... 146,231 108,246 -- 254,477 Depreciation and amortization............ 97,517 29,635 3,122(3) 119,225 (13,429)(3) 2,380(3) Merger expense........................... -- 1,867 -- 1,867 Restructuring and other special charges............................... 44,187 -- -- 44,187 ---------- -------- -------- ---------- Total operating expenses......... 1,191,260 677,643 (25,876) 1,843,027 ---------- -------- -------- ---------- Operating loss................... (171,707) (61,174) 7,927 (224,954) Interest and other income.................. 10,822 6,701 -- 17,523 Interest and other expense................. (58,208) (8,614) -- (66,822) Loss on investment in TelDaFax............. (990) -- -- (990) Foreign exchange loss...................... (2,369) (3,471) -- (5,840) ---------- -------- -------- ---------- Loss from continuing operations before income taxes and minority interests............. (222,452) (66,558) 7,927 (281,083) Provision (benefit) for income taxes....... (6,999) (11,041) 4,530(8) (13,510) ---------- -------- -------- ---------- Loss from continuing operations..................... (215,453) (55,517) 3,397 (267,573) Preferred stock dividends.................. (2,461) -- -- (2,461) ---------- -------- -------- ---------- Loss from continuing operations available to common stockholders................... $ (217,914) $(55,517) $ 3,397 $ (270,034) ========== ======== ======== ========== Loss per common share from continuing operations: Basic.................................... $ (4.30) $ (3.33)(9) ========== ========== Diluted.................................. $ (4.30) $ (3.33)(9) ========== ========== Weighted average shares outstanding: Basic.................................... 50,634 81,127(9) ========== ========== Diluted.................................. 50,634 81,127(9) ========== ==========
166 180 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA PRO FORMA WORLD ACCESS AND WORLD WORLDXCHANGE WORLDXCHANGE ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------- ---------------- ------------ ---------------- ASSETS Cash and equivalents(2(i))................. $ 172,479 $ 6,913 $ -- $ 179,392 Short-term investments..................... 160,211 -- -- 160,211 Restricted cash............................ 31,095 -- -- 31,095 Accounts and notes receivable.............. 264,678 103,172 -- 367,850 Prepaid expenses and other current assets................................... 38,491 32,566 -- 71,057 Net assets held for sale................... 41,465 -- -- 41,465 ---------- --------- --------- ---------- Total Current Assets.............. 708,419 142,651 -- 851,070 ---------- --------- --------- ---------- Property and equipment..................... 151,609 193,494 (6,500)(11) 285,603 (68,000)(11) 15,000(11) Investment in TelDaFax..................... 130,851 -- -- 130,851 Goodwill and other intangibles............. 1,080,797 90,162 (76,327)(13) 1,680,974 548,172(11) 41,300(11) (3,130)(15) Other assets............................... 79,185 4,105 (38,192)(11) 45,098 ---------- --------- --------- ---------- Total Assets...................... $2,150,861 $ 430,412 $ 412,323 $2,993,596 ========== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt............................ $ 57,033 $ 201,825 $ (38,192)(11) $ 217,453 (3,213)(15) Accounts payable........................... 246,436 23,682 (792)(15) 269,326 Other accrued liabilities.................. 151,328 224,478 3,000(11) 378,806 ---------- --------- --------- ---------- Total Current Liabilities......... 454,797 449,985 (39,197) 865,585 Long-term debt............................. 257,946 70,829 (11,596)(15) 317,179 Other long-term liabilities................ 10,336 5,547 -- 15,883 ---------- --------- --------- ---------- Total Liabilities................. 723,079 526,361 (50,793) 1,198,647 ---------- --------- --------- ---------- Stockholders' Equity (Deficit): Preferred Stock............................ 6 30,000 (30,000)(14) 6 Common stock............................... 732 148,056 (148,056)(14) 1,044 298(11) 14(15) Additional paid in capital................. 1,601,862 -- 336,686(11) 1,968,717 17,712(11) 12,457(15) Notes receivable from shareholders......... -- (1,937) 1,937(14) -- Accumulated other comprehensive loss....... (12,239) (12,900) 12,900(14) (12,239) Accumulated deficit........................ (162,579) (259,168) 259,168(14) (162,579) ---------- --------- --------- ---------- Total Stockholders' Equity (Deficit)....................... 1,427,782 (95,949) 463,116 1,794,949 ---------- --------- --------- ---------- Total Liabilities and Stockholders' Equity............ $2,150,861 $ 430,412 $ 412,323 $2,993,596 ========== ========= ========= ==========
167 181 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ---------------- ------------ ---------------- Service revenues................ $570,279 $280,586 $(14,257)(16) $ 836,608 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)....... 500,355 225,269 (14,257)(16) 711,367 Selling, general and administrative................ 59,430 80,584 -- 140,014 Depreciation and amortization... 41,618 25,756 11,046(12) 79,244 (3,306)(12) 4,130(12) Restructuring and other special charges....................... (3,995) -- -- (3,995) -------- -------- -------- --------- Total operating expenses............. 597,408 331,609 (2,387) 926,630 -------- -------- -------- --------- Operating loss......... (27,129) (51,023) (11,870) (90,022) Interest and other income....... 12,996 -- -- 12,996 Interest and other expense...... (29,789) (17,096) 901(15) (45,984) Loss on investment in TelDaFax...................... (2,874) -- -- (2,874) Foreign exchange loss........... 117 -- -- 117 -------- -------- -------- --------- Loss from continuing operations before income taxes and minority interests... (46,679) (68,119) (10,969) (125,767) Provision (benefit) for income taxes......................... (754) -- 32(18) (722) -------- -------- -------- --------- Loss from continuing operations........... (45,925) (68,119) (11,001) (125,045) Preferred stock dividends....... (1,163) (1,600) -- (2,763) -------- -------- -------- --------- Loss from continuing operations available to common stockholders......... $(47,088) $(69,719) $(11,001) $(127,808) ======== ======== ======== ========= Loss per common share from continuing operations: Basic......................... $ (0.82) $ (1.43)(19) ======== ========= Diluted....................... $ (0.82) $ (1.43)(19) ======== ========= Weighted average shares outstanding: Basic......................... 57,658 89,680(19) ======== ========= Diluted....................... 57,658 89,680(19) ======== =========
168 182 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ---------------- ------------ ---------------- Service revenues............. $1,019,553 $ 607,035 $ (25,601)(16) $1,600,987 Operating expenses:.......... Cost of services (exclusive of depreciation and amortization shown separately below)........ 903,325 477,317 (25,601)(16) 1,355,041 Selling, general and administrative........... 146,231 193,070 -- 339,301 Depreciation and amortization............. 97,517 43,304 8,768(12) 151,238 (6,611)(12) 8,260(12) Restructuring and other special charges.......... 44,187 -- -- 44,187 ---------- --------- ------------ ---------- Total operating expenses.......... 1,191,260 713,691 (15,184) 1,889,767 ---------- --------- ------------ ---------- Operating loss...... (171,707) (106,656) (10,417) (288,780) Interest and other income.... 10,822 -- -- 10,822 Interest and other expense... (58,208) (25,385) 1,230(15) (82,363) Loss on investment in TelDaFax................... (990) -- -- (990) Foreign exchange loss........ (2,369) -- -- (2,369) ---------- --------- ------------ ---------- Loss from continuing operations before income taxes and minority interests......... (222,452) (132,041) (9,187) (363,680) Provision (benefit) for income taxes............... (6,999) -- (172)(18) (7,171) ---------- --------- ------------ ---------- Loss from continuing operations before minority interest.......... (215,453) (132,041) (9,015) (356,509) Minority interest............ -- 1,614 -- 1,614 ---------- --------- ------------ ---------- Loss from continuing operations........ (215,453) (130,427) (9,015) (354,895) Preferred stock dividends.... (2,461) (784) -- (3,245) ---------- --------- ------------ ---------- Loss from continuing operations available to common stockholders...... $ (217,914) $(131,211) $ (9,015) $ (358,140) ========== ========= ============ ========== Loss per common share from continuing operations: Basic...................... $ (4.30) $ (4.33)(19) ========== ========== Diluted.................... $ (4.30) $ (4.33)(19) ========== ========== Weighted average shares outstanding: Basic...................... 50,634 82,656(19) ========== ========== Diluted.................... 50,634 82,656(19) ========== ==========
169 183 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000 (IN THOUSANDS)
PRO FORMA PRO FORMA WORLD ACCESS WORLD TELDAFAX AND TELDAFAX ACCESS(28) TELDAFAX(20) ADJUSTMENTS COMBINED ---------- ------------ ----------- ------------ ASSETS Cash and equivalents(2(i))................ $ 172,479 $ 26,408 $ -- $ 198,887 Short-term investments.................... 160,211 -- -- 160,211 Restricted cash........................... 31,095 -- -- 31,095 Accounts and notes receivable............. 264,678 42,427 -- 307,105 Prepaid expenses and other current assets.................................. 38,491 30,625 -- 69,116 Net assets held for sale.................. 41,465 -- -- 41,465 ---------- -------- -------- ---------- Total Current Assets............ 708,419 99,460 -- 807,879 ---------- -------- -------- ---------- Property and equipment.................... 151,609 65,281 (24,000)(21) 192,890 Investment in TelDaFax.................... 130,851 -- (130,851)(21) -- Goodwill and other intangibles............ 1,080,797 15,811 (12,430)(23) 1,439,147 321,969(21) 33,000(21) Other assets.............................. 79,185 13,027 -- 92,212 ---------- -------- -------- ---------- Total Assets.................... $2,150,861 $193,579 $187,688 $2,532,128 ========== ======== ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt........................... $ 57,033 $ 7,260 $ -- $ 64,293 Accounts payable.......................... 246,436 73,688 -- 320,124 Other accrued liabilities................. 151,328 9,626 5,000(21) 165,954 ---------- -------- -------- ---------- Total Current Liabilities....... 454,797 90,574 5,000 550,371 Long-term debt............................ 257,946 19,320 -- 277,266 Other long-term liabilities............... 10,336 347 -- 10,683 ---------- -------- -------- ---------- Total Liabilities............... 723,079 110,241 5,000 838,320 ---------- -------- -------- ---------- Minority interests........................ -- 888 -- 888 Stockholders' Equity (Deficit): Preferred stock........................... 6 -- -- 6 Common stock.............................. 732 84,309 (84,309)(24) 964 232(21) Additional paid in capital................ 1,601,862 7,737 (7,737)(24) 1,866,768 264,906(21) Accumulated other comprehensive loss...... (12,239) 47 (47)(24) (12,239) Accumulated deficit....................... (162,579) (9,643) 9,643(24) (162,579) ---------- -------- -------- ---------- Total Stockholders' Equity (Deficit)..................... 1,427,782 82,450 182,688 1,692,920 ---------- -------- -------- ---------- Total Liabilities and Stockholders' Equity.......... $2,150,861 $193,579 $187,688 $2,532,128 ========== ======== ======== ==========
170 184 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA WORLD ACCESS, STAR, PRO FORMA TELDAFAX WORLDXCHANGE AND WORLD ACCESS(28) TELDAFAX(20) ADJUSTMENTS TELDAFAX COMBINED ---------------- ------------ ----------- ------------------ Service revenues............................. $570,279 $150,036 $(2,772)(25) $717,543 Operating expenses:.......................... Cost of services (exclusive of depreciation and amortization shown separately below)... 500,355 126,302 (2,772)(25) 623,885 Selling, general and administrative.......... 59,430 27,807 -- 87,237 Depreciation and amortization................ 41,618 12,253 7,359(22) 62,130 (2,400)(22) 3,300(22) Restructuring and other special charges...... (3,995) -- -- (3,995) -------- -------- ------- -------- Total operating expenses............ 597,408 166,362 5,487 769,257 -------- -------- ------- -------- Operating loss...................... (27,129) (16,326) (8,259) (51,714) Interest and other income.................... 12,996 885 -- 13,881 Interest and other expense................... (29,789) (788) -- (30,577) Loss on investment in TelDaFax............... (2,874) -- 2,874 -- Foreign exchange loss........................ 117 -- -- 117 -------- -------- ------- -------- Loss from continuing operations before income taxes and minority interests......................... (46,679) (16,229) (5,385) (68,293) Provision (benefit) for income taxes......... (754) (6,676) (369)(26) (7,799) -------- -------- ------- -------- Loss from continuing operations before minority interest.......... (45,925) (9,553) (5,016) (60,494) Minority interest............................ -- 851 -- 851 -------- -------- ------- -------- Loss from continuing operations..... (45,925) (8,702) (5,016) (59,643) Preferred stock dividends.................... (1,163) -- -- (1,163) -------- -------- ------- -------- Loss from continuing operations available to common stockholders...................... $(47,088) $ (8,702) $(5,016) $(60,806) ======== ======== ======= ======== Loss per common share from continuing operations: Basic...................................... $ (0.82) $ (0.66)(27) ======== ======== Diluted.................................... $ (0.82) $ (0.66)(27) ======== ======== Weighted average shares outstanding: Basic...................................... 57,658 92,333(27) ======== ======== Diluted.................................... 57,658 92,333(27) ======== ========
171 185 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA TELDAFAX WORLD ACCESS AND WORLD ACCESS(28) TELDAFAX(20) ADJUSTMENTS TELDAFAX COMBINED ---------------- ------------ ----------- ----------------- Service revenues........................... $1,019,553 $364,039 $ (8,914)(25) $1,374,678 Operating expenses:........................ Cost of services (exclusive of depreciation and amortization shown separately below)...................... 903,325 304,810 (8,914)(25) 1,199,221 Selling, general and administrative...... 146,231 48,758 -- 194,989 Depreciation and amortization............ 97,517 18,369 15,493(22) 133,179 (4,800)(22) 6,600(22) Restructuring and other special charges................................ 44,187 -- -- 44,187 ---------- -------- ----------- ---------- Total operating expenses.......... 1,191,260 371,937 8,379 1,571,576 ---------- -------- ----------- ---------- Operating loss.................... (171,707) (7,898) (17,293) (196,898) Interest and other income.................. 10,822 2,469 -- 13,291 Interest and other expense................. (58,208) (2,171) -- (60,379) Loss on investment in TelDaFax............. (990) -- 990 -- Foreign exchange loss...................... (2,369) -- -- (2,369) ---------- -------- ----------- ---------- Loss from continuing operations before income taxes and minority interests....................... (222,452) (7,600) (16,303) (246,355) Provision (benefit) for income taxes....... (6,999) (3,830) (738)(26) (11,567) ---------- -------- ----------- ---------- Loss from continuing operations before minority interest........ (215,453) (3,770) (15,565) (234,788) Minority interest.......................... -- 774 -- 774 ---------- -------- ----------- ---------- Loss from continuing operations... (215,453) (2,996) (15,565) (234,014) Preferred stock dividends.................. (2,461) -- -- (2,461) ---------- -------- ----------- ---------- Loss from continuing operations available to common stockholders.................... $ (217,914) $ (2,996) $ (15,565) $ (236,475) ========== ======== =========== ========== Loss per common share from continuing operations: Basic.................................... $ (4.30) $ (2.77)(27) ========== ========== Diluted.................................. $ (4.30) $ (2.77)(27) ========== ========== Weighted average shares outstanding: Basic.................................... 50,634 85,309(27) ========== ========== Diluted.................................. 50,634 85,309(27) ========== ==========
172 186 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS STAR ADJUSTMENTS (1) These columns represent the historical financial position and results of operations of STAR as of and for the six months ended June 30, 2000 and for the year ended December 31, 1999 and have been adjusted to reflect the sale of PT-1, a required condition of the STAR merger. For pro forma purposes, we have assumed that PT-1 will be sold to Counsel and the net cash proceeds received from the sale will be approximately $120.0 million.
STAR STAR EXCLUSION OF EXCLUDING PT-1 JUNE 30, 2000 PT-1 JUNE 30, 2000 -------------- ------------ -------------- Cash and equivalents....................... $ 16,844 $ (4,960)(i) $131,884 120,000(ii) Short-term investments..................... 1,756 --(i) 1,756 Accounts and notes receivable.............. 161,169 (61,359)(i) 99,810 Prepaid expenses and other current assets................................... 46,552 (24,529)(i) 22,023 -------- --------- -------- Total Current Assets............. 226,321 29,152 255,473 -------- --------- -------- Property and equipment, net................ 304,314 (39,934)(i) 264,380 Goodwill and other intangibles............. 193,316 (189,348)(i) 3,968 Other assets............................... 5,838 (1,071)(i) 4,767 -------- --------- -------- Total Assets..................... $729,789 $(201,201) $528,588 ======== ========= ======== Short-term debt............................ $ 88,709 $ (2,029)(i) $ 86,680 Accounts payable........................... 126,292 (21,785)(i) 104,507 Other accrued liabilities.................. 163,182 (55,493)(i) 107,689 -------- --------- -------- Total Current Liabilities........ 378,183 (79,307) 298,876 -------- --------- -------- Long-term debt............................. 59,403 (4,005)(i) 55,398 Other long-term liabilities................ 33,634 (890)(i) 32,744 -------- --------- -------- Total Liabilities................ 471,220 (84,202) 387,018 -------- --------- -------- Total Stockholders' Equity....... 258,569 (116,999)(iii) 141,570 -------- --------- -------- Total Liabilities and Stockholders' Equity........... $729,789 $(201,201) $528,588 ======== ========= ========
(i) Represents the historical asset and liability amounts for PT-1, including PT-1 goodwill recorded by STAR. It does not include certain liabilities that Counsel will not assume in connection with the PT-1 asset sale. These liabilities consist primarily of income taxes, certain network operating costs and litigation matters that have been managed on a consolidated basis and historically accounted for on STAR's balance sheet. There are no significant liabilities on PT-1's balance sheet that are not being assumed by Counsel. (ii) Represents the net cash proceeds expected to be received from the PT-1 asset sale, estimated as follows: Gross purchase price $150,000 Net assets adjustment (8,000) Fees and expenses (2,100) STAR income taxes (19,000) Other costs (900) -------- $120,000 ========
173 187 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The gross purchase price will be adjusted upward or downward if (a) the aging of PT-1's accounts receivable and accounts payable at the closing date differs materially from the related aging as of December 31, 1999, and (b) the net assets of PT-1 as of the closing date differ from $37.2 million, the net assets of PT-1 as of December 31, 1999. Net assets, as defined in the PT-1 asset purchase agreement, excludes goodwill, deferred income taxes, inter-company balances and other liabilities not included on PT-1's December 31, 1999 balance sheet and therefore not assumed by Counsel. Based on an analysis prepared by STAR in September 2000, there has been no material change in the aging of PT-1's accounts receivable and accounts payable during 2000, and accordingly no adjustment in purchase price is expected for this provision. Based on the net assets of PT-1 as of June 30, 2000, we expect the purchase price to be reduced by approximately $8.0 million. The $19.0 million of income taxes represents the net cash liability we expect STAR to incur as a result of the gain it will realize on the PT-1 asset sale for federal and state income tax purposes. This liability, which was calculated net of PT-1 operating loss carryforwards available to offset the tax gain, will be assumed by World Access in connection with the STAR merger. The PT-1 asset purchase agreement requires 15% of the gross purchase price, or $22.5 million, to be placed into escrow on the closing date. This escrowed purchase price will be immediately released to World Access upon (i) the completion of the STAR merger and (ii) World Access' agreement to assume STAR and PT-1's representations, warranties and other obligations under the PT-1 asset purchase agreement. World Access plans to assume these obligations and accordingly expects to receive the $22.5 million of cash immediately upon completion of the STAR merger. (iii) Represents the assumed loss on the sale of PT-1. As the sale of PT-1 by STAR is a required condition to the merger and which must be completed before the merger is consummated, the assumed loss on the sale of PT-1 of $116,999 is not reflected in the World Access unaudited pro forma combined financial statements.
STAR STAR EXCLUDING PT-1 SIX MONTHS SIX MONTHS ENDED EXCLUSION OF ENDED JUNE 30, 2000 PT-1 JUNE 30, 2000 -------------- ------------ -------------- Carrier service revenue....................... $ 497,400 $(260,485) $ 236,915 Cost of carrier services...................... (433,657) 224,354 (209,303) Selling, general and administrative........... (61,555) 22,063 (39,492) Depreciation and amortization................. (26,539) 8,059 (18,480) Interest and other income..................... 7,819 (132) 7,687 Interest expense.............................. (7,742) 588 (7,154) Benefit for income taxes...................... 5,706 1,571 7,277 --------- --------- --------- Net loss............................ $ (18,568) $ (3,982) $ (22,550) ========= ========= =========
174 188 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
STAR STAR EXCLUDING PT-1 YEAR ENDED EXCLUSION OF YEAR ENDED DECEMBER 31, 1999 PT-1 DECEMBER 31, 1999 ----------------- ------------ ----------------- Carrier service revenues.................. $1,061,774 $(445,305) $ 616,469 Cost of carrier services.................. (925,206) 387,311 (537,895) Selling, general and administrative....... (160,067) 51,821 (108,246) Depreciation and amortization............. (44,236) 14,601 (29,635) Merger expense............................ (1,878) 11 (1,867) Interest and other income................. 7,036 (335) 6,701 Interest expense.......................... (9,895) 1,281 (8,614) Foreign exchange loss..................... (3,471) -- (3,471) Benefit for income taxes.................. 12,096 (1,055) 11,041 ---------- --------- --------- Net loss........................ $ (63,847) $ 8,330 $ (55,517) ========== ========= =========
(2) The STAR merger will be accounted for under the purchase method of accounting. The total cost to acquire STAR is subject to change, to the extent that the number of shares of STAR common stock to be acquired will not be fixed until the effective date of the merger. A change in total cost will result in a corresponding change in goodwill and related amortization expense. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill and other intangible assets. These allocations are subject to change pending the completion of the final analysis of the total purchase price and fair values of the assets acquired and the liabilities assumed. The impact of these changes could be material. Purchase price: Issuance of World Access common stock(i).................. $ 279,711 Fair value of World Access options issued in exchange for STAR options(ii)....................................... 8,139 Estimated fees and expenses............................... 3,000 --------- Total estimated purchase price.................... $ 290,850 Allocation to fair values: Pro forma stockholders' equity as of June 30, 2000(iii)... $(141,570) Intangible assets(v)...................................... (11,900) Adjust assets and liabilities: Eliminate historical goodwill as of June 30, 2000...... 1,764 Write-down of fixed assets to fair value............... 94,000 --------- Preliminary goodwill(iv).......................... $ 233,144 =========
----------------------- (i) In accordance with the STAR merger agreement, each share of STAR common stock issued and outstanding shall be converted into the right to receive 0.3866 shares of World Access common stock. At June 30, 2000, approximately 22,667,000 shares of World Access common stock are assumed to have been issued in connection with the STAR merger as follows (in thousands, except per share amounts): STAR common shares outstanding at June 30, 2000............. 58,632 Multiplied by: Exchange ratio............................... 0.3866 -------- Shares of World Access Common Stock assumed to be exchanged................................................. 22,667 Multiplied by: Average market price(a)...................... $ 12.34 -------- Value of World Access Common Stock exchanged................ $279,711 ========
175 189 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In accordance with the STAR merger agreement, World Access, at its option, may pay up to 40% of the purchase price in the form of cash. Currently, World Access has no intention of paying any portion of the STAR purchase price with cash other than an immaterial amount to be paid for fractional shares and any cash to be paid for Dissenters' Shares. However, should World Access decide to pay a portion of the STAR purchase price in cash, assuming the maximum of 40% and based upon the average closing price of World Access Common Stock on the Nasdaq National Market for the 10 trading day period ended July 17, 2000 of $10.83, World Access would be required to pay STAR shareholders approximately $98.2 million in cash and issue approximately 13.6 million shares of World Access Common Stock having an approximate value of $171.5 million in connection with the merger. Since the option to pay a portion of the STAR purchase price in cash is solely at the option of the World Access and World Access has no intention of paying any portion of the STAR purchase price with the cash option, the pro forma balance sheets have been prepared excluding the cash option. --------------------------- (a) The average market price represents the average market price of World Access Common Stock for the three trading days prior to and after June 7, 2000, the date economic terms of the merger were amended. (ii) As the consummation of the merger is expected to occur after July 1, 2000, we have valued the World Access options using the guidance in FIN 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25. Under FIN 44, the fair value of vested options issued will be included as part of the purchase price. The fair value of unvested options issued will also be included as part of the purchase price; however, a portion of the intrinsic value (if any) of the unvested options will be allocated to unearned compensation and recognized as compensation cost over the remaining future vesting period. The intrinsic value to be allocated to unearned compensation is not significant and has not been reflected in these pro forma financial statements. In accordance with the merger agreement, each STAR option is to be converted into an option to purchase 0.3866 shares of World Access Common Stock. At June 30, 2000, STAR had approximately 3.7 million options outstanding; 1.8 million of which were vested and 1.9 million were unvested. The vested and unvested options are convertible to approximately 686,000 and 751,000 World Access options, respectively, totaling 1.4 million. The fair value of the 686,000 vested options is $4.4 million computed using the Black-Scholes Option Pricing Model and is included in the purchase price. The fair value of the 751,000 unvested options is $3.7 million computed using the Black-Scholes Option Pricing Model. The assumptions used in the Black-Scholes model are: dividend yield 0%, volatility 70%, risk free interest rate of 6.43%, and an expected life of 3 years. (iii) STAR pro forma stockholders' equity as of June 30, 2000 assumes the sale of PT-1 for net cash proceeds of $120.0 million. (iv) The pro forma goodwill is preliminary and subject to change based on a final review of the fair values of STAR's net assets as of the actual merger date. Upon a final review of the fair value of STAR's assets and liabilities, it is likely that certain tangible and intangible assets such as international licenses, foreign carrier operating agreements and property and equipment may be recognized at amounts which differ from the amounts estimated in these unaudited pro forma financial statements. Although we do not expect these final 176 190 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) adjustments to be significant, they could increase or decrease the depreciation and amortization expense reflected in the unaudited pro forma financial statements. In addition, certain liabilities related to exiting STAR activities or terminating STAR employees may be recorded as part of the purchase price allocation in accordance with ETIF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. This would increase goodwill and related amortization expense. World Access has not finalized a plan to exit any activities of STAR or terminate any STAR employees, and will not have a final plan until a detailed analysis of the combined operations is performed shortly after the STAR merger is consummated. (v) Intangible assets consist of wholesale and retail customer base, licenses and interconnection, management and workforce expertise. Amortization is provided using the straight-line method over a 5-year period. (3) Amortization of additional goodwill over an estimated life of 20 years. The pro forma adjustment to goodwill was computed as follows (in thousands):
HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT -------- ------------ ------------ ---------- STAR -- for the six months ended June 30, 2000................................... $233,144 $ 5,829 $(5,094) $ 735 STAR -- for the year ended December 31, 1999................................... $233,144 $11,657 $(8,535) $3,122
Depreciation benefit as a result of write-down of fixed assets to fair value is arrived at using an estimated life of 7 years. The pro forma adjustment to property and equipment was computed as follows (in thousands):
PRO FORMA PROPERTY AND DEPRECIATION EQUIPMENT ADJUSTMENT ------------ ------------ STAR -- for the six months ended June 30, 2000.............. $94,000 $ (6,715) STAR -- for the year ended December 31, 1999................ $94,000 $(13,429)
Amortization of additional intangible assets over an estimated life of 5 years. The pro forma adjustment to intangible assets was computed as follows (in thousands):
PRO FORMA INTANGIBLE AMORTIZATION ASSETS ADJUSTMENT ------------ ------------ STAR -- for the six months ended June 30, 2000.............. $11,900 $ 1,190 STAR -- for the year ended December 31, 1999................ $11,900 $ 2,380
(4) Elimination of STAR's historical goodwill. (5) Elimination of STAR's historical stockholders' equity accounts. (6) In connection with the consummation of the STAR merger, a vendor of STAR has agreed to convert up to approximately $90.0 million of STAR indebtedness into approximately 7,826,000 shares of World Access Common Stock based upon a conversion rate of $11.50 per share. As of September 6, 2000, the closing price per share of World Access Common Stock was $9.19. Since the fair value of the World Access Common Stock is less than $11.50 per share, World Access is paying consideration less than the carrying amount of the accounts payable and debt. This difference is recorded as a decrease to goodwill. These shares are assumed to be issued for 177 191 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) purposes of the calculation of basic and diluted earnings per share in the pro forma condensed combined statement of operations. The balance sheet adjustment reflects the conversion of approximately $78.7 million from accounts payable and debt to common stock, paid-in capital and goodwill for the amount of indebtedness outstanding as of June 30, 2000. The adjustment to the pro forma statement of operations is to eliminate the interest expense recorded on the debt included in the historical results. (7) Elimination of intercompany revenues and related costs. (8) Adjustment for the additional tax benefit derived from pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from STAR's net operating losses. (9) Represents pro forma weighted average shares for basic and diluted earnings from continuing operations per share. The weighted average shares are computed assuming the issuance of approximately 22,667,000 shares of common stock to complete the STAR merger and 7,826,000 shares upon the conversion of STAR indebtedness into World Access Common Stock, see Note 6. Due to the pro forma loss from continuing operations, potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. WORLDXCHANGE ADJUSTMENTS (10) These columns represent the historical financial position and results of operations of WorldxChange as of and for the six months ended June 30, 2000 and for the year ended December 31, 1999. As WorldxChange's fiscal year end is September 30 the following table represents a reconciliation of WorldxChange's results of operations for its fiscal year ended on September 30, 1999 to the year ended December 31, 1999:
HISTORICAL RESULTS FOR FISCAL YEAR EXCLUSION OF INCLUSION OF ENDED OPERATIONS OPERATIONS YEAR ENDED SEPTEMBER 30, FROM 10/1/98- FROM 10/1/99- DECEMBER 31, 1999 12/31/98 12/31/99 1999 -------------- ------------- ------------- ------------ Revenues............................ $ 421,580 $(89,927) $ 143,327 $ 474,980 Cost of services.................... (328,334) 70,922 (112,545) (369,957) Selling, general and administrative.................... (124,112) 27,952 (43,430) (139,590) Depreciation and amortization....... (17,705) 3,564 (9,375) (23,516) Interest and other expense.......... (17,531) 4,234 (6,420) (19,717) Minority interest................... 2,251 (637) -- 1,614 Preferred stock dividends........... (2) 2 (784) (784) --------- -------- --------- --------- Net loss.................. $ (63,853) $ 16,110 $ (29,227) $ (76,970) ========= ======== ========= =========
178 192 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) On November 4, 1999, WorldxChange acquired the outstanding shares of certain European subsidiaries of ACC Corp. ("ACC"), a subsidiary of AT&T. The historical results of operations of WorldxChange includes ACC's results for the two months ended December 31, 1999. The results of ACC for the period from January 1, 1999 to October 31, 1999 have been added to the WorldxChange historical results of operations as follows:
WXC WXC YEAR ENDED ACC FOR YEAR ENDED DECEMBER 31, 1999 THE PERIOD DECEMBER 31, 1999 INCLUDING 1/1/99 TO INCLUDING 2 MONTHS OF ACC 10/31/99 12 MONTHS OF ACC ----------------- ---------- ----------------- Revenues................................ $ 474,980 $ 132,055 $ 607,035 Cost of services........................ (369,957) (107,360) (477,317) Selling, general and administrative..... (139,590) (53,480) (193,070) Depreciation and amortization........... (23,516) (19,788) (43,304) Interest and other expense.............. (19,717) (5,668) (25,385) Minority interest....................... 1,614 -- 1,614 Preferred stock dividends............... (784) -- (784) --------- --------- --------- Net loss...................... $ (76,970) $ (54,241) $(131,211) ========= ========= =========
The following table represents a reconciliation of WorldxChange's results of operations for the nine months ended June 30, 2000 (as shown in the WorldxChange financial statements included in this registration statement) to the results of operations for the six months ended June 30, 2000:
EXCLUSION OF RESULTS FOR THE RESULTS FOR THE RESULTS FOR THE NINE MONTHS THREE MONTHS ENDED SIX MONTHS ENDED ENDED JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 2000 ------------------- ------------------ ---------------- Revenues................... $ 423,913 $(143,327) $ 280,586 Cost of services........... (337,814) 112,545 (225,269) Selling, general and administrative........... (124,014) 43,430 (80,584) Depreciation and amortization............. (35,131) 9,375 (25,756) Interest and other expense.................. (23,516) 6,420 (17,096) Preferred stock dividends................ (2,384) 784 (1,600) --------- --------- --------- Net loss................... $ (98,946) $ 29,227 $ (69,719) ========= ========= =========
(11) The WorldxChange merger will be accounted for under the purchase method of accounting. The total cost to acquire WorldxChange is subject to change, to the extent that the number of shares of WorldxChange capital stock to be acquired will not be fixed until the effective date of the merger. A change in total cost will result in a corresponding change in goodwill and related amortization expense. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill and other intangible assets. These allocations are subject to change pending the completion of the final analysis of the total purchase price and fair values of the assets acquired and the liabilities assumed. The impact of these changes could be 179 193 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) material. The preliminary purchase price and goodwill is currently estimated as follows (in thousands): Purchase price: Issuance of World Access Common Stock(i).................. $336,984 Fair value of World Access options issued in exchange for WorldxChange options(ii)............................... 17,712 Bridge financing(iii)..................................... 38,192 Estimated fees and expenses............................... 3,000 -------- Total estimated purchase price.................... $395,888 Allocation to fair values: Historical shareholders' deficit as of June 30, 2000...... $ 95,949 Intangible assets (vi).................................... (41,300) Eliminate payable to World Access......................... (38,192) Adjust assets and liabilities: Eliminate historical goodwill as of June 30, 2000...... 76,327 Write-off of impaired assets(iv)....................... 6,500 Write-down of fixed assets to fair value............... 68,000 Write-up of management information systems to fair value................................................. (15,000) -------- Preliminary goodwill(v)................................... $548,172 ========
----------------------- (i) In accordance with the merger agreement, each share of WorldxChange common stock issued and outstanding shall be converted into the right to receive 0.6583 shares of World Access Common Stock. At June 30, 2000, a total of 29,848,000 shares of World Access Common Stock are assumed to have been issued in connection with the WorldxChange merger as follows (in thousands, except per share amounts): WorldxChange common shares outstanding upon the conversion of preferred shares outstanding at June 30, 2000.......... 2,727 WorldxChange common shares outstanding at June 30, 2000..... 42,614 -------- Total WorldxChange common shares outstanding...... 45,341 Multiplied by: Exchange ratio............................... 0.6583 -------- Shares of World Access Common Stock assumed to be exchanged................................................. 29,848 Multiplied by: Average market price (a)..................... $ 11.29 -------- Value of World Access Common Stock exchanged................ $336,984 ========
- --------------- (a) The average price represents the average market price of World Access Common Stock for the three trading days prior to and after May 23, 2000, the date economic terms of the merger were amended. (ii) As the consummation of the merger is expected to occur after July 1, 2000, we have valued the World Access options using the guidance in FIN 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB opinion No. 25. Under FIN 44, the fair value of vested options issued will be included as part of the purchase price. The fair value of unvested options issued will also be included as part of the purchase price; however, a portion of the intrinsic value (if any) of the unvested options will be allocated to unearned compensation and recognized as compensation cost over the remaining future vesting period. The intrinsic value to be allocated to unearned compensation is not significant and has not been reflected in these pro forma financial statements. 180 194 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In accordance with the merger agreement, each WorldxChange option is to be converted into an option to purchase 0.6583 shares of World Access Common Stock. At June 30, 2000, WorldxChange had approximately 4.0 million options outstanding; 2.5 million of which were vested and 1.5 million were unvested. The vested and unvested options are convertible to approximately 1.6 million and 1.0 million World Access options respectively, totaling 2.6 million. The fair value of the 1.6 million vested options is $12.7 million computed using the Black-Scholes Option Pricing Model and is included in the purchase price. The fair value of the 1.0 million unvested options is $5.0 million computed using the Black-Scholes Option Pricing Model. The assumptions used in the Black-Scholes model are: dividend yield 0%, volatility 70%, risk free interest rate of 6.43%, and an expected life of three years. (iii) As an integral component of the merger agreement, World Access agreed to provide WorldxChange up to $45.0 million in bridge funds, $38.2 million of which had been advanced as of June 30, 2000. These funds are being used to finance operating losses expected to be incurred by WorldxChange prior to the merger date and to make permanent investments in working capital that are required to support WorldxChange growth. World Access expects that the remaining balance of $6.8 million to be advanced subsequent to the merger date and intends to fully forgive this loan in connection with the consummation of the merger. As a result, the bridge financing already funded is being accounted for as additional purchase price. (iv) At June 30, 2000, WorldxChange has PC based switches with net book value of approximately $6.5 million. The merger with World Access would result in an impairment of these assets, hence, the adjustment to write-off impaired assets from the acquisition. Consequently, depreciation expense is decreased by $722,000 and $361,000 for the year ended December 31, 1999 and the six months ended June 30, 2000, respectively. See note 12 for adjustment to depreciation expense. (v) The pro forma goodwill is preliminary and subject to change based on a final review of the fair values of WorldxChange's net assets as of the actual merger date. Upon a final review of the fair value of WorldxChange's assets and liabilities, it is likely that certain tangible and intangible assets such as international licenses, foreign carrier operating agreements and property and equipment may be recognized at amounts which differ from the amounts estimated in these unaudited pro forma financial statements. Although we do not expect these final adjustments to be significant, they could increase or decrease the depreciation and amortization expense reflected in the unaudited pro forma financial statements. (vi) Intangible assets consist of wholesale and retail customer base, management information systems, licenses and interconnection, management and workforce expertise. Amortization is provided using the straight-line method over a 5-year period. (12) Amortization of goodwill over an estimated life of 20 years. The pro forma adjustment to goodwill was computed as follows (in thousands):
HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT -------- ------------ ------------ ---------- WorldxChange -- For the six months ended June 30, 2000.......................... $548,172 $13,704 $ (2,658) $11,046 WorldxChange -- For the year ended December 31, 1999...................... $548,172 $27,409 $(18,641) $ 8,768
181 195 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation benefit as a result of write-off of impaired assets, write-down of fixed assets to fair value and write-up of management information systems to fair value is arrived at using an estimated life of nine years. The pro forma adjustment to property and equipment was computed as follows (in thousands):
PRO FORMA PROPERTY AND DEPRECIATION EQUIPMENT ADJUSTMENT ------------ ------------ WorldxChange -- for the six months ended June 30, 2000...... $ 59,500 $(3,306) WorldxChange -- for the year ended December 31, 1999........ $ 59,500 $(6,611)
Amortization of additional intangible assets over an estimated life of 5 years. The pro forma adjustment to intangible assets was computed as follows (in thousands):
PRO FORMA INTANGIBLE AMORTIZATION ASSETS ADJUSTMENT ----------- ------------- WorldxChange -- for the six months ended June 30, 2000...... $41,300 $4,130 WorldxChange -- for the year ended December 31, 1999........ $41,300 $8,260
(13) Elimination of WorldxChange's historical goodwill. (14) Elimination of WorldxChange's historical shareholders' deficit accounts. (15) In connection with the consummation of the WorldxChange merger, a vendor of WorldxChange has agreed to convert up to approximately $25.0 million of WorldxChange indebtedness into approximately 2,174,000 shares of World Access Common Stock based upon a conversion rate of $11.50 per share. As of September 6, 2000, the closing price per share of World Access Common Stock was $9.19. Since the fair value of the World Access Common Stock is less than $11.50 per share, World Access is paying consideration less than the carrying amount of the accounts payable and debt. This difference is recorded as a decrease to goodwill. These shares are assumed to be issued for purposes of the calculation of basic and diluted earnings per share in the pro forma condensed combined statement of operations. The balance sheet adjustment reflects the conversion of approximately $15.6 million accounts payable and debt to common stock, paid-in-capital and goodwill for the amount of indebtedness outstanding as of June 30, 2000. The adjustment to the pro forma statement of operations is to eliminate the interest expense recorded on the debt included in the historical results. (16) Elimination of intercompany carrier service revenues and related costs. (17) At June 30, 2000, WorldxChange had a $2.2 million note payable to STAR. Assuming the mergers of WorldxChange and STAR with World Access are consummated, this adjustment is necessary to eliminate the intercompany debt. (18) Adjustment for the additional income tax provision derived from pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from WorldxChange's net operating losses. (19) Represents pro forma weighted average shares for basic and diluted earnings from continuing operations per share. The weighted average shares are computed assuming the issuance of an aggregate of 29,848,000 shares issued to complete the WorldxChange merger and 2,174,000 shares upon the conversion of WorldxChange indebtedness into World Access Common Stock, see Note 15. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. 182 196 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) TELDAFAX ADJUSTMENTS (20) These columns represent the historical financial position and results of operations of TelDaFax as of and for the six months ended June 30, 2000 and for the year ended December 31, 1999. The following tables represent the conversion of TelDaFax's balance sheet as of June 30, 2000 and statements of operations for the three months and year ended June 30, 2000 and December 31, 1999, respectively, from local currency (DM) into U.S. dollars. The U.S. dollar equivalent was computed by multiplying the deutsche mark balance by 0.4901, the exchange rate as of June 30, 2000 for the balance sheet and by 0.4876 and 0.5435 which represent the average exchange rates for the six month period and year ended June 30, 2000 and December 31, 1999, respectively.
TELDAFAX TELDAFAX JUNE 30, EXCHANGE JUNE 30, 2000 RATE 2000 ------------------- -------- -------------------- (IN THOUSANDS - DM) (IN THOUSANDS - USD) Cash and equivalents...................... 53,882 0.4901 $ 26,408 Accounts receivable....................... 86,569 0.4901 42,427 Prepaid expenses and other current assets.................................. 62,487 0.4901 30,625 ------- -------- Total current assets.................. 202,938 99,460 ------- -------- Property and equipment, net............... 133,199 0.4901 65,281 Goodwill.................................. 32,261 0.4901 15,811 Other assets............................... 26,580 0.4901 13,027 ------- -------- Total assets.......................... 394,978 $193,579 ======= ======== Short-term debt........................... 14,814 0.4901 7,260 Accounts payable.......................... 150,353 0.4901 73,688 Other accrued liabilities................. 19,640 0.4901 9,626 ------- -------- Total current liabilities............. 184,807 90,574 ------- -------- Long-term debt............................ 39,422 0.4901 19,320 Other long-term liabilities............... 707 0.4901 347 ------- -------- Total liabilities..................... 224,936 110,241 ------- -------- Minority interests........................ 1,811 0.4901 888 Stockholders' Equity (Deficit): Common stock.............................. 172,024 0.4901 84,309 Additional paid in capital................ 15,787 0.4901 7,737 Accumulated other comprehensive loss...... -- 47 Accumulated deficit....................... (19,580) 0.4925 (9,643) ------- -------- Total stockholders' equity............ 168,231 82,450 ------- -------- Total liabilities and stockholders' equity.............................. 394,978 $193,579 ======= ========
183 197 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
TELDAFAX TELDAFAX SIX MONTHS ENDED EXCHANGE SIX MONTHS ENDED JUNE 30, 2000 RATE JUNE 30, 2000 ------------------- -------- -------------------- (IN THOUSANDS - DM) (IN THOUSANDS - USD) Service revenues......................... 307,704 0.4876 $150,036 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)................... 259,028 0.4876 126,302 Selling, general and administrative... 57,029 0.4876 27,807 Depreciation and amortization......... 25,129 0.4876 12,253 ------- -------- Total operating expenses.............. 341,186 166,362 ------- -------- Operating loss................... (33,482) (16,326) Interest and other income............. 1,814 0.4876 885 Interest expense...................... (1,617) 0.4876 (788) ------- -------- Loss from continuing operations before income taxes and minority interests............. (33,285) (16,229) Provision (benefit) for income taxes............................... (13,691) 0.4876 (6,676) ------- -------- Loss from continuing operations before minority interests...... (19,594) (9,553) Minority interests.................... 1,746 0.4876 851 ------- -------- Loss from continuing operations..................... (17,848) $ (8,702) ======= ========
184 198 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Effective October 1, 1999, TelDaFax acquired a majority interest in the telecommunications equipment distributor Demuth & Dietl Co. Kommunikationselektronik GmbH (D & D). The historical results of operations of TelDaFax for the year ended December 31, 1999 includes D & D results for the three months ended December 31, 1999. The results of D & D for the period from January 1, 1999 to September 30, 1999 have been added to the TelDaFax historical results of operations as follows:
TELDAFAX TELDAFAX TELDAFAX YEAR ENDED D&D FOR YEAR ENDED YEAR ENDED DECEMBER 31, 1999 THE PERIOD DECEMBER 31, 1999 DECEMBER 31, 1999 INCLUDING 3 MONTHS JANUARY 1, 1999 TO INCLUDING 12 MONTHS EXCHANGE INCLUDING 12 MONTHS OF D&D SEPTEMBER 30, 1999 OF D&D RATE OF D&D ------------------ ------------------- ------------------- -------- -------------------- (IN THOUSANDS - DM) (IN THOUSANDS - USD) Service revenues...... 611,018 58,787 669,805 0.5435 $364,039 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)............. 507,745 53,083 560,828 0.5435 304,810 Selling, general and administrative..... 84,008 5,703 89,711 0.5435 48,758 Depreciation and amortization....... 33,630 168 33,798 0.5435 18,369 -------- ------- -------- -------- Total operating expenses........... 625,383 58,954 684,337 371,937 -------- ------- -------- -------- Operating loss.... (14,365) (167) (14,532) (7,898) Interest and other income............. 4,456 86 4,542 0.5435 2,469 Interest expense..... (3,692) (302) (3,994) 0.5435 (2,171) -------- ------- -------- -------- Loss from continuing operations before income taxes and minority interests....... (13,601) (383) (13,984) (7,600) Provision (benefit) for income taxes... (7,009) (37) (7,046) 0.5435 (3,830) -------- ------- -------- -------- Loss from continuing operations before minority interest........ (6,592) (346) (6,938) (3,770) Minority interest.... 1,336 89 1,425 0.5435 774 -------- ------- -------- -------- Loss from continuing operations...... (5,256) (257) (5,513) $ (2,996) ======== ======= ======== ========
(21) The board of directors of World Access has approved a Purchase and Transfer Agreement, dated as of June 14, 2000, under which World Access will acquire shares of TelDaFax stock. Pursuant to the TelDaFax Purchase Agreement, World Access will attempt to acquire 100% of the outstanding shares of TelDaFax in five transactions (collectively referred to as the TelDaFax Purchase): Purchase of the TelDaFax Shares Owned by the Apax Funds. On September 21, 2000 World Access acquired 11,178,176 shares of TelDaFax held by the funds advised by Apax, except the A+M fund, in exchange for 11,457,631 shares of World Access common stock. The shares held by the Apax funds, excluding the A+M fund represented 33.03% of the outstanding capital stock of TelDaFax. As of October 1, 2000, there were 33,828,600 shares of TelDaFax stock outstanding. 185 199 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A+M is a fund advised by Apax; however, because World Access intends to purchase the TelDaFax shares of A+M separately pursuant to a put/call arrangement, all references to "Apax funds" exclude A+M unless otherwise noted. Put/Call Option for Shares of Dr. Klose and A+M. From June 14, 2000 until December 31, 2001, Dr. Klose has the right to sell to World Access all of the outstanding shares of TelDaFax he owns in up to three installments. From July 1, 2002 until December 31, 2002, World Access has the right to buy from Dr. Klose all of the outstanding shares of TelDaFax owned by Dr. Klose at the time World Access exercises its right to purchase. As of October 1, 2000, Dr. Klose owned 2,756,200 shares of TelDaFax stock, equal to 8.15% of the outstanding capital stock of TelDaFax. From September 21, 2000 until April 30, 2001, A+M has the right to sell to World Access all of the outstanding shares of TelDaFax owned by A+M in one installment. From July 1, 2001 until December 31, 2001, World Access has the right to buy from A+M all of the outstanding shares owned by A+M. As of October 1, 2000, A+M owned 143,492 shares of TelDaFax stock, equal to 0.42% of the outstanding capital stock of TelDaFax. The Consideration for the Purchase of TelDaFax Shares of the Apax Funds and Dr. Klose. In exchange for each share of TelDaFax common stock purchased by World Access from A+M and Dr. Klose, World Access will issue a number of shares of World Access common stock determined using the same exchange ratio as that used in the TelDaFax tender offer. Tender Offer. World Access will launch a tender offer for all of the shares of TelDaFax pursuant to which each share of TelDaFax would receive 1.025 shares of World Access common stock. Combination of German Businesses of World Access and Business of TelDaFax. Under the TelDaFax contribution agreement, World Access agreed to contribute the German operations of two of its subsidiaries, NETnet Telekommunications, or NETnet Germany and NewTel Communications, to TelDaFax. In exchange, TelDaFax agreed to issue 1,620,334 of its shares to NETnet Germany and 925,905 shares to Newtel. The total TelDaFax shares received for these World Access subsidiaries would represent 7.0% of the outstanding capital stock of TelDaFax. The TelDaFax Purchase will be accounted for under the purchase method of accounting. The contribution of NETnet Germany and NewTel and the tender offer are all contractually required to close on the same day and the consummation of these transactions is conditioned on World Access obtaining at least 50.1% ownership of the outstanding capital stock of TelDaFax. Although the shares to be acquired from Dr. Klose and A+M may not happen on the same date as the contribution of NETnet Germany and NewTel and the tender offer, it is World Access' intent to acquire 100% of the outstanding stock of TelDaFax and as such, for purposes of the pro forma financial information, we have assumed World Access acquired 100% of the TelDaFax outstanding stock. In accordance with EITF 90-13, Accounting for Simultaneous Common Control Mergers, the transfer of NETnet Germany and NewTel to TelDaFax should be accounted for by World Access as a purchase of TelDaFax under APB Opinion 16, Business Combinations. World Access will fair value TelDaFax assets and liabilities to the extent acquired by World Access. World Access will fair value NETnet Germany and NewTel assets and liabilities to the extent NETnet Germany and NewTel are sold to minority shareholders. As the pro forma financial information assumes World Access will acquire 100% of the outstanding capital stock of TelDaFax, all of TelDaFax assets and liabilities will be recorded at fair value and the NETnet Germany and NewTel assets and liabilities will remain at historical cost. Consequently, under this scenario, World Assess would not recognize any gain or loss on the contribution of NETnet Germany and NewTel to TelDaFax. 186 200 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The total cost to acquire TelDaFax is subject to change, to the extent that the number of shares of TelDaFax capital stock to be acquired will not be fixed until the effective date of the merger. A change in total cost will result in a corresponding change in goodwill and related amortization expense. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill and other intangible assets. These allocations are subject to change pending the completion of the final analysis of the total purchase price and fair values of the assets acquired and the liabilities assumed. The impact of these changes could be material. The preliminary purchase price and goodwill is currently estimated as follows (in thousands): Purchase price: Acquisition of 33.03% of TelDaFax common stock(i)......... $130,851 Issuance of World Access Common Stock (ii)................ 265,138 Estimated fees and expenses............................... 5,000 -------- Total estimated purchase price.................... $400,989 Allocation to fair values: Historical shareholders' equity as of June 30, 2000....... (82,450) Intangible assets (iv).................................... (33,000) Adjust assets and liabilities: Eliminate historical goodwill.......................... 12,430 Write down of fixed assets to fair value............... 24,000 -------- Preliminary goodwill (iii).................................. $321,969 ========
- --------------- (i) On September 21, 2000, World Access purchased all of the outstanding shares of TelDaFax held by the funds advised by Apax, except the A+M fund, in exchange for shares of World Access common stock. The Apax funds, excluding the A+M fund, owned 11,178,176 shares of TelDaFax stock, equal to 33.03% of the outstanding capital stock of TelDaFax. In accordance with the purchase agreement, each share of TelDaFax common stock shall be converted into the right to receive 1.025 shares of World Access Common Stock. The fair value of the World Access common stock is determined as follows (in thousands, except per share amounts): TelDaFax common shares acquired by World Access............. 11,178 Multiplied by: Exchange ratio............................... 1.025 -------- Shares of World Access common stock exchanged............... 11,458 Multiplied by: Average market price(a)...................... $ 11.42 -------- Value of World Access common stock exchanged................ $130,851 ========
(a) The average price represents the average market price of World Access common stock for the three trading days prior and the three trading days subsequent to June 14, 2000, the date the economic terms of the purchase were announced. (ii) In accordance with the purchase agreement, each share of TelDaFax common stock held by Dr. Klose and A+M and all TelDaFax common stock subject to the tender offer shall be converted into the right to receive 1.025 shares of World Access common stock and this World 187 201 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Access common stock is assumed to have been issued in connection with the TelDaFax purchase as follows (in thousands, except per share amounts): TelDaFax common shares held by: Dr. Klose and A+M........................................... 2,900 Remaining shares subject to the tender offer................ 19,751 -------- Total TelDaFax shares purchased................... 22,651 Multiplied by: Exchange ratio............................... 1.025 -------- Shares of World Access common stock to be exchanged 23,217 Multiplied by: Average market price (a)..................... $ 11.42 -------- Value of World Access common stock exchanged................ $265,138 ========
- --------------- (a) The average price represents the average market price of World Access common stock for the three trading days prior and the three trading days subsequent to June 14, 2000, the date economic terms of the purchase were announced. (iii) The pro forma goodwill is preliminary and subject to change based on a final review of the fair values of TelDaFax's net assets as of the actual purchase date. Upon a final review of the fair value of TelDaFax's assets and liabilities, it is likely that certain tangible and intangible assets such as customer lists, trademarks and property and equipment may be recognized at amounts which differ from the amounts estimated in these unaudited pro forma financial statements. Although we do not expect these final adjustments to be significant, they could increase or decrease the amortization and depreciation expense reflected in the unaudited pro forma financial statements. (iv) Intangible assets consist of wholesale and retail customer base, licenses and interconnection, management and workforce expertise. Amortization is provided using the straight-line method over a 5-year period. (22) Amortization of goodwill over an estimated life of 20 years. The pro forma adjustment to goodwill was computed as follows (in thousands):
HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT -------- ------------ ------------ ---------- TelDaFax -- For the six months ended June 30, 2000........................ $321,969 $ 8,049 $ (690) $ 7,359 TelDaFax -- For the year ended December 31, 1999............................. $321,969 $16,098 $ (605) $15,493
Depreciation benefit as a result of write-down of fixed assets to fair value is arrived at using an estimated life of 5 years. The pro forma adjustment to property and equipment was computed as follows (in thousands):
PRO FORMA PROPERTY AND DEPRECIATION EQUIPMENT ADJUSTMENT ------------ ------------ TelDaFax -- For the six months ended June 30, 2000.... $24,000 $(2,400) TelDaFax -- For the year ended December 31, 1999...... $24,000 $(4,800)
188 202 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Amortization of additional intangible assets over an estimated life of 5 years. The pro forma adjustment to intangible assets was computed as follows (in thousands):
PRO FORMA INTANGIBLE AMORTIZATION ASSETS ADJUSTMENT ------------ ------------ TelDaFax -- For the six months ended June 30, 2000.... $33,000 $ 3,300 TelDaFax -- For the year ended December 31, 1999...... $33,000 $ 6,600
(23) Elimination of historical goodwill. (24) Elimination of historical shareholders' equity accounts. (25) Elimination of intercompany service revenues and related costs. (26) Adjustment to record additional tax provision (benefit) derived from certain pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from TelDaFax's net operating losses. (27) Represents pro forma weighted average shares for basic and diluted earnings from continuing operations per share. The weighted average shares are computed assuming the issuance of an aggregate of 34,675,000 shares issued to complete the TelDaFax purchase. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. The following represents the pro forma net loss and net loss per share assuming World Access acquires a 50.1% majority interest in TelDaFax for the various scenarios listed below:
OPERATING NET LOSS SCENARIO LOSS NET LOSS PER SHARE - -------- --------- --------- --------- World Access acquires STAR, WorldxChange and TelDaFax: Year ended December 31, 1999.............................. $(358,799) $(419,276) $(3.24) Six months ended June 30, 2000............................ $(136,355) $(152,850) $(1.12) World Access acquires STAR and TelDaFax: Year ended December 31, 1999.............................. $(241,726) $(279,050) $(2.87) Six months ended June 30, 2000............................ $ (73,462) $ (72,130) $(0.69) World Access acquires WorldxChange and TelDaFax: Year ended December 31, 1999.............................. $(305,552) $(367,156) $(3.72) Six months ended June 30, 2000............................ $(110,785) $(133,546) $(1.26) World Access acquires TelDaFax: Year ended December 31, 1999.............................. $(188,479) $(226,930) $(3.40) Six months ended June 30, 2000............................ $ (47,892) $ (52,826) $(0.72)
PRO FORMA WORLD ACCESS (28) On December 17, 1999, World Access entered into an Asset Purchase Agreement with Long Distance International, Inc. ("LDI") whereby it agreed to purchase substantially all of its assets in exchange for World Access Convertible Preferred Stock, Series D, with an Aggregate Liquidation Preference of $185,000,000 ("World Access Preferred") and the assumption of certain of LDI's liabilities. At the closing of the transaction, 81% of the World Access Preferred was issued to holders of LDI's 12 1/4% Senior Notes due 2008 ("Note Holders"), in satisfaction of LDI's obligations thereunder; 6% of World Access Preferred was issued to NETnet International S.A. ("S.A.") in 189 203 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) satisfaction of LDI's obligation under an Acquisition Agreement dated October 9, 1998; 3% of the World Access Preferred was issued to LDI to satisfy any remaining obligations; and 10% of the World Access Preferred was deposited into escrow to secure LDI's indemnification obligations under the Asset Purchase Agreement. Any escrow proceeds not so applied will be allocated 70% to the Note Holders; 20% to S.A. and 10% to LDI. The Unaudited Pro Forma World Access Condensed Combined Statement of Operations for the year ended December 31, 1999 give effect to our February 2000 acquisition of LDI, our December 1999 merger with FaciliCom and related transactions, and our May 1999 acquisition of Comm/Net as if the acquisitions had been completed on January 1, 1999. The Unaudited Pro Forma World Access Condensed Combined Statement of Operations for the six months ended June 30, 2000 gives effect to our February 2000 acquisition of LDI as if the acquisition had been completed on January 1, 1999. The unaudited pro forma condensed combined statements of operations, while helpful in illustrating characteristics of the combined company under one set of assumptions, does not attempt to predict or suggest future results. As a result of the FaciliCom merger and the restructuring program initiated by World Access in the fourth quarter of 1999, World Access expects to realize significant operational and financial synergies. These synergies are expected to include cost reductions resulting from traffic routing changes made to take advantage of each company's least cost routes, elimination of redundant leased line costs, elimination of redundant switching centers and consolidation of administrative functions. World Access currently estimates that these annualized cost savings, which have been excluded from the unaudited pro forma condensed combined statement of operations, will range from $20.0 million to $35.0 million. The unaudited pro forma condensed combined statements of operations are presented for comparative purposes only and are not intended to be indicative of the actual results had these transactions occurred as of the beginning of the period nor does it purport to indicate results which may be attained in the future. 190 204 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA WORLD ACCESS UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JUNE 30, 2000
WORLD PRO FORMA PRO FORMA ACCESS(A) ADJUSTMENTS WORLD ACCESS ---------- ----------- ------------ ASSETS Cash and equivalents(2(i))............................. $ 329,279 $(156,800)(B) $ 172,479 Short-term investments................................. 160,211 -- 160,211 Restricted cash........................................ 31,095 -- 31,095 Accounts and notes receivable.......................... 264,678 -- 264,678 Prepaid expenses and other current assets.............. 38,491 -- 38,491 Net assets held for sale............................... 41,465 -- 41,465 ---------- --------- ----------- Total Current Assets......................... 865,219 (156,800) 708,419 ---------- --------- ----------- Property and equipment................................. 151,609 -- 151,609 Investment in TelDaFax................................. -- 130,851(C) 130,851 Goodwill and other intangibles......................... 1,080,797 -- 1,080,797 Other assets........................................... 79,185 -- 79,185 ---------- --------- ----------- Total Assets................................. $2,176,810 $ (25,949) $ 2,150,861 ========== ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt........................................ $ 57,033 $ -- $ 57,033 Accounts payable....................................... 246,436 -- 246,436 Other accrued liabilities.............................. 151,328 -- 151,328 ---------- --------- ----------- Total Current Liabilities.................... 454,797 -- 454,797 Long-term debt......................................... 417,946 (160,000)(B) 257,946 Other long-term liabilities............................ 10,336 -- 10,336 ---------- --------- ----------- Total Liabilities............................ 883,079 (160,000) 723,079 ---------- --------- ----------- Stockholders' Equity (Deficit): Preferred Stock........................................ 6 -- 6 Common stock........................................... 617 115(C) 732 Additional paid in capital............................. 1,471,126 130,736(C) 1,601,862 Accumulated other comprehensive loss................... (12,239) -- (12,239) Accumulated deficit.................................... (165,779) 3,200(B) (162,579) ---------- --------- ----------- Total Stockholders' Equity (Deficit)......... 1,293,731 134,051 1,427,782 ---------- --------- ----------- Total Liabilities and Stockholders' Equity... $2,176,810 $ (25,949) $ 2,150,861 ========== ========= ===========
191 205 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA WORLD ACCESS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
WORLD PRO FORMA PRO FORMA ACCESS(A) LDI(F) ADJUSTMENTS WORLD ACCESS --------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Service revenues................................ $561,600 $ 8,679 $ -- $570,279 Operating expenses: Cost of carrier services (exclusive of depreciation and amortization shown separately below)........................................ 490,330 10,025 -- 500,355 Selling, general and administrative............. 51,338 8,092 -- 59,430 Depreciation and amortization................... 36,512 2,595 812(I) 41,618 1,699(I) Restructuring credit............................ (3,995) -- -- (3,995) -------- -------- ------- -------- Total operating expenses.............. 574,185 20,712 2,511 597,408 -------- -------- ------- -------- Operating income (loss)............... (12,585) (12,033) (2,511) (27,129) Interest and other income....................... 9,254 3,742 -- 12,996 Interest expense................................ (28,572) (6,235) 5,018(L) (29,789) Loss on investment in TelDaFax.................. -- -- (2,874)(Q) (2,874) Foreign exchange gain (loss).................... 211 (94) -- 117 -------- -------- ------- -------- Income (loss) from continuing operations before income taxes...... (31,692) (14,620) (367) (46,679) Provision (benefit) for income taxes............ (2,115) -- 1,361(M) (754) -------- -------- ------- -------- Income (loss) from continuing operations.......................... (29,577) (14,620) (1,728) (45,925) Preferred stock dividends....................... (1,163) -- -- (1,163) -------- -------- ------- -------- Income (loss) from continuing operations available to common stockholders........................ $(30,740) $(14,620) $(1,728) $(47,088) ======== ======== ======= ======== Loss per common share from continuing operations: Basic......................................... $ (0.53) $ (0.82)(P) ======== ======== Diluted....................................... $ (0.53) $ (0.82)(P) ======== ======== Weighted average shares outstanding: Basic......................................... 57,658 57,658(P) ======== ======== Diluted....................................... 57,658 57,658(P) ======== ========
192 206 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA WORLD ACCESS UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
WORLD PRO FORMA PRO FORMA ACCESS(A) FACILICOM(D) COMM/NET(E) LDI(F) ADJUSTMENTS WORLD ACCESS --------- ------------ ----------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Carrier service revenues...... $501,081 $404,485 $13,868 $117,662 $(17,543)(H) $1,019,553 Operating expenses: Cost of carrier services (exclusive of depreciation and amortization shown separately below)........... 448,305 364,773 9,923 97,867 (17,543)(H) 903,325 Selling, general and administrative.............. 28,433 56,652 2,324 58,822 -- 146,231 Depreciation and amortization................ 13,541 27,823 390 20,716 36,229(I) 97,517 5,786(I) (6,968)(J) Restructuring and other special charges............. 37,800 -- -- 6,387 -- 44,187 -------- -------- ------- -------- -------- ---------- Total operating expenses........... 528,079 449,248 12,637 183,792 17,504 1,191,260 -------- -------- ------- -------- -------- ---------- Operating income (loss)............. (26,998) (44,763) 1,231 (66,130) (35,047) (171,707) Interest and other income..... 3,308 3,026 -- 4,488 -- 10,822 Interest expense.............. (12,914) (33,413) (65) (33,607) (8,325)(K) (58,208) 30,116(L) Loss on investment in TelDaFax.................... -- -- -- -- (990)(Q) (990) Foreign exchange loss......... (620) (1,749) -- -- -- (2,369) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations before income taxes....... (37,224) (76,899) 1,166 (95,249) (14,246) (222,452) Provision (benefit) for income taxes....................... (10,126) (7,335) 264 -- 10,198(M) (6,999) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations......... (27,098) (69,564) 902 (95,249) (24,444) (215,453) Preferred stock dividends..... (1,968) -- -- (2,049) (493)(N) (2,461) 2,049(O) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations available to common stockholders....... $(29,066) $(69,564) $ 902 $(97,298) $(22,888) $ (217,914) ======== ======== ======= ======== ======== ========== Loss per common share from continuing operations: Basic....................... $ (0.78) $ (4.30)(P) ======== ========== Diluted..................... $ (0.78) $ (4.30)(P) ======== ========== Weighted average shares outstanding: Basic....................... 37,423 50,634(P) ======== ========== Diluted..................... 37,423 50,634(P) ======== ==========
193 207 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A. This column represents the historical financial position and results of operations of World Access. The World Access results of operations for the year ended December 31, 1999 includes the results of Comm/Net from May 1, 1999 and the results of FaciliCom from December 7, 1999. The World Access results of operations for the six months ended June 30, 2000 include the results of operations of LDI from February 11, 2000. B. Under the terms of the Indenture governing World Access' $300.0 million of 13.25% Senior Notes due 2008, World Access has an obligation to utilize the net cash proceeds from the sale of certain of its equipment businesses to make a one-time tender offer for all or a portion of the 13.25% Senior Notes outstanding. Based on the net cash received to date from the sale of Telco Systems in April 2000, World Access is currently obligated to tender for approximately $160.0 million of its 13.25% Senior Notes by January 2, 2001. The net cash relates to the $268.6 million cash element of the Telco Systems sales price, less approximately $11.0 million in transaction expenses and $97.0 million of income taxes. The income taxes represents the net cash liability World Access is expected to incur as a result of the gain it will realize on the sale of Telco Systems for federal and state income tax purposes. Income taxes assume a tax basis for Telco Systems of approximately $92.0 million and a combined federal and state tax rate of 40%. The actual tender price is defined in the Indenture as face value less the current value of five points, or $15.0 million, of World Access common stock paid to the note holders in December 1999 in connection with the exchange of FaciliCom notes. Assuming $6.00 per share as the value of World Access common stock, the current tender price would be approximately 98% of face value. Since the tender price will be below face value and the notes carry what World Access believes to be an attractive interest rate, we are not able to forecast how much, if any, of the $160.0 million will actually be tendered. However, to be conservative, we have included a pro forma adjustment to reflect the potential $156.8 million reduction in cash and $160.0 million reduction in long-term debt that will occur if 100% of the tender offer is accepted. Under the Indenture, World Access will also be required to tender for a portion of the 13.25% Senior Notes outstanding when it receives additional net cash proceeds from the sale of 9.6 million shares of BATM Advanced Communications stock or from the sale of its NACT business. The BATM shares, which had a value of approximately $75.4 million at June 30, 2000, were received by World Access in connection with the sale of Telco Systems. World Access is contractually restricted from selling or otherwise monetizing these shares until April 5, 2001 without the consent of BATM. Any tender offer related to these two events must be commenced within nine months from the date World Access receives the related cash proceeds. Since the amount and timing of this future tender offer is contingent upon future events, we have not included a pro forma adjustment to reflect this potential reduction in cash and long-term debt. 194 208 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) C. On September 21, 2000, World Access purchased all of the outstanding shares of TelDaFax held by the funds advised by Apax, except the A+M fund, in exchange for shares of World Access common stock. The Apax funds, excluding the A+M fund, owned 11,178,176 shares of TelDaFax stock, equal to 33.03% of the outstanding capital stock of TelDaFax. In accordance with the purchase agreement, each share of TelDaFax common stock shall be converted into the right to receive 1.025 shares of World Access common stock. The fair value of the World Access common stock is determined as follows (in thousands, except per share amounts): TelDaFax common shares acquired by World Access............. 11,178 Multiplied by: Exchange ratio............................... 1.025 -------- Shares of World Access common stock exchanged............... 11,458 Multiplied by: Average market price(a)...................... $ 11.42 -------- Value of World Access common stock exchanged................ $130,851 ========
(a) The average price represents the average market price of World Access common stock for the three trading days prior and the three trading days subsequent to June 14, 2000, the date the economic terms of the purchase were announced. D. This column represents the historical results of operations of FaciliCom for the period January 1, 1999 to December 6, 1999. On August 17, 1999 the Company entered into a definitive merger agreement with FaciliCom International, Inc. ("FaciliCom"), a privately owned company that is a facilities-based provider of European and U.S. originated international long-distance voice, data and Internet services. On December 7, 1999, the transaction was completed in its final form whereby FaciliCom merged into the Company (the "FaciliCom Merger"). In connection with the FaciliCom Merger, the stockholders of FaciliCom received approximately $56.0 million in cash, 369,901 shares of Convertible Preferred Stock, Series C (the "Series C Preferred Stock"), and 495,557 vested options that each may be exercised to acquire one share of the Company's common stock at an average exercise price of $2.63 per share. In addition, the Company issued 1,912,500 non-qualified options to purchase Company common stock at an exercise price of $15.00 per share in exchange for substantially all the options held by FaciliCom's employees. The Series C Preferred Stock which has a $369.9 million liquidation preference was valued at $265.5 million based on the fair value of the assets received as of the date of acquisition. The stock options were valued at $24.8 million based on the Black-Scholes option valuation model. Included in other liabilities in the table below, is $300.0 million 10 1/2% FaciliCom Series B Senior Notes due 2008 which were exchanged for the Company's 13.25% Senior Notes due 2008 having an aggregate principal amount of $300.0 million. As consideration for this exchange the Company issued 942,627 shares of its common stock valued at $15.0 million to FaciliCom noteholders. The Series C Preferred Stock bears no dividend and is convertible into shares of the Company's common stock at a conversion rate of $20.38 per common share, subject to adjustment in the event of below market issuances of common stock, stock dividends, subdivisions, combinations, reclassifications and other distributions with respect to common stock. If the closing trading price of the Company's common stock exceeds $20.38 per share for 60 consecutive trading days, the Series C Preferred Stock will automatically convert into common stock. Initially, the holders of the Series C Preferred Stock were entitled to elect four new directors to the Company's board of directors. Except for the election of directors, the holders of the Series C Preferred Stock vote on an as-converted basis with the holders of the Company's common stock. 195 209 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The acquisition of FaciliCom has been accounted for using the purchase method of accounting. Accordingly, the results of FaciliCom's operations have been included in the accompanying consolidated financial statements from December 7, 1999. The excess of purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized over a 20 year period. The following summarizes the allocation of the purchase price (in thousands): Purchase price: Cash...................................................... $ 56,000 Preferred stock issued.................................... 265,515 Common stock issued....................................... 15,000 Stock options issued...................................... 24,785 Fees and expenses......................................... 15,650 --------- Total purchase price.............................. 376,950 Allocation to fair value of net assets: Current assets............................................ (183,934) Property and equipment.................................... (116,479) Intangible assets......................................... (9,206) Other assets.............................................. (1,362) Current liabilities....................................... 207,362 Other liabilities......................................... 313,148 --------- Goodwill.......................................... $ 586,479 =========
E. This column represents the historical results of operations of Comm/Net for the period January 1, 1999 to April 30, 1999. In May 1999, the Company acquired substantially all the assets and assumed certain liabilities of Comm/Net Holding Corporation and its wholly owned subsidiaries, Enhanced Communications Corporation, Comm/Net Services Corporation and Long Distance Exchange Corporation (Comm/Net Holdings and its wholly owned subsidiaries are collectively referred to herein as "Comm/Net"). Comm/Net, headquartered in Plano, Texas, is a facilities-based provider of wholesale international long distance and wholesale prepaid calling card services, primarily to the Mexican telecommunications markets. In connection with the acquisition, the Company issued 23,174 shares of 4.25% Cumulative Junior Convertible Preferred Stock, Series B (the "Series B Preferred Stock"), valued at approximately $18.5 million with a $23.2 million liquidation preference, and paid approximately $3.5 million to retire certain Comm/Net notes payable outstanding at the time of acquisition. The Series B Preferred Stock is convertible into shares of the Company's common stock at a conversion rate of $16.00 per common share, subject to standard anti-dilution adjustments. If the closing trading price of the Company's common stock exceeds $16.00 per share for 45 consecutive trading days, the Series B Preferred Stock will automatically convert into common stock. Preferred dividends began accruing July 1, 1999 and are payable quarterly. In March 2000, the Series B Preferred Stock was converted into 1,448,373 shares of the Company's common stock. The acquisition of Comm/Net has been accounted for under the purchase method of accounting. Accordingly, the results of Comm/Net's operations have been included in the accompanying consolidated financial statements from May 1, 1999. The excess of purchase price over the fair 196 210 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) value of net assets acquired has been recorded as goodwill and is being amortized over a 20 year period. the following summarizes the allocation of the purchase price (in thousands): Purchase price: Preferred stock issued.................................... $18,539 Debt paid................................................. 3,502 Fees and expenses......................................... 800 ------- Total purchase price.............................. 22,841 Allocation to fair values of net assets: Current assets............................................ (7,754) Property and equipment.................................... (3,351) Current liabilities....................................... 9,609 Other assets and liabilities, net......................... 1,368 ------- Goodwill.......................................... $22,713 =======
F. These columns represents the historical results of operations of LDI. For the Unaudited Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 2000, the historical results of operations of LDI are for the period January 1, 2000 to February 10, 2000. For the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1999, the historical results of operations of LDI are for the period January 1, 1999 to December 31, 1999. G. The LDI merger has been accounted for under the purchase method of accounting. Under the terms of the Agreement and Plan of Merger dated as of December 17, 1999, the purchase price was determined as follows (in thousands): Purchase price: Issuance of preferred stock (i)........................... $217,560 Debt forgiven............................................. 4,674 Fair value of World Access options issued in exchange for LDI options (ii)....................................... 21,731 Fees and expenses......................................... 2,000 -------- 245,965 Allocation to fair value of net assets: Cash...................................................... (42,476) Other current assets...................................... (15,447) Intangible assets......................................... (27,614) Property and equipment.................................... (17,113) Other assets.............................................. (871) Current liabilities....................................... 80,433 Other liabilities......................................... 723 -------- Goodwill.................................................... $223,600 ========
(i) World Access management has determined the fair value of the 185,000 shares of Series D Preferred Stock issued as part of the LDI merger consideration to be $217,560 or $1,176 per share. The fair value was determined by the fair value of the assets received as of the date of acquisition. The Series D Preferred Stock bears no dividend and is convertible into shares of World Access Common Stock at a conversion rate of $18 per common share of World Access Common Stock, subject to adjustment in the event of below market issuances of World Access 197 211 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Common Stock, stock dividends, subdivisions, combinations, reclassifications and other distributions with respect to World Access common stock. If the closing trading price of World Access Common Stock exceeds $18 per share for 60 consecutive trading days, the Series D Preferred Stock will automatically convert into World Access Common Stock. (ii) Represents the fair value of approximately 1,500,000 options to acquire World Access Common Stock issued in exchange for options outstanding to acquire shares of LDI stock. The fair value has been determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield 0%, volatility 70%, risk free interest rate of 6.3% and an expected life of 4 years. The World Access options have an exercise price of $18.50 per share. The holders of the LDI redeemable warrants have agreed to terminate their warrants as part of the closing of the acquisition by World Access. H. Elimination of inter-company revenues and related costs. I. Amortization of additional goodwill as a result of the FaciliCom, Comm/Net and LDI Acquisitions over an estimated life of 20 years. The additional Resurgens goodwill of $127.4 million is a result of the 7,500,000 shares released from escrow related to the acceleration of the Resurgens earn-out in connection with the FaciliCom Merger. The pro forma adjustment to goodwill was computed as follows (in thousands):
HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENTS -------- ------------ ------------ ----------- For the six months ended June 30, 2000: LDI....................................... $223,600 $ 5,590 $ (4,778) $ 812 ======= ======== ======= For the year ended December 31, 1999: FaciliCom................................. 586,479 29,324 (2,475) 26,849 Resurgens................................. 127,425 6,371 (409) 5,962 LDI....................................... 223,600 11,180 (8,210) 2,970 Comm/Net.................................. 22,713 1,136 (688) 448 ------- -------- ------- $48,011 $(11,782) $36,229 ======= ======== =======
198 212 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Amortization of additional intangible assets over their estimated useful lives. The pro forma adjustment for intangible asset amortization was computed as follows (in thousands):
INTANGIBLE PRO FORMA HISTORICAL PRO FORMA ASSETS AMORTIZATION AMORTIZATION ADJUSTMENT ---------- ------------ ------------ ---------- For the six months ended June 30, 2000: LDI........................................ $27,614 $1,972 $ (925) $1,047 FaciliCom.................................. 9,206 921 (269) 652 ------- ------ ------- ------ $36,820 $2,893 $(1,194) $1,699 ======= ====== ======= ====== For the year ended December 31, 1999: LDI........................................ $27,614 $3,944 $ -- $3,944 FaciliCom.................................. 9,206 1,842 -- 1,842 ------- ------ ------- ------ $36,820 $5,786 $ -- $5,786 ======= ====== ======= ======
J. Adjustment to depreciation expense for the adjustment to fair values of switching equipment and IRUs at FaciliCom. K. Represents the adjustment to interest expense related to the exchange of $300.0 million of FaciliCom notes with a 10.5% coupon for World Access notes with a 13.25% coupon and the amortization of the $15.0 million debt discount related to World Access notes over a period of eight years. The pro forma adjustment to interest expense was computed as follows (in thousands): Interest expense on World Access notes for eleven months.... $(36,438) Debt issue cost amortization on World Access notes for eleven months............................................. (1,719) Historical FaciliCom note interest expense.................. 28,875 Historical FaciliCom debt issue cost amortization........... 957 -------- Net increase in interest expense.................. $ (8,325) ========
L. Adjustment to reduce interest expense related to the elimination of LDI indebtedness resulting from the acquisition as follows:
FOR THE 42 DAY FOR THE YEAR PERIOD ENDED ENDED FEBRUARY 11, DECEMBER 31, 2000 1999 ------------ ----------------- Interest expense on LDI's 12 1/4% Senior Notes..... $4,609 $27,656 Amortization of original issue discount on LDI's 12 1/4% Senior Notes............................. 200 1,202 Amortization of LDI's 12 1/4% Senior Notes offering costs............................................ 157 944 Interest expense on notes payable to the holders of LDI's 12 1/4% Senior Notes....................... 52 314 ------ ------- Net decrease in interest expense......... $5,018 $30,116 ====== =======
M. Adjustment for the additional tax benefit derived from pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from LDI's and FaciliCom's net operating losses. N. To increase preferred stock dividends to reflect the Series B preferred stock issued in connection with the Comm/Net acquisition as outstanding for the full period. 199 213 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) O. To eliminate historical LDI preferred stock dividends and preferred stock and warrant redemption accretion. P. Represents pro forma weighted average shares and basic diluted earnings from continuing operations per share for the year ended December 31, 1999. The weighted average shares are computed assuming the issuance of (1) an aggregate of 4,713,128 shares issued for $75.0 million in connection with the private placement of World Access common stock in conjunction with the FaciliCom merger; (2) an aggregate of 942,627 shares issued to the holders of the FaciliCom notes; (3) an aggregate 963,722 shares issued to certain FaciliCom shareholders; and (4) 7,500,000 shares released from escrow related to the acceleration of the Resurgens earn-out in connection with the FaciliCom merger as of January 1, 1999. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. For the six months ended June 30, 2000, no additional shares of common stock are deemed to be outstanding. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common shares would be anti-dilutive. Q. On September 21, 2000, World Access acquired 33.03% of the outstanding shares of TelDaFax. The Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1999 and the six months ended June 30, 2000, give effect to this acquisition as if it had occurred on January 1, 1999. As a result, the following loss from investments have been recognized:
33.03% TELDAFAX ACQUISITION BY NET LOSS WORLD ACCESS -------- -------------- Six months ended June 30, 2000.............................. (8,702) (2,874) Year ended December 31, 1999................................ (2,996) (990)
200 214 MANAGEMENT OF THE COMBINED COMPANY EXECUTIVE OFFICERS Following the consummation of the STAR merger and/or the WorldxChange merger, John D. Phillips will serve as Chairman of the Board and Chief Executive Officer of the combined company, and Walter J. Burmeister will serve as the President of the combined company. It is anticipated that the other current executive officers of World Access will continue as executive officers of the combined company with the duties and responsibilities they currently have at World Access. At the time of mailing this joint proxy statement/prospectus, the companies have not yet determined which specific offices will be held by the current executive officers of STAR and WorldxChange. BOARD OF DIRECTORS The board of directors of World Access currently consists of 11 members, seven of which are elected by the World Access common stockholders and four of which are nominated and elected by the Series C preferred stockholders. Upon the completion of the STAR merger and/or the WorldxChange merger, the percentage of the total outstanding World Access common stock represented by the number of shares of World Access common stock issuable upon conversion of the Series C preferred stock will significantly decrease, and as a result the Series C preferred stockholders will be entitled to designate only two directors. The current directors of World Access elected by common stockholders are: Stephen J. Clearman, John P. Imlay, Jr., Massimo Prelz Oltramonti, John D. Phillips, John P. Rigas, Carl E. Sanders and Lawrence C. Tucker. The current directors of World Access designated by the Series C preferred stockholders are: Walter J. Burmeister, Kirby J. Campbell, Bryan Cipoletti and Dru A. Sedwick. In connection with the completion of the STAR and/or WorldxChange mergers, two of the current directors of World Access designated by the Series C preferred stockholders will no longer serve on the World Access board. As of the date of this joint proxy statement/prospectus, the two directors whose terms will end upon completion of the STAR and/or WorldxChange mergers have not been determined. Under the terms of the STAR merger agreement, World Access agreed to elect Christopher Edgecomb, or such other person designated by STAR and agreed to by World Access, to the board of directors of World Access immediately following completion of the STAR merger. Under the terms of the WorldxChange merger agreement, World Access agreed to elect one designee of WorldxChange to the World Access board of directors immediately following completion of the WorldxChange merger. The WorldxChange merger agreement provides that this designee will be Walter Anderson, who is currently the Chairman of the Board of WorldxChange, or another person designated by Gold & Appel Transfer S.A. and reasonably acceptable to World Access. Mr. Anderson has the power to direct such designation by Gold & Appel Transfer S.A. As of the date of this joint proxy statement/prospectus, the director designees of STAR and WorldxChange have not been determined. DESCRIPTION OF WORLD ACCESS' BUSINESS AND STRATEGY In 1999, World Access adopted a strategy designed to build on its U.S.-based carrier service business and position itself to become a significant provider of bundled voice, data and Internet services to retail business customers located in selected European countries. World Access believes that the European telecommunications market has become extremely fragmented in recent years due primarily to deregulation and significant forecasted growth. As a result, World Access expects that a significant consolidation of carriers operating in Europe will occur in the next few years, not unlike that which occurred in the United States telecommunications market during the late 1980's and 1990's. The strategy of World Access is to establish a pan-European telecommunications network and gain significant market share during this period as a consolidator in this market. To execute its strategy, World Access intends to aggressively pursue the acquisition of businesses, with a particular emphasis on those that provide retail services to small and medium sized businesses operating in Europe. 201 215 To support its retail services strategy, World Access acquired FaciliCom International in December 1999. FaciliCom had invested in excess of $200.0 million over the past few years to establish an inter-country network in the U.S. and 13 European countries. Although the vast majority of its revenues were derived from transporting traffic for other carriers, similar to World Access' base business, FaciliCom's network was also capable of supporting certain retail traffic and related services. This acquisition effectively doubled the size of World Access' carrier service revenue, provided a significant amount of European originated revenue and lowered the combined company's costs of terminating international traffic in Europe. World Access entered 2000 with an annual revenue base in excess of $1.0 billion, almost all of which relates to transporting traffic for other carriers. In February 2000, World Access acquired substantially all the assets of Long Distance International. The most significant and strategic asset acquired was NETnet International, a wholly-owned subsidiary. NETnet, which had revenue of approximately $83.0 million in 1999, provides an array of telecommunications services to small and medium sized business customers in Austria, France, Germany, Italy, Norway, Spain, Sweden, Switzerland and the United Kingdom. The acquisition of NETnet gave World Access approximately 20,000 retail customers, an experienced retail sales force and a foundation for the offering of bundled voice, data and Internet services to its targeted market in Europe. It also provided World Access with a strong retail trade name, which World Access currently expects to use for all of its retail product offerings in Europe. World Access hopes to substantially improve the historical gross margins realized by NETnet by terminating selected NETnet traffic over the World Access network and eliminating the costs of redundant network facilities. With the addition of NETnet, World Access now generates approximately eight percent of its total revenue from retail services and the remainder from its base carrier business. Of the total revenue, approximately 60% results from traffic originated in the United States and 40% from traffic originated in Europe. In February 2000, World Access entered into agreements to merge with STAR and WorldxChange. After completing these mergers, World Access expects its revenue mix will be approximately 20% retail and 80% carrier. In addition to an improved retail/carrier revenue mix, the STAR and WorldxChange mergers are expected to provide World Access with substantial benefits in the areas of network coverage, network capacity and reduced operating costs. On a combined basis, the networks and operations of all three companies contain redundant switching equipment, facilities and personnel. World Access will eliminate these redundant assets and significantly reduce the headcount of the combined company in an effort to realize cost synergies. Implementing this process includes the write-down of switching and transmission equipment taken out of service, the write-off of certain leasehold improvements, establishing provisions for lease commitments remaining on certain facilities with no future use, employee termination benefits and other related costs. To the extent that these items relate to World Access facilities and personnel, World Access will record a restructuring charge in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. All other costs relate to facilities and personnel of the acquired enterprises, and, accordingly, will be treated as purchase price in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. In connection with World Access' August 1, 2000 consolidation of WorldxChange, management committed to such a consolidation plan. Although the plan has been approved, management is still in the process of quantifying the specific costs of the plan. Currently, management's best estimate of the costs attributable to World Access facilities and personnel is in the range of $30.0 million to $50.0 million. A range has not been established for costs associated with WorldxChange facilities and personnel. Management has not finalized a consolidation plan for the World Access and STAR integration; however, management believes that further consolidation activities resulting from the STAR merger will 202 216 not significantly involve World Access facilities or personnel, and thus, no material EITF 94-3 charge will be required. The STAR and WorldxChange mergers will give World Access substantial operations and network capacity in Germany and the United Kingdom, which represent the two largest segments of the European telecommunications market. World Access expects to leverage these operations to further grow its retail business in these two key countries. WorldxChange has also developed Internet-based information management systems that incorporate all key aspects of retail telecommunications services, including billing, fraud protection and customer care. These information systems are expected to serve as the platform for supporting all retail operations conducted by World Access in Europe. Although the STAR and WorldxChange mergers are expected to provide significant benefits to World Access, they also dramatically increase the business and financial risks World Access must overcome to execute its strategy. World Access, STAR and WorldxChange all have a history of significant net operating losses, and World Access is expected to assume approximately $300.0 million in debt upon the consummation of the two mergers. You should carefully review the risk factors contained in this joint proxy statement/prospectus. The sale of $70.0 million of Series A Preferred Stock, the sale of $158.1 million of common stock in private placement transactions and approximately $275.0 million of gross cash proceeds from the sale of two equipment businesses in April 2000 have significantly enhanced the financial strength of World Access and improved its liquidity. World Access believes that existing cash balances of approximately $400.0 million, available borrowings under a $100.0 million revolving bank line of credit and additional cash expected to be generated from the sale of remaining World Access Equipment Group assets will provide World Access with sufficient financial resources to support the cash requirements of World Access, STAR and WorldxChange for at least the next 12 months. In June 2000, World Access agreed to acquire all or a majority of TelDaFax AG, a provider of bundled fixed line, wireless, Internet and e-commerce services to business and residential customers in Germany. In 1999, TelDaFax had revenue of approximately $329.0 million. As of June 30, 2000, TelDaFax had approximately $26.0 million in cash and marketable securities, with essentially no debt. TelDaFax currently operates nine switches and has 170 interconnection points within Germany. It is also in the process of deploying a 2,800-kilometer fiber optic network between selected German cities that will provide the foundation for future growth in its service offerings. The TelDaFax network, together with the existing network assets of World Access and STAR, will give World Access an extensive telecommunication network in Germany. In addition, TelDaFax has a dedicated sales force that consists of 350 direct sales personnel and over 1,000 non-exclusive sales agents. World Access stockholders will receive a separate proxy statement/prospectus on the TelDaFax acquisition in the near future. The financial statements of TelDaFax have been included in this joint proxy statement/prospectus and considered in the preparation of the Unaudited Pro Forma Financial Information contained herein. WORLD ACCESS' PROPOSED ACQUISITION OF TELDAFAX AG The board of directors of World Access has approved a Purchase and Transfer Agreement under which World Access agreed to acquire shares of TelDaFax stock. Pursuant to the TelDaFax Purchase Agreement, World Access agreed to acquire shares of TelDaFax in five transactions, one of which has been completed: - Funds Share Purchase. Apax Germany II L.P., Apax Funds Nominees Ltd. fur "B" Account, Apax Funds Nominees Ltd. fur "D" Account and AP Vermogensverwaltung Gesellschaft burgerlichen Rechts, collectively referred to as the Apax funds, agreed to sell all of the TelDaFax shares held by them to World Access. On September 21, 2000, World Access purchased all of the 203 217 TelDaFax shares owned by the Apax funds, 11,178,176 shares, in exchange for 11,457,631 shares of World Access common stock. - Contribution. TelDaFax and NETnet Telekommunications GmbH and NewTel Communications GmbH, each a subsidiary of World Access, entered into a Contribution/Exchange Agreement under which World Access agreed to contribute the German operations of NETnet and NewTel to TelDaFax in exchange for newly issued shares of TelDaFax; - Klose Share Purchase. From June 14, 2000 until December 31, 2001, Dr. Henning F. Klose has a right to sell to World Access at Dr. Klose's option, all shares of TelDaFax stock held by Dr. Klose in up to three installments. From July 1, 2002 until December 31, 2002, World Access has a right to purchase from Dr. Klose at World Access' option, all shares of TelDaFax stock held by Dr. Klose. In the Klose share purchase, each share of TelDaFax stock will be exchanged for 1.025 shares of World Access common stock; - A+M Share Purchase. From January 1, 2000 until April 30, 2001, A+M GmbH & Co Vermogensverwaltung KG has a right to sell to World Access at A+M's option, all shares of TelDaFax stock held by A+M. From July 1, 2001 until December 31, 2001, World Access has a right to purchase from A+M at World Access' option, all shares of TelDaFax stock held by A+M. In the A+M share purchase, each share of TelDaFax stock will be exchanged for 1.025 shares of World Access common stock; and - Tender Offer. World Access will conduct a tender offer for all of the issued and outstanding shares of TelDaFax. In the tender offer, World Access will offer as consideration 1.025 shares of World Access common stock for each share of TelDaFax stock, subject to upward or downward adjustment made in good faith by the World Access board in order to complete the tender offer. If World Access offers more than 1.025 shares of World Access common stock for each TelDaFax common share in the tender offer, then World Access is required to similarly increase the number of shares of World Access common stock issued in exchange for the TelDaFax shares purchased from the Apax funds, including A+M, and Dr. Klose. The TelDaFax transactions that World Access has not completed require the approval of a majority in voting power of the shares of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock entitled to vote and voting as a single class. The World Access stockholders will consider and vote on the remaining TelDaFax transactions at a separate special meeting. In connection with this meeting, World Access will file a separate registration statement with the Securities and Exchange Commission containing a proxy statement describing the TelDaFax transactions. WORLD ACCESS' THIRD QUARTER SPECIAL CHARGES AND FINANCIAL PROJECTIONS On September 19, 2000, World Access announced its financial projections for the remainder of 2000 and for 2001 based on a recently developed business model. The new business model includes the results of WorldxChange, the financial results of which will be consolidated for two months of the third quarter of 2000 and for all of the fourth quarter of 2000. The projections in the model also include the results of STAR and TelDaFax, which are expected to close in the fourth quarter of 2000, beginning in the first quarter of 2001. World Access expects revenue for the third quarter of 2000 of approximately $320.0 million, and it expects revenue for the fourth quarter of 2000 to be approximately $340.0 million. World Access expects to record a restructuring charge in the third quarter of 2000 of between $30.0 million and $50.0 million related to the integration of WorldxChange. This charge reflects nonrecurring costs associated with the consolidation of facilities, severance, integration of network operations, and elimination of duplicate activities. World Access also expects selling, general and administrative expenses in the third quarter of 2000 to include a nonrecurring charge of approximately $35.0 million in order to significantly increase reserves for 204 218 doubtful accounts and accrue for costs associated with migration of billing systems and rebranding of all retail activities using the NETnet brand. In August 2000, World Access began to see a larger number of its customers defer payments owed to it, particularly customers that were operating as competitive local exchange carriers or those operating in the prepaid calling card industry. These companies are typically referred to as Tier 3 carriers. In late August and early September, several of these carriers declared bankruptcy or announced their intent to reorganize. While World Access evaluates the collectibility of its accounts receivable and establishes appropriate reserves on a regular basis, these deteriorating conditions required World Access to perform a more extensive review of the financial condition of its current customer base, in particular Tier 3 carriers and resellers of telecom services. As a result of this review, World Access came to the conclusion that many of these companies were undercapitalized and would need significant additional capital in the next three to 12 months to continue as going concerns. Based on the continuing weakness being experienced in the debt markets for telecom companies and the dramatic decrease in equity valuations for telecom companies in recent months, World Access also concluded that it would be difficult for many of these companies to raise the needed capital. The recent failures of several telecom businesses and the public announcements by others of their need to raise cash will only serve to further weaken the debt and equity markets historically relied upon by these carriers. In late August, in connection with the increasing number of late payments, World Access elected to tighten its credit policies and aggressively discontinue service when certain customers missed payment commitments. Based on the review referenced above and after careful consideration, World Access subsequently elected to discontinue services entirely to many Tier 3 customers and reseller customers and significantly restrict the volume of traffic carried for others. Although discontinuing or curtailing service to customers in and of itself does not alleviate the legal liability for customers to pay for services previously provided, and World Access certainly intends to pursue every available course of action to ensure accounts receivable are collected, there is now a much greater risk of loss for amounts owed by these customers. This risk is associated with the deteriorating financial condition of these carriers, weaknesses in the debt and equity markets for telecom companies and the fact these carriers will be inclined to allocate available cash to the carriers they are using to terminate their present and future traffic. In the future, these customers will also likely be required to pay for a higher percentage of their termination services on a prepaid basis, further reducing the amount of cash available to pay for previous services provided. To recognize the increased risk of loss related to the actions taken by World Access in late August and September, World Access felt it was necessary to record a significant increase in its reserve for doubtful accounts in the third quarter of 2000. World Access also predicts that its revenue for 2001 will be approximately $2.6 billion, pro forma for all outstanding acquisitions and assumed future acquisitions included in the business model. These financial projections are only estimates. Further, the projections assume future acquisitions. However, World Access is not currently a party to any agreements or understandings with respect to any material acquisitions other than STAR, WorldxChange and TelDaFax. World Access cannot assure you that any expected future acquisitions will be completed. World Access' actual results in the periods covered by these projections may differ materially from these estimates. PROPOSAL 3 AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK THAT WORLD ACCESS IS ENTITLED TO ISSUE FROM 150,000,000 SHARES TO 290,000,000 SHARES Currently, World Access does not have a sufficient number of shares of common stock authorized for issuance under its amended certificate of incorporation to complete the STAR merger, the WorldxChange 205 219 merger and its proposed transactions with TelDaFax AG described on page 203. Neither the STAR merger agreement nor the WorldxChange merger agreement condition the completion of the mergers on stockholder approval of an increase in authorized shares. However, if the World Access stockholders do not approve an increase in the authorized shares, World Access' management will determine with which merger World Access will proceed or if an alternative structure for one of the mergers is feasible. The authorized capital of World Access currently consists of 150,000,000 shares of common stock, $.01 par value per share, and 10,000,000 shares of preferred stock. The World Access board of directors has adopted a resolution unanimously approving and recommending to the World Access stockholders for their approval an amendment to Article IV of World Access' amended certificate of incorporation to provide for an increase in the number of shares of common stock authorized for issuance from 150,000,000 shares to 290,000,000 shares. An analysis of common shares outstanding and reserved for issuance follows: Outstanding as of October 1, 2000........................... 73,254,336 Reserved for issuance upon conversion of preferred stock.... 33,939,077 Reserved for issuance for stock options and warrants........ 15,484,196 Reserved for issuance upon conversion of debentures......... 3,105,380 ----------- Total outstanding and reserved as of October 1, 2000............................................. 125,782,989 STAR merger (assuming 100% paid in stock)................... 22,700,000 WorldxChange merger......................................... 29,800,000 Conversion of debt in connection with above mergers......... 10,000,000 Reserved for exchange of STAR and WorldxChange stock options................................................... 3,800,000 TelDaFax transactions (assuming 100% acquired).............. 23,200,000 ----------- Total outstanding and reserved upon completion of pending mergers and transactions................. 215,282,989 ===========
If Proposal 3 is approved by the World Access stockholders, and the STAR merger, WorldxChange merger and TelDaFax transactions are completed, World Access will have approximately 78.6 million shares of common stock available for issuance. The World Access board of directors believes the increase in the number of shares of common stock authorized for issuance is desirable to enhance our flexibility in connection with possible future actions, such as public or private offerings of shares for cash, dividends payable in our stock, corporate mergers and acquisitions, and implementation and continuation of employee benefit plans. Having additional authorized shares for issuance in the future would allow shares of common stock to be issued without the expense and delay of a special meeting of stockholders. The additional shares of common stock may be voting or non-voting as determined in the board's sole discretion with no further authorization by security holders required for the creation and issuance of the additional shares, subject to the requirements of the Nasdaq National Market that stockholder approval be obtained for certain issuances of additional shares of common stock in excess of 20% of the number of shares then outstanding. In addition, if World Access issued a new series of common stock or any preferred stock that disparately reduced the voting rights of the World Access common stock, then the World Access common stock could be excluded from the Nasdaq National Market. The terms of any new series of common stock or any preferred stock subject to this proposal cannot be stated or estimated at this time. The World Access board of directors is not proposing the increase in the authorized number of shares of common stock with the intention of using the shares for anti-takeover purposes. However, it is possible that the issuance of additional shares of common stock authorized by this Proposal 4 may render more difficult or discourage a merger, tender offer or proxy contest involving World Access, the assumption of control of World Access by the holder of a large block of the common stock or the removal of incumbent 206 220 management. For example, the issuance of additional shares of common stock could discourage a potential acquiror by: - increasing the number of shares of common stock necessary to gain control of World Access; - permitting World Access, through the public or private issuance of shares of common stock, to dilute the stock ownership of a potential acquiror; or - permitting World Access to privately place shares of common stock with purchasers who side with the board of directors in opposing a takeover bid. Except for the proposed issuance in connection with the TelDaFax transaction, World Access does not have any current plans, agreements or understandings under which any of the additional shares of common stock to be authorized would be issued. Approval of this Proposal 3 requires the affirmative vote of a majority in voting power of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock voting as a single class, and a majority of the outstanding shares of World Access common stock voting as a single class. If approved by the World Access stockholders, the amendment to the amended certificate of incorporation will become effective upon filing with the Secretary of the State of Delaware a certificate of amendment to our amended certificate of incorporation, which filing is expected to take place shortly after the World Access special meeting. THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE FROM 150,000,000 SHARES TO 290,000,000 SHARES. PROPOSAL 4 AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED DIRECTORS FROM 12 TO 15 The World Access board of directors has adopted a resolution unanimously approving and recommending to the stockholders for their approval an amendment to Article IX of the World Access amended certificate of incorporation to increase the number of authorized directors from 12 to 15. Article IX of the World Access amended certificate of incorporation currently provides that the World Access board of directors shall consist of not fewer than three members and not more than 12 members. The exact number of authorized directors within this range may be fixed from time to time by a resolution of the World Access board. The World Access board of directors believes an increase in the maximum number of directors from 12 to 15 will provide it greater flexibility in determining the board's composition. Approval of this Proposal 4 requires the affirmative vote of at least 75% in voting power of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock entitled to vote and voting as a single class. If approved by the World Access stockholders, the amendment to the amended certificate of incorporation will become effective upon filing with the Secretary of State of Delaware a certificate of amendment to the World Access amended certificate of incorporation, which filing is expected to take place shortly after the World Access special meeting. THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED DIRECTORS FROM 12 TO 15. 207 221 PROPOSAL 5 AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO END THE CLASSIFICATION OF THE WORLD ACCESS BOARD OF DIRECTORS SO THAT ALL DIRECTORS WILL SERVE TERMS OF ONE YEAR AND UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED The World Access board of directors has adopted a resolution unanimously approving and recommending to the stockholders for their approval an amendment to Article IX of the World Access amended certificate of incorporation to end the classification of the World Access board of directors. Article IX of the World Access amended certificate of incorporation currently provides for the division of the board of directors into three classes with each serving staggered three year terms. The purpose of dividing the directors into three classes was to promote continuity and stability in our management and policies by making an attempted takeover of World Access more difficult. A classified board of directors extends the time required to make a change in control of the board and tends to discourage any hostile takeover because it takes at least two annual meetings to make a change in control of the board, since only a minority of the directors are elected at each meeting. The World Access board of directors believes that the elimination of the classified board will allow World Access stockholders to express their views annually regarding the board in its entirety by electing all directors annually and also help to ensure that each director will represent the interest of all stockholders. Further, the elimination of the classified board promotes greater accountability by all directors each year and encourages directors to better serve stockholders while discouraging preserving the status quo. Because there is no limit to the number of terms an individual may serve, the continuity and stability of the World Access board's membership and our policies and long-term strategic planning should not be affected. Although eliminating the classification of the World Access board may increase the risk of a hostile takeover, World Access' management believes the benefits of eliminating the classification of the board provides greater potential for value to shareholders. Further, as World Access seeks to acquire new businesses, it may, from time to time, grant board nominees to acquired companies, for which shorter terms are beneficial. If this proposal is approved, World Access directors will be elected for and will serve one year terms until their successors are duly elected and qualified or until the earlier of their death, resignation or removal. The amendment to the World Access certificate of incorporation to eliminate the classified board would not shorten the terms of directors elected or appointed prior to it becoming effective. The new procedure would, however, apply to all World Access directors as their terms expire. Approval of this Proposal 5 requires the affirmative vote of at least 75% in voting power of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock entitled to vote and voting as a single class. If approved by the World Access stockholders, the amendment to the amended certificate of incorporation will become effective upon filing with the Secretary of State of Delaware a certificate of amendment to the World Access amended certificate of incorporation, which filing is expected to take place shortly after the World Access special meeting. THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO END THE CLASSIFICATION OF THE WORLD ACCESS BOARD OF DIRECTORS SO THAT ALL DIRECTORS WILL SERVE TERMS OF ONE YEAR AND UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED. 208 222 PROPOSAL 6 AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN TO INCREASE THE NUMBER OF WARRANTS ISSUABLE UNDER THE PLAN FROM 600,000 WARRANTS TO 1,200,000 WARRANTS In December 1994, in an effort to attract and retain the best available personnel to serve on its board of directors, World Access established the World Access, Inc. Directors' Warrant Incentive Plan. Other purposes of the Warrant Plan are to provide additional incentive to the persons serving as World Access directors, to encourage their continued service on the World Access board, and to align director and stockholder long-term incentives. World Access directors currently receive no cash compensation. The Warrant Plan also represents a source of equity capital to World Access in that directors are required to pay the warrant exercise price in the form of cash. In addition, warrants issued under the Warrant Plan are non-qualified for federal income tax purposes. This tax treatment is intended to provide World Access income tax deductions equal to the difference between the aggregate market value and aggregate exercise price of the warrants on the dates of exercise. DESCRIPTION OF PROPOSED AMENDMENT The aggregate number of shares of World Access common stock currently authorized for issuance pursuant to the Warrant Plan is 600,000. As of October 1, 2000, 450,000 shares available under the Warrant Plan had been issued or were contingently issuable upon the exercise of outstanding warrants. To date, all warrants under the Warrant Plan have been granted only to outside directors of the board. On April 25, 2000, the World Access board approved, subject to and effective upon stockholder approval, an amendment to the Warrant Plan that would authorize an additional 600,000 shares of World Access common stock for issuance under the Warrant Plan, so that the total shares authorized for the Warrant Plan will be 1,200,000 shares. If the proposed amendment is approved by the World Access stockholders, this change will be effective as of April 25, 2000. World Access believes that the increase in the authorized shares under the Warrant Plan is in the best interests of all stockholders and will further the purposes of the Warrant Plan. The number of authorized shares has not been increased since the Warrant Plan was initially adopted in December 1994. World Access has grown significantly since that time and is forecasting significant additional growth during the next few years. The increase in the number of authorized shares will provide World Access with 750,000 shares available for future issuance under the Warrant Plan. With five elected outside directors currently serving on the World Access board of directors, these shares would allow for three years of potential grants, assuming the performance criteria under the Warrant Plan is met in each year. BRIEF SUMMARY OF THE WARRANT PLAN The Warrant Plan provides that each member of the World Access board may be granted on an annual basis, in the discretion of the World Access board, warrants to purchase up to 50,000 shares of World Access common stock in the aggregate. However, no warrants may be granted under the Warrant Plan during 1999 and thereafter unless the fair market value of the World Access common stock has increased a certain amount over the previous four years. The shares may be authorized, but unissued, reacquired or forfeited shares of World Access common stock. Each warrant will have a five-year term. The initial exercise price of the warrants granted under the Warrant Plan shall be 110% of the fair market value of the World Access common stock on the date of grant. World Access must, at all times, keep available and reserve a number of shares sufficient to satisfy the Warrant Plan's requirements. The warrants shall become exercisable in one or more installments as the World Access board may determine, but if a director has not attended at least 75% of the meetings of the World Access board for the year in which an installment first becomes exercisable, then the installment will not become exercisable at that time. Generally, no warrant shall be exercisable within the first six months of its term. The warrants are exercisable only while the World Access board member remains a member of the board, and for 60 days thereafter. This exercise period is extended to three months if the termination of service is 209 223 due to a total and permanent disability. Generally, the exercise period is extended to six months following a non-employee director's death if death occurs while still a director, and the portion of the warrant exercisable is determined as if the director had lived and continued service as a director for an additional six months. If death occurs during the three months following termination of service as a director, the warrant may be exercised during the six months following death, but only to the extent that it had accrued at the date of termination. Payment of the exercise price may be made in cash or check or any combination of cash and check. Warrants generally may not be transferred other than by will or by the laws of descent or distribution, or pursuant to a qualified domestic relations order. However, the World Access board may, in its discretion, authorize transfer to the spouse, children, or grandchildren of the warrant holder, to a trust for the family members, to a partnership of which the family members are the only partners, or to a charitable organization. The World Access board will adjust the number of shares of World Access common stock available for issuance under the Warrant Plan and the price per share of World Access common stock covered by each outstanding warrant proportionately for the following: - any increase or decrease in the number of issued shares of World Access common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the World Access common stock, or - any other increase or decrease in the number of issued shares of World Access common stock effected without receipt of consideration by World Access, except for the conversion of convertible securities or the issuance by World Access of stock or convertible securities. Warrants to be issued pursuant to the Warrant Plan will become immediately exercisable: - if World Access is to be consolidated with or acquired by another entity in a merger; - upon the sale of substantially all of World Access's assets or the sale of at least 90% of the outstanding World Access common stock to a third party; - upon the merger or consolidation of World Access with or into any other corporation or the merger or consolidation of any corporation with or into World Access in which consolidation or merger the stockholders of World Access receive distributions of cash or securities; or - upon the liquidation or dissolution of World Access. The World Access board has authority to: - determine, upon review of relevant information and in accordance with the Warrant Plan, the fair market value of the World Access common stock; - interpret the Warrant Plan; - prescribe, amend and rescind rules and regulations relating to the Warrant Plan; - authorize any person to execute on behalf of World Access any instrument required to effectuate the grant of a warrant previously granted under the Warrant Plan; and - make all other determinations deemed necessary or advisable for the administration of the Warrant Plan. All World Access board determinations will be final and binding on all holders of warrants. A warrant may be suspended or terminated if the Chief Executive Officer of World Access reasonably believes that the warrant holder has committed an act of misconduct. If the World Access board (excluding the relevant warrant holder) determines that the warrant holder has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to World Access, breach of fiduciary duty or deliberate disregard of World Access rules resulting in loss, damage or injury to World Access, or if the warrant holder makes unauthorized disclosure of any World Access trade secret or confidential information, engages in unfair competition, induces any World Access customer to breach a contract with World Access, or induces any principal for whom World Access acts as agent to terminate such agency relationship, such warrant holder shall not be entitled to exercise any warrant. 210 224 The Warrant Plan will continue in effect until December 2004, unless earlier terminated by the World Access board. The World Access board may amend or terminate the Warrant Plan at any time, provided any such amendment or termination will not affect previously granted warrants, unless otherwise agreed in writing between World Access and the holder of the warrant. As of October 1, 2000, there were 350,000 warrants issued and outstanding under the Warrant Plan at exercise prices ranging from $8.25 to $25.85 per share, all of which were exercisable. As of October 1, 2000, 100,000 warrants have been exercised under the Warrant Plan. Current directors of World Access have been granted warrants to acquire the following number of shares of Common Stock under the Warrant Plan: Mr. Clearman - 150,000; Mr. Imlay - 50,000; Mr. Phillips - 100,000; and Mr. Sanders - 50,000. Federal Income Tax Consequences. Neither World Access nor the warrant holder has income tax consequences from the grant of warrants under the Warrant Plan. Generally, in the tax year when the holder exercises a warrant, the warrant holder recognizes ordinary income in the amount by which the fair market value of the shares at the time of exercise exceeds the exercise price for the warrants. World Access will generally have a deduction in the same amount as the ordinary income recognized by the warrant holder in World Access' tax year in which or with which the warrant holder's tax year (of exercise) ends. VOTE REQUIRED Approval of this Proposal 6 requires the affirmative vote of a majority in voting power of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock, voting as a single class. If approved by the World Access stockholders, the amendment to the Warrant Plan will become effective upon the approval. THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN TO INCREASE THE NUMBER OF WARRANTS ISSUABLE UNDER THE PLAN FROM 600,000 WARRANTS TO 1,200,000 WARRANTS. PROPOSAL 7 AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN TO CHANGE THE PERFORMANCE CRITERIA UNDER THE PLAN On April 25, 2000, the World Access board approved, subject to and effective upon stockholder approval, an amendment to the Warrant Plan that would change the performance criteria of the World Access common stock under the Warrant Plan. If the proposed amendment is approved by the World Access stockholders, this change will be effective as of April 25, 2000. The previous performance criteria dates back to the inception of the Warrant Plan in December 1994 when World Access common stock traded at $1.25 per share. Under the current provisions of the Warrant Plan, no warrants may be granted for a year unless the price of World Access common stock has increased by a compounded average annual growth rate equal to or in excess of 35% for the four years preceding the year of grant. The proposed amendment would decrease the period over which the growth rate of World Access common stock is to be measured to determine whether warrants may be granted for a particular year. Under the proposed amendment, beginning in February 2001, the growth rate of the price of World Access common stock will be measured over the previous two years rather than the previous four years. In addition, the stock price must have grown by a compounded average annual growth rate equal to or in excess of 10% over the measurement period, rather than 35%, in order for the World Access board to grant warrants under the Warrant Plan. World Access believes that the decrease in the measurement period for the growth rate of World Access common stock for the determination of whether warrants may be granted is in the best interests of all stockholders and will further the purposes of the Warrant Plan. The target price to determine eligibility 211 225 in February 2001 is approximately $26.00 under both the previous and proposed performance criteria. The proposed revisions to the performance criteria were designed to address the fact that the previous criteria requires a target price of more than $60.00 per share in February 2002. Warrants issued under the Warrant Plan represent the only form of ongoing consideration paid to outside directors. As a result, World Access believes the performance criteria defined under this Warrant Plan must be reasonably defined to assist World Access in attracting and retaining highly qualified outside directors. VOTE REQUIRED Approval of this Proposal 7 requires the affirmative vote of a majority in voting power of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock, voting as a single class. If approved by the World Access stockholders, the amendment to the Warrant Plan will become effective upon such approval. THE WORLD ACCESS BOARD OF DIRECTORS RECOMMENDS THAT THE WORLD ACCESS STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE WORLD ACCESS DIRECTORS' WARRANT INCENTIVE PLAN TO CHANGE THE PERFORMANCE CRITERIA OF WORLD ACCESS COMMON STOCK UNDER THE PLAN. PROPOSAL 8 ELECTION OF WORLD ACCESS DIRECTORS The World Access amended certificate of incorporation provides that the World Access board shall be classified into three classes as nearly equal in number as possible, so that approximately one-third of the members of the board shall be elected at each annual meeting of stockholders, and each director shall serve for a three-year term. The World Access amended certificate of incorporation further provides that the World Access board shall consist of not fewer than three members and not more than 12 members, with the exact number of directors within the range to be fixed from time to time by the World Access board. If Proposal 4 is approved by the World Access stockholders at the World Access special meeting, World Access will amend its amended certificate of incorporation to increase the number of authorized directors from 12 to 15. Notwithstanding these provisions, the World Access amended certificate of incorporation provides that whenever the holders of any one or more classes or series of stock has the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, such directors so elected shall not be divided into classes. The number of such directors shall not be counted in determining the maximum number of directors permitted under Article IX of the World Access amended certificate of incorporation, unless expressly provided otherwise by the terms of the class or series in the World Access amended certificate of incorporation. Messrs. Burmeister, Campbell, Cipoletti and Sedwick are designees of the Series C preferred stock of World Access and, as such, are not divided into classes. If Proposal 4 is approved at the World Access special meeting, all World Access directors, including the nominees for director named in this joint proxy statement/prospectus, will serve terms of one year or until their successors are duly elected and qualified. The World Access board has fixed the number of directors at 11, and the World Access board currently is comprised of 11 members. There are two director positions in the class whose term of office expires in 2000. These positions are currently held by Stephen J. Clearman and John D. Phillips, who are standing for reelection. The persons named as proxies are not entitled to vote for a greater number of persons than the number of nominees named in this joint proxy statement/prospectus. There are no family relationships among any World Access directors, executive officers or nominees. The World Access board knows of no reason why the nominees may be unable to serve as a director. If a nominee is unable to serve, the shares represented by all valid proxies received may be voted for a substitute nominee designated by the World Access board, or the World Access board may reduce the number of directors. If any director resigns, dies or is otherwise unable to serve out his or her term, or the number of directors is increased by the World Access board, any vacancy so arising may be filled by the 212 226 World Access board. A director elected to fill a vacancy shall serve until the next election of the class of directors to which the director belongs and until his or her successor is elected and qualified. THE WORLD ACCESS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF WORLD ACCESS VOTE "FOR" THE ELECTION OF STEPHEN J. CLEARMAN AND JOHN D. PHILLIPS AS DIRECTORS. INFORMATION REGARDING NOMINEES AND DIRECTORS Biographical information follows for the person nominated and each person whose term of office as a director will continue after the World Access special meeting. Directors' ages are as of October 1, 2000. WORLD ACCESS NOMINEES FOR DIRECTOR Stephen J. Clearman. Mr. Clearman has served as one of World Access' directors since 1988. Mr. Clearman co-founded Geocapital Partners. Since 1984, he has served as a general partner of six Geocapital venture capital partnerships. Mr. Clearman currently serves as a director of MemberWorks Incorporated and several private companies, all of which principally provide computer software or information services. Mr. Clearman's current term as a director of World Access is scheduled to end at the World Access special meeting. Mr. Clearman is 49. John D. ("Jack") Phillips. Mr. Phillips has served as one of World Access' directors since December 1994, as its Chief Executive Officer since December 1998 and as Chairman of its board of directors since May 1999. Mr. Phillips was Chairman of the Board and Chief Executive Officer of Cherry Communications and Cherry U.K. d/b/a Resurgens Communications Group from October 1997 until December 1998, when World Access acquired both companies. He was President, Chief Executive Officer and a director of Metromedia International from November 1995 until December 1996. Metromedia International was formed in November 1995 through the merger of The Actava Group, Inc., Orion Pictures Corporation, MCEG Sterling Incorporated and Metromedia International Telecommunications, Inc. He served as President, Chief Executive Officer and a director of Actava from April 1994 until November 1995. In May 1989, Mr. Phillips became Chief Executive Officer of Resurgens Communications Group, Inc. and served in this capacity until September 1993 when Resurgens merged with Metromedia Communications Corporation and WorldCom. Mr. Phillips' current term as a director of World Access is scheduled to end at the World Access special meeting. Mr. Phillips is 57. WORLD ACCESS DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING Massimo Prelz Oltramonti. Mr. Prelz has served as one of World Access' directors since December 1999. He is a Managing Director of Gilbert Global Equity Partners, L.L.C., a private equity firm with a diversified global investment strategy. He previously served as Managing Director of Advent International Corporation, the general partner of a series of global private equity funds. In this capacity, he co-managed the media and telecom investment activity of Advent International in Europe and was directly responsible for its investments in Scandinavian Broadcasting Systems SA, Esat Telecom Group plc, PrimaCom AG, Esaote S.p.A. and Jazztel SA. Prior to joining Advent International in 1991, Mr. Prelz was a partner at Alta Berkeley Associates, a venture capital group in London. He currently serves as Vice-Chairman of PrimaCom AG and is a director of Esat Telecom Group plc, Jazztel SA and Iaxis N.V. Mr. Prelz's current term as a director of World Access is scheduled to end at World Access' 2002 Annual Meeting of Stockholders. Mr. Prelz is 45. Lawrence C. Tucker. Mr. Tucker has served as one of World Access' directors since April 1999. He has been a General Partner of Brown Brothers Harriman & Co., a private banking firm, since 1979 and he also serves on The Partners' Steering Committee. Mr. Tucker serves as a director of MCI WorldCom, Inc., the MCI WorldCom Venture Fund, US Unwired, Inc., National Healthcare Corporation, Riverwood Holdings, Inc., VAALCO Energy Inc. and National Equipment Services, Inc. Brown Brothers Harriman & Co. is the general partner of The 1818 Fund, L.P., The 1818 Fund II, L.P., The 1818 Fund III, L.P., and The 1818 Mezzanine Fund, L.P. Mr. Tucker serves on our board of directors as the designee of the 213 227 holder of our Series A preferred stock, and his current term as a director of World Access is scheduled to end at World Access' 2002 Annual Meeting of Stockholders. Mr. Tucker is 57. WORLD ACCESS DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING John P. Imlay, Jr. Mr. Imlay has served as one of World Access' directors since December 1998. He is Chairman of Imlay Investments, Inc., a private investment firm which manages capital and provides venture funds for small technology companies. He also serves as Chairman of Dun & Bradstreet Software Services, Inc., an application software company, and as a director of Metromedia International Group, Inc., a global media, entertainment and communications company. Mr. Imlay is the former Chairman of Management Science America, a mainframe application software company that was acquired by Dun & Bradstreet in 1990. He is also a director of the Atlanta Falcons and The Gartner Group. Mr. Imlay's current term as a director of World Access is scheduled to end at World Access' 2001 Annual Meeting of Stockholders. Mr. Imlay is 64. John P. Rigas. Mr. Rigas has served as one of World Access' directors since December 1999. He is a Managing Partner of Zilkha Capital Partners L.P., a private equity firm involved in a wide variety of venture capital and technology investments both in the U.S. and internationally. Mr. Rigas is a founder of Zilkha Capital Partners and has been a member of its predecessor firms for twelve years. He currently serves as the Chairman of Advanced Interactive Systems Inc. and as a director of New Colt Holding, Inc., Omniglow, Inc. and Total Sports, Inc. Mr. Rigas' current term as a director of World Access is scheduled to end at World Access' 2001 Annual Meeting of Stockholders. Mr. Rigas is 37. Carl E. Sanders. Mr. Sanders has served as one of World Access directors' since December 1998. He is engaged in the private practice of law as Chairman of Troutman Sanders LLP, a law firm based in Atlanta, Georgia. He is a former governor of the State of Georgia. Mr. Sanders is currently a director of Carmike Cinemas, Matria Health Care and H.I.E. Corp. Mr. Sanders' current term as a director of World Access is scheduled to end at World Access' 2001 Annual Meeting of Stockholders. Mr. Sanders is 75. WORLD ACCESS DIRECTORS NOT DIVIDED INTO CLASSES Walter J. Burmeister. Mr. Burmeister has served as World Access' President and one of its directors since December 1999. Mr. Burmeister was one of FaciliCom's co-founders and served as its Chief Executive Officer, President and one of its directors from 1995 until it merged with World Access in December 1999. Prior to co-founding FaciliCom, Mr. Burmeister founded TMG, a telecommunications consulting firm, and he has served as its Chairman from 1992 to the present. Mr. Burmeister was Vice President and Chief Financial Officer of Bell Atlantic International from 1989 to 1992. In this position, Mr. Burmeister was responsible for overseeing business development in Central and South America, the Middle East and Africa, as well as managing that company's financial affairs. During his 31 years with Bell Atlantic, Mr. Burmeister was Vice President of Bell of Pennsylvania's and Diamond State Telephone's sales organization and headed the C&P Telephone Operations Staff. Mr. Burmeister has served as a director of Skysat Communications Network since 1992. Mr. Burmeister serves on World Access board of directors as a designee of the holders of our Series C preferred stock. Mr. Burmeister is 61. Kirby J. Campbell. Mr. Campbell has served as one of World Access' directors since December 1999. He served as Treasurer, Vice President and as a director of FaciliCom from its inception in 1995 until it merged with World Access in December 1999. Since June 1997, Mr. Campbell has been the Chief Executive Officer of Armstrong Holdings, Inc., FaciliCom's indirect majority stockholder, and he was previously Executive Vice President of Armstrong Holdings. Mr. Campbell also holds various executive and board positions with Armstrong Holdings' affiliated companies. Mr. Campbell serves on our board of directors as a designee of the holders of our Series C preferred stock. Mr. Campbell is 53. Bryan Cipoletti. Mr. Cipoletti has served as one of World Access' directors since December 1999. He served as a director of FaciliCom from September 1997 until it merged with us in December 1999. Mr. Cipoletti has been Chief Financial Officer of Armstrong Holdings since December 1999 and was Vice President of Finance of Armstrong Holdings from 1993 to 1999. Mr. Cipoletti also holds various executive 214 228 and board positions with Armstrong Holdings' affiliated companies. Mr. Cipoletti serves on our board of directors as a designee of the holders of Series C preferred stock. Mr. Cipoletti is 40. Dru A. Sedwick. Mr. Sedwick has served as one of World Access' directors since December 1999. He served as Secretary, Vice President and as a director of FaciliCom from FaciliCom's inception in 1995 until it merged with us in December 1999. Since June 1997, Mr. Sedwick has been President of Armstrong Holdings, and previously he was Senior Vice President of Armstrong Holdings. Mr. Sedwick also holds various executive and board positions with Armstrong Holdings' affiliated companies. Mr. Sedwick serves on our board of directors as a designee of the holders of the World Access Series C preferred stock. Mr. Sedwick is 36. MEETINGS AND COMMITTEES OF THE WORLD ACCESS BOARD During 1999, the World Access board met seven times and took actions by unanimous written consent 14 times. The World Access board has a standing Executive Committee, Audit Committee and Compensation Committee. No incumbent World Access board member attended fewer than 75% of the aggregate of: - the total number of meetings of the World Access board which the director was eligible to attend during 1999 and - the total number of meetings held by any committee of the World Access board upon which the director served during 1999. The Executive Committee was formed in December 1999 and presently consists of Messrs. Burmeister, Campbell, Phillips and Tucker. The Executive Committee performs the duties as are delegated to it by the board of directors, subject to the limitations on the delegation contained in the Delaware General Corporation Law. The Audit Committee, which presently consists of Messrs. Cipoletti, Oltramonti and Rigas, recommends engagement of independent auditors for World Access, reviews and approves services performed by the auditors, reviews and evaluates World Access' accounting system and its system of internal controls and performs other related duties delegated to the committee by the World Access board. The Audit Committee met two times during 1999. The Compensation Committee, which presently consists of Messrs. Clearman, Imlay, Sanders and Sedwick, performs the duties regarding compensation for executive officers as the World Access board may delegate to the Compensation Committee from time to time. The Compensation Committee met eight times during 1999. The World Access board has not established a separate committee of its members to nominate candidates for election as directors. WORLD ACCESS DIRECTOR COMPENSATION World Access' non-employee directors receive no cash compensation for their service as directors of World Access. Their compensation is in the form of stock warrants as discussed below. The directors are reimbursed for out-of-pocket travel and related expenses incurred in connection with their attendance at meetings of the World Access' board or its committees and at other World Access events to which they are invited. In December 1994, in an effort to attract and retain experienced executives to serve as outside directors, the Outside Directors' Warrant Plan was adopted. World Access' stockholders approved the Warrant Plan at the 1995 Annual Meeting of Stockholders. The purposes of the Warrant Plan are to attract and retain the best available personnel for service as directors of World Access, to provide additional incentive to the persons serving as directors, to align director and stockholder long-term interests and to encourage continued service on the World Access 215 229 board. Warrants may be granted under the Warrant Plan only to directors of World Access who are neither employees of World Access nor of any of its affiliates. The aggregate number of shares of common stock authorized to be issued pursuant to the Warrant Plan is 2,400,000, subject to adjustments as described below. The Warrant Plan provides that each eligible non-employee director elected to serve as a director of World Access on or after October 1, 1994 may be granted, in the discretion of the World Access board, warrants to purchase no more than 450,000 shares of common stock in the aggregate. The initial exercise price of the warrants will be not less than the fair market value of the common stock subject to the warrant on the date of grant. In June 1999, the our board granted the following directors warrants to purchase a total of 201,000 shares of World Access' common stock at an exercise price of $11.69 per share, the then current market price: Mr. Clearman -- 17,000 shares; Mr. Imlay -- 42,000 shares; Mr. Sanders -- 42,000 shares; and Mr. Tucker -- 100,000 shares. These warrants, which were fully vested upon issuance, expire on June 15, 2004. In December 1999, Mr. Prelz and Mr. Rigas joined World Access' board and were each granted warrants to purchase 100,000 shares of World Access' common stock at an exercise price of $17.62 per share, the then current market price. These warrants, which were fully vested upon issuance, expire on December 9, 2004. In December 1994, we also adopted the Directors' Warrant Incentive Plan pursuant to which our board may grant, beginning in February 1997, to each non-employee director on an annual basis warrants to purchase up to 50,000 shares of common stock at an exercise price per share equal to no less than 110% of the fair market value of the common stock at the date of grant. No warrants may be granted under the Incentive Plan in a given year unless our common stock has appreciated by a compounded annual average rate of return in excess of 35% for the four-year period preceding the year of grant. The aggregate number of shares of common stock authorized to be issued pursuant to the Incentive Plan is 600,000, subject to adjustments as described below. Upon stockholder approval at the World Access special meeting, 35% for the four-year period will be amended to 10% for the two-year period and the number of authorized shares will be increased to 1.2 million shares. In March 1999, pursuant to the Incentive Plan, our board granted each of Messrs. Clearman, Imlay and Sanders warrants to purchase 50,000 shares of our common stock at an exercise price of $8.25 per share, 110% of the then current market price. These warrants became fully vested on December 31, 1999 and expire on March 10, 2004. The Warrant Plan and the Incentive Plan provide that warrants awarded under these plans will become immediately exercisable: - if we are consolidated with or acquired by another entity in a merger, - upon the sale of substantially all of our assets or the sale of at least 90% of outstanding common stock to a third party, - upon our merger or consolidation with or into any other corporation or the merger or consolidation of any corporation with or into us, in which consolidation or merger our stockholders received distributions of cash or securities as a result of the merger or consolidation, or - upon our liquidation or dissolution. DESCRIPTION OF WORLD ACCESS' CAPITAL STOCK WORLD ACCESS COMMON STOCK The holders of World Access common stock are entitled to one vote for each share held of record on all matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of directors. Accordingly, holders of a majority of the outstanding shares of World Access common stock 216 230 and the holders of the World Access Series A preferred stock, Series D preferred stock and Series E preferred stock, voting on an as converted to common stock basis, can elect all members of World Access' board of directors. Holders of the remaining shares of World Access common stock by themselves cannot elect any member of the board of directors. The holders of World Access common stock are entitled to receive dividends when dividends are declared by the board of directors. In the event of the dissolution of World Access, the holders of World Access common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the World Access common stock. Holders of shares of World Access common stock, as such, have no conversion, preemptive or other subscription rights. There are no redemption provisions applicable to the World Access common stock. WORLD ACCESS PREFERRED STOCK The World Access certificate of incorporation authorizes the World Access board of directors to issue shares of preferred stock in one or more series and to fix the rights of the shares to be included in such shares. The World Access certificate of incorporation authorizes the issuance of 10,000,000 shares of preferred stock, of which 50,000 shares designated as Series A preferred stock, 350,260 shares designated as Series C preferred stock, 184,000 shares designated as Series D preferred stock, and 9,645 shares designated as Series E are issued and outstanding. The material terms of the Series A preferred stock, the Series C preferred stock, the Series D preferred stock and the Series E preferred stock are summarized below. World Access Series A preferred stock Dividends. The holders of the Series A preferred stock are entitled to receive quarterly cash dividends at an annual rate on the liquidation preference of the Series A preferred stock, which is $1,000, equal to 4.25%, when declared by the World Access board of directors. Dividends payable on the Series A preferred stock are cumulative and accrue, whether or not declared, on a daily basis from April 19, 1999. Ranking. The Series A preferred stock ranks, as to dividend and liquidation rights, senior to World Access common stock, the Series C preferred stock and the Series D preferred stock. Voting rights. In addition to any voting rights provided by law, the holders of the Series A preferred stock are entitled to vote on all matters voted on by holders of World Access common stock voting together as a single class with the holders of World Access common stock, Series C preferred stock, Series D preferred stock and other shares entitled to vote thereon. Each holder of the Series A preferred stock is entitled to cast the number of votes per share as is equal to the number of votes that the holder would be entitled to cast if the holder had converted its shares into World Access common stock on the record date for determining the stockholders entitled to vote on any such matters. In addition, unless the consent or approval of a greater number of shares is then required by law, the vote of the holders of at least 66 2/3% of the outstanding shares of Series A preferred stock, voting separately as a single series, is required to: - authorize, increase the authorized number of shares of or issue any shares of any class of stock ranking senior or equal to the Series A preferred stock; - authorize, adopt or approve an amendment to the certificate of incorporation of World Access that would increase or decrease the par value of the Series A preferred stock, or change the rights of the Series A preferred stock, or would change the rights of stock ranking senior or equal to the Series A preferred stock; - amend or alter the certificate of incorporation so as to adversely affect the Series A preferred stock; 217 231 - authorize or issue any security convertible into, exchangeable for or evidencing the right to purchase or otherwise receive any shares of any class or classes of stock ranking senior or equal to the Series A preferred stock; - effect the voluntary dissolution, recapitalization or reorganization of World Access, or the consolidation or merger of World Access with or into another entity; or - authorize, increase the authorized number of shares of, or issue any shares of capital stock having an optional or mandatory redemption date earlier than April 21, 2004 or amend the terms of any capital stock to provide that such capital stock has an optional or mandatory redemption date earlier than April 21, 2004. Board of directors representation. If World Access: - fails to declare or pay the full amount of dividends payable on the Series A preferred stock for two quarterly dividend periods, whether consecutive or not, or - fails to comply with specific affirmative and negative covenants of World Access set forth in the Stock Purchase Agreement, dated April 19, 1999, between World Access and The 1818 Fund III, L.P., then the number of directors on the World Access board of directors must be increased by one, and the holders of the Series A preferred stock will have the exclusive right to fill such directorship. The person designated as a director by the holders of the Series A preferred stock will continue in such position until such breach is cured. Redemption. On or after April 21, 2003, World Access has the right to redeem the Series A preferred stock for a price per share equal to $1,000 plus an amount per share equal to all accrued and unpaid dividends through the redemption date. If a change of control of World Access occurs on or before April 21, 2001, World Access has the right to redeem the Series A preferred stock for a price per share equal to $1,250 plus an amount per share equal to all accrued and unpaid dividends through the redemption date. Conversion price. The Series A preferred stock is convertible, at any time, into shares of World Access common stock for a conversion price equal to $11.50 per share. The conversion price is subject to adjustment in the event of below market issuances of World Access common stock, stock dividends, subdivisions, combinations, reclassifications and other distributions with respect to World Access common stock and certain other instances described in the World Access certificate of incorporation. Mandatory exchange. If at any time on or after April 19, 2004 until April 19, 2009, the holders of at least 50% of the Series A preferred stock demand that World Access exchange the Series A preferred stock, then World Access must exchange all such shares for, at World Access' option, either shares of World Access common stock or subordinated nonconvertible notes of World Access. The exchange must occur at a per share price equal to $1,000 per share plus an amount per share equal to all accrued and unpaid dividends to the exchange date. The exchange date must occur at any time, or from time to time, during the period from the 40th day following the date a stockholder demands the exchange to the third anniversary of such date. Any shares of common stock issued in the exchange will be valued at 95% of the average market price of World Access common stock for the ten trading days preceding the applicable exchange date, but in no event greater than the conversion price then in effect. Mandatory conversion. If for 45 consecutive trading days the market price of World Access common stock exceeds 261% of the conversion price in effect on each such trading day, all shares of Series A preferred stock will be automatically converted into such number of shares of World Access common stock as equals the number of shares subject to conversion multiplied by the quotient of $1,000 divided by the conversion price in effect on the last trading day of such 45-day period. 218 232 World Access Series C preferred stock Ranking. The Series C preferred stock ranks, as to dividends, equal with the World Access common stock and the Series D preferred stock and junior to the Series A preferred stock. With respect to liquidation preference, the Series C preferred stock ranks senior to the World Access common stock, junior to the Series A preferred stock, and equal with the Series D preferred stock. Voting rights. In addition to any voting rights provided by law, except with respect to the election of directors, the holders of the Series C preferred stock are entitled to vote on all matters voted on by holders of World Access common stock voting together as a single class with the holders of World Access common stock, Series A preferred stock, Series D preferred stock and other shares entitled to vote thereon. Each holder of the Series C preferred stock is entitled to cast the number of votes per share as is equal to the number of votes that the holder would be entitled to cast if the holder had converted its shares into World Access common stock on the record date for determining the stockholders entitled to vote on any such matters. In addition, unless the consent or approval of a greater number of shares is then required by law, the vote of the holders of at least 66 2/3% of the outstanding shares of Series C preferred stock, voting separately as a single series, is required to: - authorize, increase the authorized number of shares of or issue any shares of any class of stock ranking senior to the Series C preferred stock; - authorize, adopt or approve an amendment to the certificate of incorporation of World Access that would increase or decrease the par value of the Series C preferred stock, or change the rights of the Series C preferred stock, or would change the rights of stock ranking senior to the Series C preferred stock; - amend or alter the certificate of incorporation so as to adversely affect the Series C preferred stock; - authorize or issue any security convertible into, exchangeable for or evidencing the right to receive any shares of any class or classes of stock ranking senior to the Series C preferred stock; and - effect the voluntary dissolution, recapitalization or reorganization of World Access, or the consolidation or merger of World Access with or into another entity, or the sale or other distribution to another entity of all or substantially all of the assets of World Access. Board of directors representation. The holders of the Series C preferred stock have the right, voting as a separate series, to nominate and elect four directors to the World Access board of directors and are not entitled to vote with respect to the election of any other directors, provided that on the record date for determining the stockholders eligible to vote for directors, at least 15% of the originally issued Series C preferred stock is outstanding. However, if the World Access common stock issuable upon conversion of the Series C preferred stock equals less than 20% of the outstanding shares of capital stock of World Access entitled to vote for the election of directors, then, so long as the outstanding shares of Series C preferred stock equal at least 15% of the originally issued Series C preferred stock, the holders of the Series C preferred stock have the right to elect, voting as a separate series, the number of directors which, as a percentage of the total number of World Access directors, is at least equal to the percentage of all outstanding shares of capital stock entitled to vote for the election of directors held by such holders of Series C preferred stock, on an as converted basis. Conversion price. The Series C preferred stock is convertible, at any time, into shares of World Access common stock for a conversion price equal to $20.38 per share. The conversion price is subject to adjustment in the event of below market issuances of World Access common stock, stock dividends, subdivisions, combinations, reclassifications and other distributions with respect to World Access common stock and other instances described in the World Access certificate of incorporation. Mandatory conversion. If for 60 consecutive trading days the market price of World Access common stock exceeds the conversion price in effect on each such trading day, all shares of Series C preferred 219 233 stock will be automatically converted into such number of shares of World Access common stock as equals the number of shares subject to conversion multiplied by the quotient of $1,000 divided by the conversion price in effect on the last trading day of such 60-day period. In addition, any outstanding shares of Series C preferred stock that have not been converted into World Access common stock by December 7, 2002 will be automatically converted into such number of shares of World Access common stock as is equal to the number of shares of Series C preferred stock subject to conversion, multiplied by the quotient of (i) $1,000 divided by (ii) the average market price for the 20 consecutive days ending on December 7, 2002. Notwithstanding the foregoing, the average market price for the 20 consecutive days ending on December 7, 2002 may not be less than $11.50 or greater than the conversion price, and is subject to increase based on a specific decline in the Nasdaq Composite Index between December 7, 1999 and December 7, 2002. World Access Series D preferred stock Ranking. The Series D preferred stock ranks, as to dividends, equal with the World Access common stock and the Series C preferred stock and junior to the Series A preferred stock. With respect to liquidation preference, the Series D preferred stock ranks senior to the World Access common stock, junior to the Series A preferred stock, and equal with the Series C preferred stock. Voting rights. In addition to any voting rights provided by law, the holders of the Series D preferred stock are entitled to vote on all matters voted on by holders of World Access common stock voting together as a single class with the holders of World Access common stock, Series A preferred stock, Series C preferred stock and other shares entitled to vote thereon. Each holder of the Series D preferred stock is entitled to cast the number of votes per share as is equal to the number of votes that the holder would be entitled to cast if the holder had converted its shares into World Access common stock on the record date for determining the stockholders entitled to vote on any such matters. Conversion price. The Series D preferred stock is convertible, at any time, into shares of World Access common stock for a conversion price equal to $18.00 per share. The conversion price is subject to adjustment in the event of below market issuances of World Access common stock, stock dividends, subdivisions, combinations, reclassifications and other distributions with respect to World Access common stock and other instances described in the World Access certificate of incorporation. Mandatory conversion. If for 60 consecutive trading days the market price of World Access common stock exceeds the conversion price in effect on each such trading day, all shares of Series D preferred stock will be automatically converted into such number of shares of World Access common stock as equals the number of shares subject to conversion multiplied by the quotient of $1,000 divided by the conversion price in effect on the last trading day of such 60-day period. In addition, any outstanding shares of Series D preferred stock that have not been converted into World Access common stock by February 14, 2003 will be automatically converted into such number of shares of World Access common stock as is equal to the number of shares of Series D preferred stock subject to conversion, multiplied by the quotient of (i) $1,000 divided by (ii) the average market price for the 20 consecutive days ending on February 14, 2003. Notwithstanding the foregoing, the average market price for the 20 consecutive days ending on February 14, 2003 may not be less than $11.50 or greater than the conversion price, and subject to increase based on a specific decline in the Nasdaq Composite Index between February 14, 2000 and February 14, 2003. World Access Series E preferred stock Ranking. The Series E preferred stock ranks, as to dividends, equal with the World Access common stock, the Series C preferred stock, and Series D preferred stock and junior to the Series A preferred stock. With respect to liquidation preference, the Series E preferred stock ranks senior to the World Access common stock, junior to the Series A preferred stock, and equal with the Series C preferred stock and Series D preferred stock. 220 234 Voting rights. In addition to any voting rights provided by law, the holders of the Series E preferred stock are entitled to vote on all matters voted on by holders of World Access common stock voting together as a single class with the holders of World Access common stock, Series A preferred stock, Series C preferred stock, Series D preferred stock and other shares entitled to vote thereon. Each holder of the Series E preferred stock is entitled to cast the number of votes per share as is equal to the number of votes that the holder would be entitled to cast if the holder had converted its shares into World Access common stock on the record date for determining the stockholders entitled to vote on any such matters. Conversion price. The Series E preferred stock is convertible, at any time, into shares of World Access common stock for a conversion price equal to $21.75 per share. The conversion price is subject to adjustment in the event of below market issuances of World Access common stock, stock dividends, subdivisions, combinations, reclassifications and other distributions with respect to World Access common stock and other instances described in the World Access certificate of incorporation. Mandatory conversion. If for ten consecutive trading days the market price of World Access common stock exceeds the conversion price in effect on each such trading day, all shares of Series E preferred stock will be automatically converted into such number of shares of World Access common stock as equals the number of shares subject to conversion multiplied by the quotient of $1,000 divided by the conversion price in effect on the last trading day of such ten-day period. In addition, any outstanding shares of Series E preferred stock that have not been converted into World Access common stock by July 13, 2003 will be automatically converted into such number of shares of World Access common stock as is equal to the number of shares of Series E preferred stock subject to conversion, multiplied by the quotient of (i) $1,000 divided by (ii) the average market price for the ten consecutive days ending on July 13, 2003. Notwithstanding the foregoing, the average market price for the ten consecutive days ending on July 13, 2003 may not be less than $11.50 or greater than the conversion price, and subject to increase based on a specific decline in the Nasdaq Composite Index between July 13, 2000 and July 13, 2003. PRINCIPAL STOCKHOLDERS OF WORLD ACCESS As of October 1, 2000, the issued and outstanding classes of World Access voting securities were as follows:
COMMON SHARES SHARES OUTSTANDING EQUIVALENT ----------- ----------- Common stock................................................ 73,254,336 73,254,336 Series A preferred stock.................................... 70,000 6,086,956 Series C preferred stock.................................... 350,260 17,186,451 Series D preferred stock.................................... 184,000 10,222,222 Series E preferred stock.................................... 9,645 443,448 ----------- Total voting securities........................... 107,193,413 ===========
The following table sets forth information regarding the beneficial ownership of the World Access common stock and each individual class of World Access preferred stock as of October 1, 2000 for: - each person who beneficially owns more than 5% of the World Access common stock; - each current World Access director individually; - each current World Access executive officer who would be a named executive officer under Rule 402 of Regulation S-K; and - all current directors and executive officers of World Access as a group. 221 235 The following table also sets forth information assuming the completion of both the STAR and WorldxChange mergers. For purposes of this table, we have assumed that World Access will pay 100% of the STAR merger consideration in World Access common stock.
TOTAL SHARES TOTAL SHARES BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE OWNED(1) OWNED OWNED(1) OWNED SHARES BEFORE BEFORE AFTER AFTER UNDERLYING COMPLETION COMPLETION COMPLETION COMPLETION SHARES DERIVATIVE OF THE OF THE OF THE OF THE NAME OWNED(1) SECURITIES(2) MERGERS MERGERS(3) MERGERS MERGERS(3) - ---- ---------- ------------- ------------ ---------- ------------ ---------- WORLD ACCESS COMMON STOCK Apax Partners Co.(4) Possaqtstrabe 11........... 11,457,631 -- 11,457,631 15.6% 11,457,631 9.1% D-81679 Munchen Germany Armstrong International Telecommunications, Inc.(5).................... -- 15,162,015 15,162,015 17.1 15,162,015 10.8 One Armstrong Place Butler, PA 16001 WorldCom Network Services, Inc.(6).................... 7,081,444 -- 7,081,444 9.7 17,081,444 13.6 500 Clinton Center Drive Clinton, MS 39056 The 1818 Fund III, L.P.(7)... -- 6,086,956 6,086,956 7.7 6,086,956 4.6 59 Wall Street New York, NY 10005 Morgan Stanley & Co. Incorporated(8)............ -- 5,685,111 5,685,111 7.2 5,685,111 4.3 1585 Broadway New York, NY 10036 Roger B. Abbott(9)........... -- -- -- * 9,939,982 7.9 9999 Willow Creek Road San Diego, CA 92131 Walter Anderson(10).......... -- -- -- * 7,691,817 6.1 Gold & Appel Transfer, S.A. Omar Hodge Building Wickhams City Tortola, British V.I. Walter J. Burmeister+++(11).......... -- 1,135,694 1,135,694 1.5 1,135,694 * Kirby J. Campbell+........... -- -- -- * -- * Bryan Cipoletti+............. -- -- -- * -- * Stephen J. Clearman+(12)..... 1,309,044 167,000 1,476,044 2.0 1,476,044 1.2 John P. Imlay, Jr.+.......... 59,900 179,000 238,900 * 238,900 * John D. Phillips+++(13)...... 1,312,500 1,175,333 2,487,833 3.3 2,487,833 2.0 Massimo Prelz Oltramonti+(14)............ 1,885,251 100,000 1,985,251 2.7 1,985,251 1.6 John P. Rigas+(15)........... 1,561,958 100,000 1,661,958 2.3 1,661,958 1.3 Carl E. Sanders+(16)......... 62,000 179,000 241,000 * 241,000 * Dru A. Sedwick+.............. -- -- -- * -- * Lawrence C. Tucker+(7)....... -- 6,186,956 6,186,956 7.8 6,186,956 4.7 W. Tod Chmar++............... 312,500 50,000 362,500 * 362,500 * Mark A. Gergel++(17)......... 27,249 263,499 290,748 * 290,748 *
222 236
TOTAL SHARES TOTAL SHARES BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE OWNED(1) OWNED OWNED(1) OWNED SHARES BEFORE BEFORE AFTER AFTER UNDERLYING COMPLETION COMPLETION COMPLETION COMPLETION SHARES DERIVATIVE OF THE OF THE OF THE OF THE NAME OWNED(1) SECURITIES(2) MERGERS MERGERS(3) MERGERS MERGERS(3) - ---- ---------- ------------- ------------ ---------- ------------ ---------- Michael F. Mies++(17)........ 2,480 33,750 36,230 * 36,230 * Bryan D. Yokley.............. -- -- -- * -- * All directors and executive officers as a group (15 persons)................... 6,532,882 9,570,232 16,103,114 19.4 15,977,444 11.9
SERIES A PREFERRED STOCK The 1818 Fund III, L.P....... 70,000 -- 70,000 100.0 70,000 100.0 Lawrence C. Tucker........... 70,000 -- 70,000 100.0 70,000 100.0 SERIES C PREFERRED STOCK Armstrong International Telecommunications, Inc.... 309,002 -- 309,002 88.2 309,002 88.2 Walter J. Burmeister......... 19,161 -- 19,161 5.5 19,161 5.5 Juan Carlos Valls............ 19,161 -- 19,161 5.5 19,161 5.5 1530 Key Boulevard #306 Arlington, VA 22209 SERIES D PREFERRED STOCK Morgan Stanley & Co. Incorporated............... 102,332 -- 102,332 55.6 102,332 55.6 AIM High Yield Fund.......... 16,851 -- 16,851 9.1 16,851 9.1 11 Greenway Plaza, #1919 Houston, TX 77046 NETnet International S.A..... 14,800 -- 14,800 8.0 14,800 8.0 Siege Social; L-1611 41 Avenue de la Gare R.C. Luxemburg B49615 Kemper High Yield Series..... 11,794 -- 11,794 6.4 11,794 6.4 222 South Riverside Plaza Chicago, IL 60606 SERIES E PREFERRED STOCK 3i Group plc................. 6,760 -- 6,760 70.1 6,760 70.1 91 Waterloo Road GB-SE 8XP London England David Marcus................. 1,659 -- 1,659 17.2 1,659 17.2 4, Chemin de Normandie CH-1206 Geneva Switzerland Soditic SA................... 645 -- 645 6.7 645 6.7 118 Rue du Rhone 1204 Geneva Switzerland
- --------------- * Less than one percent + Director ++ Named executive officer 223 237 (1) Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of World Access common stock beneficially owned by them. (2) Unless otherwise indicated, represents shares which may be acquired by the exercise of stock options and warrants on or before November 30, 2000. (3) Shares of common stock subject to options, warrants and convertible securities are deemed outstanding for the purpose of computing the percentage ownership of the person holding such derivative securities, but are not deemed outstanding for computing the percentage ownership of any other person. (4) Represents 3,676,995 shares of World Access common stock owned by Apax Germany II, L.P., 2,570,778 shares owned by Apax Funds Nominees Ltd. fur "B" Account, 3,849,888 shares owned by Apax Funds Nominees Ltd. fur "D" Account and 1,359,970 shares owned by AP Vermogensverwaltung Gesellschaft burgerlichen Rechts. Apax Partners Co., advisor to these funds, is deemed to be the beneficial owner of these shares. (5) Represents 15,162,015 shares of World Access common stock issuable upon the conversion of 309,002 shares of Series C preferred stock. (6) Includes 1,746,500 shares of World Access common stock held in escrow pursuant to our acquisition of Cherry Communications Incorporated in December 1998. This amount currently represents our best estimate of the shares to ultimately be released to WorldCom Network Services, Inc., a wholly owned subsidiary of WorldCom, Inc., upon the final resolution of all creditor claims against Cherry Communications in U.S. Bankruptcy Court. WorldCom Network Services directs the voting of these shares while they are held in escrow. Also includes 10,000,000 shares to be issued to WorldCom in connection with the consummation of the STAR and WorldxChange mergers. WorldCom has agreed to exchange approximately $115.0 million of trade debt currently due from STAR and WorldxChange for World Access common stock at an exchange ratio of $11.50 per share. (7) Includes 6,086,956 shares of World Access common stock issuable upon the conversion of 70,000 shares of Series A preferred stock owned of record by The 1818 Fund III, a private equity partnership. The general partner of the 1818 Fund III is Brown Brothers Harriman & Co. Mr. Tucker, a partner at Brown Brothers Harriman & Co., is deemed to be the beneficial owner of these shares due to his role as co-manager of The 1818 Fund III. (8) Represents 5,685,111 shares of World Access common stock issuable upon the conversion of 102,332 shares of Series D preferred stock. (9) Represents 15,099,472 shares of WorldxChange common stock converted into World Access common stock at .6583 per share. All WorldxChange shares, other than (i) 1,000,000 shares as to which Mr. Abbott has sole voting power pursuant to a voting trust agreement, (ii) 81,176 shares that are held directly by Mr. Abbott, and (iii) 81,176 shares that are held directly by Mr. Abbott's spouse, Rosalind Abbott, are jointly held by Mr. Abbott and his spouse as community property. (10) Represents 11,684,365 shares of WorldxChange common stock owned by Gold & Appel, Transfer, S.A. converted into World Access common stock at .6583 per share. Under a power of attorney from Gold & Appel, Walter Anderson has sole investment power over these shares and as a result may be deemed to be the beneficial owner of such shares. Mr. Anderson, however, disclaims beneficial ownership of these shares. (11) Includes 940,204 shares of World Access common stock issuable upon the conversion of 19,161 shares of Series C preferred stock. (12) Includes 1,211,982 shares of World Access common stock owned by Geocapital V, L.P., 36,900 shares owned by Geocapital Advisors, L.P., and 7,952 shares owned by Geocapital Investors V, L.P. Mr. Clearman, a general partner of these partnerships, is deemed to be the beneficial owner of these shares. 224 238 (13) Includes 787,500 shares of World Access common stock owned of record by Resurgens Partners, LLC, of which Mr. Phillips has the sole voting and dispositive power. Also includes 100,000 shares held in the name of Mr. Phillips' wife as custodian for two of Mr. Phillips' minor children, with respect to which Mr. Phillips disclaims beneficial ownership. (14) Represents 1,443,887 shares of World Access common stock owned by Gilbert Global Equity Partners, L.P. and 441,364 shares owned by Gilbert Global Equity Partners (Bermuda), L.P. Mr. Prelz, a Managing Director of Gilbert Global Equity Partners, L.P., is deemed to be the beneficial owner of these shares. (15) Includes 1,552,958 shares of World Access common stock owned by Zilkha Capital Partners, L.P. Mr. Rigas, a Managing Partner of Zilkha Capital Partners, L.P., is deemed to be the beneficial owner of these shares. (16) Includes 2,000 shares of World Access common stock owned by Mr. Sanders' wife, with respect to which Mr. Sanders disclaims beneficial ownership. (17) Includes the following shares of World Access common stock acquired through voluntary employee contributions to World Access' 401(k) Plan and contributed to the 401(k) Plan under a matching contribution program offered to all 401(k) Plan participants: Mr. Gergel -- 4,499 shares and Mr. Mies -- 730 shares. 225 239 EXECUTIVE OFFICERS OF WORLD ACCESS INFORMATION REGARDING EXECUTIVE OFFICERS OF WORLD ACCESS The information with respect to World Access' executive officers is set forth in Item 4.5 of Part I of World Access' Annual Report on Form 10-K for the fiscal year ended December 31, 1999. On June 1, 2000 Bryan D. Yokley joined World Access as its Executive Vice President and Chief Financial Officer and Mark A. Gergel was named World Access' Executive Vice President of Corporate Development. Information concerning Mr. Yokley is set forth in the following paragraph. Bryan D. Yokley, 38, has served as World Access' Executive Vice President and Chief Financial Officer since June 2000. He was a partner in the international accounting firm of Ernst & Young LLP, prior to his employment with World Access and had over 15 years of experience with Ernst & Young. Mr. Yokley was a key partner in Ernst & Young's Southeast technology practice based in Atlanta, and while at Ernst & Young, specialized in the telecommunications industry. Mr. Yokley also served as a Practice Fellow at the Financial Accounting Standards Board during 1995 to 1997. WORLD ACCESS' EXECUTIVE COMPENSATION Summary of Compensation. The following table sets forth the cash and non-cash compensation World Access awarded or paid its named executive officers, consisting of its Chief Executive Officer and its four most highly compensated executive officers other than its Chief Executive Officer, during 1997, 1998 and 1999. WORLD ACCESS' SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION SECURITIES ---------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS (#) COMPENSATION ($)(6) - --------------------------- ---- -------- ---------- ------------ ------------------- John D. Phillips(1)................. 1999 $625,000 $1,000,000 1,267,000 $ -- Chairman and Chief Executive 1998 26,000 -- 50,000 -- Officer 1997 -- -- 50,000 -- W. Tod Chmar(2)..................... 1999 300,000 300,000 175,000 -- Executive Vice 1998 9,800 -- -- -- President and Secretary 1997 -- -- -- -- Mark A. Gergel(3)................... 1999 300,000 210,000 90,000 5,000 Executive Vice President and 1998 168,100 -- -- 4,200 Chief Financial Officer 1997 97,500 115,000 216,000 28,000 A. Lindsay Wallace(4)............... 1999 270,000 -- 160,000 36,500 President of World Access 1998 160,400 65,000 70,000 4,200 Equipment Group 1997 -- -- -- -- Michael F. Mies(5).................. 1999 150,000 45,000 50,000 5,000 Senior Vice President 1998 101,000 30,000 -- -- of Finance and Treasurer 1997 -- -- 42,500 21,500
- --------------- (1) Mr. Phillips joined World Access' board in December 1994, was appointed its Chief Executive Officer in December 1998 and its Chairman in May 1999. Under the Directors' Warrant Incentive Plan, Mr. Phillips was granted warrants to purchase 50,000 shares of World Access common stock at $9.21 per share and 50,000 shares of common stock at $25.85 per share in 1997 and 1998, respectively. These warrants were fully vested as of December 31, 1999. (2) Mr. Chmar joined World Access as Executive Vice President and Secretary in December 1998. (3) During 1997, Mr. Gergel was paid a flat sum allowance of $25,000 for the relocation of his household to Atlanta, Georgia. 226 240 (4) Mr. Wallace joined World Access in February 1998 in connection with World Access' acquisition of a majority interest in NACT Telecommunications, Inc. During 1999, Mr. Wallace was paid $31,500 to reimburse him for costs incurred in the relocation of his household to Atlanta, Georgia. (5) During 1997, Mr. Mies was paid a flat sum allowance of $21,500 for the relocation of his household to Atlanta, Georgia. (6) Except as noted above, All Other Compensation represents matching contributions that World Access provides to all eligible employees under its 401(k) benefit plan. WORLD ACCESS OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information regarding the grant of stock options to the named executive officers during 1999.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE ($) AT ASSUMED -------------------------------------- ANNUAL RATES OF NUMBER OF % OF STOCK PRICE SECURITIES TOTAL OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(4) OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------ NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10% - ---- ---------- ------------- --------- ---------- ---------- ----------- John D. Phillips(1).......... 750,000 10.6% $12.75 1/12/04 $8,077,500 $11,842,500 250,000 3.5 12.75 4/16/04 2,767,500 4,127,500 17,000 .2 11.69 6/16/04 209,600 307,000 250,000 3.5 15.88 11/29/04 2,160,000 3,782,500 W. Tod Chmar(2).............. 100,000 1.4 8.19 2/12/04 1,543,000 2,059,000 75,000 1.1 15.88 11/29/04 648,000 1,134,700 Mark A. Gergel(2)............ 40,000 .6 11.69 6/16/04 493,200 722,400 50,000 .7 15.88 11/29/04 432,000 756,500 A. Lindsay Wallace(3)........ 130,000 1.8 12.75 1/12/04 1,400,100 2,052,700 30,000 .4 11.69 6/16/04 369,900 541,800 Michael F. Mies(3)........... 37,500 .5 8.19 2/12/04 578,600 772,100 12,500 .2 11.69 6/16/04 154,100 225,800
- --------------- (1) The 750,000 and 250,000 options granted to Mr. Phillips at $12.75 per share were originally scheduled to vest over a four-year period. In connection with Mr. Phillips' execution of a letter agreement with Armstrong International Telecommunications, Inc. (see "Executive Employment Agreements"), World Access' board elected to vest all these options in full upon the consummation of its merger with FaciliCom in December 1999. The 17,000 options vested immediately upon issuance, and the other 250,000 of options will vest one-third on each of the first three anniversaries from date of grant. (2) The first option grant indicated will vest 25% on each of the first four anniversaries from date of grant and the second grant will vest one-third on each of the first three anniversaries from date of grant. (3) All options granted will vest 25% on each of the first four anniversaries from date of grant. (4) The 5% and 10% appreciation rates are set forth in the Securities and Exchange Commission rules and no representation is made that common stock will appreciate at these assumed rates or at all. 227 241 WORLD ACCESS' AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning the value of director warrants and employee options exercised by the World Access named executive officers during 1999 and the value at December 31, 1999 of unexercised warrants and options held by each such officer. The value of unexercised warrants and options reflects the increase in market value of World Access' common stock from the date of grant through December 31, 1999.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY(2) NUMBER OF WARRANTS AND OPTIONS WARRANTS AND OPTIONS SHARES AT 12-31-99 AT 12-31-99 ACQUIRED ON VALUE ---------------------------- ---------------------------- NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------ ----------- ------------- ----------- ------------- John D. Phillips -- $ -- 1,117,000 250,000 $7,130,500 $ 842,500 W. Tod Chmar -- -- -- 175,000 -- 1,358,700 Mark A. Gergel 10,125 107,500 237,500 156,000 1,038,400 470,900 A. Lindsay Wallace -- -- 122,380 212,500 712,700 1,071,800 Michael F. Mies -- -- 17,500 71,250 37,800 582,700
- --------------- (1) The "value realized" represents the difference between the exercise price of the shares and the market price of the shares on the date the warrants and options were exercised. The value realized was determined without considering any taxes which may have been owed. (2) "In-the-Money" warrants and options have an exercise price less than $19.25 per share, the closing price of the World Access common stock as of December 31, 1999. WORLD ACCESS' EXECUTIVE EMPLOYMENT AGREEMENTS On April 16, 1999, World Access entered into new employment agreements with each of John D. Phillips, its Chairman and Chief Executive Officer, W. Tod Chmar, its Executive Vice President and Secretary, and Mark A. Gergel, its Executive Vice President. On June 1, 2000, World Access entered into an employment agreement with Bryan D. Yokley, its Executive Vice President and Chief Financial Officer. Mr. Phillips' employment agreement provides for a base salary of $625,000 per year. The agreement further provides that Mr. Phillips may be awarded an annual bonus in the discretion of the World Access board pursuant to a bonus or incentive plan or otherwise. The initial term of the agreement is three years, with an automatic one-year extension on each anniversary of the agreement's effective date unless either party to the agreement gives notice of termination. If, during the term of the agreement, Mr. Phillips' employment with World Access is terminated (i) by World Access without cause, as defined below, or (ii) by Mr. Phillips for good reason, as defined below, Mr. Phillips will be entitled to an amount in cash equal to two times his base annual salary, which will be paid in bi-weekly installments over a period of 24 months, and to his then current life insurance, disability, medical, dental and hospitalization benefits for a period of 24 months or such longer period as may be provided by the terms of the appropriate program, all of Mr. Phillips' stock options, warrants and stock appreciation rights granted on or prior to the date of his employment agreement shall become fully vested and immediately exercisable until the first anniversary of Mr. Phillips' termination date, and all performance units granted to Mr. Phillips at any time prior to his termination shall become fully vested. Mr. Chmar's employment agreement provides for a base salary of $300,000 per year. The agreement further provides that Mr. Chmar may be awarded an annual bonus in the discretion of the World Access board pursuant to a bonus or incentive plan or otherwise. The initial term of the agreement is three years, with an automatic one-year extension on each anniversary of the agreement's effective date unless either party to the agreement gives notice of termination. If, during the term of the agreement, Mr. Chmar's employment with World Access is terminated (i) by World Access without cause or (ii) by Mr. Chmar for good reason, Mr. Chmar will be entitled to an amount in cash equal to his base annual salary, which will be paid in bi-weekly installments over a period of 12 months, and to his then current life insurance, disability, medical, dental and hospitalization benefits for a period of 12 months or such longer period as 228 242 may be provided by the terms of the appropriate program, all of Mr. Chmar's stock options, warrants and stock appreciation rights granted on or prior to the date of his employment agreement shall become fully vested and immediately exercisable until the first anniversary of Mr. Chmar's termination date, and all performance units granted to Mr. Chmar at any time prior to his termination shall become fully vested. Mr. Gergel's employment agreement provides for a base salary of $300,000 per year. The agreement further provides that Mr. Gergel may be awarded an annual bonus in the discretion of our board pursuant to a bonus or incentive plan or otherwise. The initial term of the agreement is three years, with an automatic one-year extension on each anniversary of the agreement's effective date unless either party to the agreement gives notice of termination. If, during the term of the agreement, Mr. Gergel's employment with World Access is terminated (i) by World Access without cause or (ii) by Mr. Gergel for good reason following a change of control, Mr. Gergel will be entitled to an amount in cash equal to his base annual salary, which will be paid in bi-weekly installments over a period of 12 months, and to his then current life insurance, disability, medical, dental and hospitalization benefits for a period of 12 months or such longer period as may be provided by the terms of the appropriate program, all of Mr. Gergel's stock options, warrants and stock appreciation rights granted on or prior to the date of his employment agreement shall become fully vested and immediately exercisable until the first anniversary of Mr. Gergel's termination date, and all performance units granted to Mr. Gergel at any time prior to his termination shall become fully vested. Notwithstanding these provisions, if Mr. Gergel terminates his employment for any reason, in addition to receiving the same treatment with respect to his options, warrants, rights and performance units, he shall be entitled to an amount of cash equal to one-half of his base annual salary and the benefits described above for a period of six months. Mr. Yokley's employment agreement provides for a base salary of $300,000 per year. The agreement further provides that Mr. Yokley will be paid a signing bonus equal to the costs he incurred to leave his previous job and may be awarded an annual bonus in the discretion of the World Access board pursuant to a bonus or incentive plan or otherwise. The initial term of the agreement is three years, with an automatic one-year extension on each anniversary of the agreement's effective date unless either party to the agreement gives notice of termination. This notwithstanding, the term of Mr. Yokley's agreement cannot expire until 24 months after a change in control of World Access as defined in the agreement. If, during the term of the agreement, Mr. Yokley's employment with World Access is terminated (i) by World Access without cause or (ii) by Mr. Yokley for good reason, Mr. Yokley will be entitled to an amount in cash equal to two times his base annual salary, which will be paid in bi-weekly installments over a period of 12 months, and to his then current life insurance, disability, medical, dental and hospitalization benefits for a period of 12 months or such longer period as may be provided by the terms of the appropriate program, all of Mr. Yokley's stock options, warrants and stock appreciation rights granted on or prior to the date of his employment agreement which have vested or which would vest in the two years following Mr. Yokley's termination date shall become fully vested and immediately exercisable until the first anniversary of Mr. Yokley's termination date, and all performance units granted to Mr. Yokley at any time prior to his termination shall become fully vested. For the purposes of the employment agreements with each of Messrs. Phillips, Chmar, Gergel and Yokley the following definitions apply: A termination of employment is for cause if the employee has been convicted of a felony or a felony prosecution has been brought against the employee or if the termination is evidenced by a resolution adopted in good faith by two-thirds (2/3) of the board that the employee (i) intentionally and continually failed substantially to perform his reasonably assigned duties, other than a failure resulting from the employee's incapacity due to physical or mental illness or from the employee's assignment of duties that would constitute good reason, which failure continued for a period of at least 30 days after a written notice of demand for substantial performance has been delivered to the employee specifying the manner in which the employee has failed substantially to perform or (ii) intentionally engaged in illegal conduct or gross misconduct which results in material economic harm to World Access. 229 243 Good reason means a good faith determination by the employee that any one or more of the following events has occurred, without the employee's express written consent: - the assignment to the employee of any duties inconsistent with the employee's position, authority, duties or responsibilities as in effect immediately prior to the date of his employment agreement, or any other action by World Access that results in a material diminution in such position, authority, duties or responsibilities; - a reduction by World Access in the employee's base salary, or a change in the eligibility requirements or performance criteria under any bonus, incentive or compensation plan, program or arrangement under which the employee is covered immediately prior to his termination date which adversely affects the employee; - any failure to pay the employee any compensation or benefits to which he is entitled within five days of the date due; - World Access' requiring the employee to be based anywhere other than within 50 miles of the employee's job location as of the date of his employment agreement, except for reasonably required travel on World Access' business which is not greater than such travel requirements prior to the date of his employment; - the taking of any action by World Access that would materially adversely affect the physical conditions existing in or under which the employee performs his employment duties; - the insolvency or the filing of a petition for bankruptcy by World Access; - any purported termination of the employee's employment for cause by World Access which does not comply with his terms of his employment agreement; or - any breach by World Access of any provision of an employment agreement. A change in control shall have occurred if: - a majority of the directors of World Access shall be persons other than persons: - for whose election proxies shall have been solicited by the board; or - who are then serving as directors appointed by the board to fill vacancies on the board caused by death or resignation, but not by removal, or to fill newly-created directorships; - a majority of the outstanding voting power of World Access shall have been acquired or beneficially owned by any person (other than World Access, a subsidiary of World Access or the employee) or any two or more persons acting as a partnership, limited partnership, syndicate, or other group acting in concert for the purpose of acquiring, holding or disposing of voting stock of World Access, which group does not include the employee; or - there shall have occurred: - a merger or consolidation of World Access with or into another corporation other than (1) a merger or consolidation with a subsidiary of World Access or (2) a merger or consolidation in which (a) the holders of voting stock of World Access immediately prior to the merger as a class continue to hold immediately after the merger at least a majority of all outstanding voting power of the surviving or resulting corporation or its parent and (b) all holders of each outstanding class or series of voting stock of World Access immediately prior to the merger or consolidation have the right to receive substantially the same cash, securities or other property in exchange for their voting stock of World Access as all other holders of the class or series; - a statutory exchange of shares of one or more classes or series of outstanding voting stock of World Access for cash, securities or other property; 230 244 - the sale or other disposition of all or substantially all of the assets of World Access, in one transaction or a series or transactions; or - the liquidation or dissolution of World Access; unless more than 25% of the voting stock, or the voting equity interest, of the surviving corporation or the corporation or other entity acquiring all or substantially all of the assets of World Access in the case of a merger, consolidation or disposition of assets or of World Access or its resulting parent corporation in the case of a statutory share exchange is beneficially owned by the employee or a group that includes the employee. John D. Phillips and Armstrong International Telecommunications, Inc. have entered into a letter agreement, pursuant to which Mr. Phillips has agreed not to sell or transfer, directly or indirectly, any shares of World Access common stock held by him without the prior written consent of Armstrong International Telecommunications for so long as Armstrong International Telecommunications or any of its affiliates remains a stockholder of World Access. The provisions of the letter agreement terminate upon: - Mr. Phillips' death or disability; - any decision to remove, or to not reelect, Mr. Phillips as the Chief Executive Officer of World Access in which at least 50% of the directors elected by the holders of World Access Series C preferred stock vote in favor of the removal or fail to vote in favor of the reelection; - the fifth anniversary of the closing of our merger with FaciliCom in the event that Mr. Phillips is no longer Chief Executive Officer of World Access for any reason; and - upon a change of control of World Access. On November 29, 1999, we entered into an agreement with A. Lindsay Wallace, President of our Equipment Group, that provides incentive compensation for Mr. Wallace in the event of the sale of specified divisions of our Equipment Group. This agreement provides that World Access will pay to Mr. Wallace: - a cash payment equal to 0.75% of the gross consideration received by World Access upon the sale of the NACT Switching Division; - a cash payment equal to 0.75% of the gross consideration received by World Access upon the sale of the Wireless Local Loop Division; and - 0.5% of the gross consideration received by World Access upon the sale of the Telco Systems Division. This agreement also provides that all stock options granted to Mr. Wallace under our 1991 Stock Option Plan and 1998 Incentive Equity Plan will become fully vested upon the sale of the NACT Switching Division and the Telco Systems Division, and those options may be exercised by Mr. Wallace at any time until the one year anniversary of the termination of Mr. Wallace's employment with World Access. Additionally, this agreement states that if Mr. Wallace's employment with World Access is terminated as a direct result of the sale of one of these divisions, World Access will continue to pay Mr. Wallace's current base salary through the second anniversary of his termination date. World Access' obligations under this agreement are conditioned upon Mr. Wallace remaining the President of the Equipment Group through the closing of the sales of these divisions, his assistance in facilitating these sales and his agreement to serve as a full-time employee or consultant with the buyer of these divisions for a period of six months following the closing date. This agreement may be revoked at any time by the Chief Executive Officer of World Access, in his sole discretion. WORLD ACCESS' COMPENSATION COMMITTEE REPORT This report sets forth information on the compensation and benefits provided to World Access' Chief Executive Officer and other executive officers of World Access during 1999 and has been prepared by the Compensation Committee of World Access' board of directors. Compensation philosophy. The Compensation Committee is currently comprised of four non-employee directors. Among other things, the Compensation Committee reviews and approves annual 231 245 executive officer compensation. In general, the compensation policies adopted by the Compensation Committee are designed to (i) attract and retain executives capable of leading World Access to meet its business objectives and (ii) motivate World Access executives to enhance long-term stockholder value. The annual compensation of Mr. Phillips, our Chairman and Chief Executive Officer, and our other executive officers consists of a combination of base salary, incentive bonuses and stock options. The Compensation Committee sets base salaries for executive officers based principally on an assessment of World Access' short and long-term goals and the specific responsibilities of each officer. Information on individual performance is provided to the Compensation Committee by our Chief Executive Officer. In addition to individual performance against goals and responsibilities, the Compensation Committee is aware of executive compensation practices at comparable companies, for example, companies which are generally of the same size in related industries. The Compensation Committee uses this information only as a general reference, however, and not to set specific salary amounts. Incentive bonuses. Annually, the Compensation Committee establishes the performance goals and range of bonuses under our Short-Term Incentive Plan for Senior Executives which was approved by our stockholders in June 1999. The performance goals for 1999 were tied to World Access achieving predefined levels of: - earnings per share; - revenue; - earnings before interest, taxes, depreciation and amortization; and - common stock price appreciation. Each performance goal operates independently, so achieving or failing to achieve results from one measurement does not reflect the eligible bonus amounts awarded for others. Stock options. The stock option program is a long-term incentive plan for executive officers and other key employees. The objectives of the program are to align executive and stockholder long-term interests by creating a strong and direct relationship between executive compensation and stockholder returns. The Compensation Committee strongly believes that by providing those individuals who have substantial responsibility for the management and growth of World Access and the maximizing of stockholder returns with an opportunity to increase their ownership of common stock, the best interests of stockholders and executives will be more closely aligned. World Access stock options typically vest over three to four years, which increases the long-term value of these awards. The Compensation Committee's determination of the number of options to award to an individual executive officer is made in a manner similar to that described above with respect to the setting of salaries. In addition, in determining the number of options to be granted to an individual, the Compensation Committee takes into account the number of options already granted to that individual and the value of those options. Discussion of 1999 Chief Executive Officer compensation. Based on our actual performance against Short-Term Incentive Plan goals in 1999, as well as Mr. Phillips' ability to complete several key strategic initiatives during the year, the Compensation Committee awarded Mr. Phillips an incentive bonus of $1.0 million. Key strategic initiatives completed by Mr. Phillips included: - $50.0 million investment by The 1818 Fund III; - acquisition of Comm/Net; - FaciliCom merger; - $75.0 million private placement by institutional investors; 232 246 - pending acquisition of Long Distance International; and - pending monetization of the Company's equipment businesses. The Compensation Committee also considered Mr. Phillips' continued progress in establishing a broad, experienced management team, the efficient integration of acquired businesses and the significant increase in the Company's market capitalization during 1999. Submitted by the Compensation Committee Stephen J. Clearman John P. Imlay, Jr. Carl E. Sanders Dru A. Sedwick WORLD ACCESS' COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS World Access' Compensation Committee consists of the four persons named as signatories to the Compensation Committee Report above. There are no Compensation Committee interlocks. 233 247 WORLD ACCESS STOCK PRICE PERFORMANCE GRAPH The following graph compares the cumulative total stockholder return on the World Access common stock with the cumulative total return, including reinvested dividends, of the Nasdaq National Market -- United States owned companies and Nasdaq Telecommunications Stocks for the five years ended December 31, 1999. The Nasdaq National Market total returns were prepared by the Center for Research in Security Prices at the University of Chicago.
WORLD ACCESS NASDAQ (U.S.) NASDAQ (TELCOM) ------------ ------------- --------------- 1994 100.00 100.00 100.00 1995 300.00 141.33 130.91 1996 320.00 173.89 133.86 1997 955.00 213.07 195.75 1998 855.00 300.25 322.30 1999 770.00 542.43 561.27
- --------------- Assumes that the value of the investment in the World Access common stock and each index was $100 on December 31, 1994, and that all dividends were reinvested. (1) World Access common stock (2) Total Return Index for The Nasdaq Stock Market (U.S. Companies) (3) Total Return Index for Nasdaq Telecommunications Stocks Pursuant to Securities and Exchange Commission regulations, this performance graph is not "soliciting material," is not deemed filed with the Commission and is not to be incorporated by reference in any of World Access' filings under the Securities Act or the Securities Exchange Act. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires World Access' directors and executive officers, and persons who own beneficially more than ten percent of a registered class of World Access' equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of World Access' securities. Directors, executive officers and greater than ten-percent stockholders are required by Commission regulations to furnish World Access with copies of all Section 16(a) reports they file. To the best of World Access' knowledge, based solely on review of the copies of such reports furnished to it and representations that no other reports were required, all Section 16(a) filing requirements applicable to World Access' directors, executive officers and greater than ten-percent beneficial owners were complied with during the 1999 fiscal year, except for Mr. Phillips, whose Annual 234 248 Statement of Changes in Beneficial Ownership on Form 5 was not filed timely. Mr. Phillips was required to file a Form 5 to reflect shares of World Access common stock that he gifted to his children in December 1999. RELATIONSHIPS AND RELATED TRANSACTIONS WITH WORLD ACCESS' DIRECTORS, OFFICERS AND STOCKHOLDERS During 1999, World Access paid aggregate fees of approximately $215,900 to JDP Aircraft II, Inc. for charter flight services provided to World Access. John D. Phillips, World Access' Chairman and Chief Executive Officer, is the sole shareholder and an officer of JDP Aircraft II. In April 1999, World Access issued 50,000 shares of Series C preferred stock to The 1818 Fund III for consideration of $50.0 million. Lawrence C. Tucker, one of World Access' directors, is a co-manager of The 1818 Fund III. World Access paid Brown Brothers Harriman & Co. $750,000 for advisory services in connection with a $75.0 million private placement of World Access common stock in December 1999 and $830,000 for advisory services in connection with an $83.1 million private placement of World Access common stock in February 2000. Additionally, World Access paid Brown Brothers Harriman & Co. approximately $1.6 million for advisory services in connection with the sale of Telco Systems, Inc. in April 2000. Mr. Tucker is a General Partner of Brown Brothers Harriman. FaciliCom, with which World Access merged in December 1999, has historically relied on its majority stockholder, Armstrong Holdings, Inc. for the performance of services, including customer billing. In connection with the FaciliCom merger, an affiliate of Armstrong Holdings received 309,002 shares of World Access' Series C preferred stock, which represented approximately 20.0% of World Access' voting common stock at December 31, 1999. In December 1999, World Access entered into a two-year services agreement with Armstrong Holdings. The terms of the agreement includes professional services billed at hourly rates and data center services based on usage and disk storage space. World Access believes that the terms of the agreements are competitive with similar services offered in the industry. In December 1999, World Access sold 4,713,128 shares of restricted common stock for $75.0 million, or $15.91 per share, in a private transaction with a group of institutional and sophisticated investors. Entities affiliated with Geocapital Partners, entities affiliated with Gilbert Global Equity Partners, and Zilkha Capital Partners were the purchasers of $20.0 million, $30.0 million, and $13.0 million of World Access common stock, respectively, in this transaction. Stephen J. Clearman, a general partner of Geocapital Partners, Massimo Prelz Oltramonti, a Managing Director of Gilbert Global Equity Partners, and John P. Rigas, a Managing Partner of Zilkha Capital Partners, are members of the World Access board of directors. ACCOUNTANTS The World Access board has appointed Ernst & Young LLP, independent public accountants, as independent accountants for World Access for the fiscal year ending December 31, 2000. Representatives of Ernst & Young LLP are expected to be present at the World Access special meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions from stockholders. On December 22, 1998, World Access engaged Ernst & Young LLP as the certifying accountants and dismissed PricewaterhouseCoopers LLP. The World Access board approved this change in accountants. World Access had no disagreements with its former accountant on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreement(s), if not resolved to the satisfaction of the former accountant, would have caused them to make reference to the subject matter of the disagreement(s) in connection with their reports during each of the two years in the period ended December 31, 1997 and from January 1, 1998 to December 22, 1998 and such accountants' report on the financial statements for each of the past two years did not contain an adverse opinion or 235 249 disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedules included in our Annual Report on Form 10-K/A, Amendment No. 2, for the years ended December 31, 1999 and 1998, as set forth in their report, which is incorporated by reference in this joint proxy statement/prospectus and elsewhere in the registration statement. Our consolidated financial statements and schedules are incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The financial statements of World Access for the year ended December 31, 1997 incorporated in this joint proxy statement/prospectus by reference to the Annual Report on Form 10-K/A, Amendment No. 2, of World Access for the year ended December 31, 1999 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, dated March 5, 1998, except for the discontinued operations described in Note C, which are as of March 14, 2000, given on the authority of that firm as experts in auditing and accounting. The consolidated financial statements of FaciliCom International, Inc. and subsidiaries incorporated in this World Access joint proxy statement/prospectus by reference to the World Access Current Report on Form 8-K dated December 22, 1999, as amended, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is also incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Ernst & Young LLP, independent certified public accountants, have audited the consolidated financial statements of Long Distance International, Inc. at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, as set forth in their report, which is incorporated by reference in this joint proxy statement/prospectus and elsewhere in the registration statement. The Long Distance International, Inc. financial statements are incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The consolidated financial statements of STAR incorporated in this joint proxy statement/prospectus by reference to STAR's Form 10-K/A, Amendment No. 1 for the year ended December 31, 1999, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report dated April 14, 2000 with respect thereto, which is also incorporated by reference into this joint proxy statement/prospectus, and are so incorporated in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. Ernst & Young LLP, independent auditors, have audited the consolidated financial statements of WorldxChange at September 30, 1999 and 1998, and for each of the three years in the period ended September 30, 1999, as set forth in their report. The WorldxChange financial statements are included in the joint proxy statement/prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. BDO Deutsche Warentreuhand, independent auditors, have audited the consolidated financial statements of TelDaFax AG at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, as set forth in their report. The TelDaFax financial statements are included in the joint proxy statement/prospectus and elsewhere in the registration statement in reliance on BDO Deutsche Warentreuhand's report, given on their authority as experts in accounting and auditing. WORLD ACCESS STOCKHOLDER PROPOSALS Proposals of World Access stockholders submitted pursuant to Rule 14a-8 of the Exchange Act for inclusion in the proxy statement for the 2001 annual meeting of stockholders of World Access must be 236 250 received by World Access at its principal executive offices at 945 E. Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326 a reasonable time before World Access begins to print and mail the proxy materials for its 2001 annual meeting of stockholders. Under the World Access amended certificate of incorporation, stockholders desiring to nominate persons for election as directors at an annual meeting must notify the Secretary of World Access in writing not less than 120 calendar days in advance of the date which is one year later than the date of World Access proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that if no annual meeting of stockholders was held in the previous year or if the date of the forthcoming annual meeting of stockholders has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement or if the forthcoming meeting is not an annual meeting of stockholders, then to be timely the stockholders' notice must be so received not later than the close of business on the tenth day following the earlier of: - the day on which notice of the date of the forthcoming meeting was mailed or given to stockholders by or on behalf of World Access or - the day on which public disclosure of the date of the forthcoming meeting was made by or on behalf of World Access. Any such stockholders' notices must contain the specific information set forth in the World Access amended certificate of incorporation. Stockholders will be furnished a copy of the World Access amended certificate of incorporation without charge upon written request to the Secretary of World Access. STAR STOCKHOLDER PROPOSALS Proposals of STAR stockholders submitted pursuant to Rule 14a-8 of the Exchange Act for inclusion in the proxy statement for the 2000 annual meeting of stockholders of STAR must be received by STAR at its principal executive offices at 223 East De La Guerra Street, Santa Barbara, California 93101 a reasonable time before STAR begins to print and mail the proxy materials for its 2000 annual meeting of stockholders. OTHER MATTERS THAT MAY COME BEFORE THE WORLD ACCESS SPECIAL MEETING The World Access board does not know of any other matters which may come before the World Access special meeting. If any other matters are properly presented at the World Access special meeting, it is the intention of the persons named in the accompanying proxy to vote, or otherwise act, in accordance with their best judgement on the matters. OTHER MATTERS THAT MAY COME BEFORE THE STAR SPECIAL MEETING The STAR board does not know of any other matters which may come before the STAR special meeting. If any other matters are properly presented at the STAR special meeting, it is the intention of the persons named in the accompanying proxy to vote, or otherwise act, in accordance with their best judgement on the matters. LEGAL MATTERS The legality of the World Access common stock offered by this joint proxy statement/prospectus, including the material federal income tax consequences of the mergers, will be passed upon for World Access by Long Aldridge & Norman LLP, Atlanta, Georgia. LAN Equities Partnership, L.P., an affiliate of Long Aldridge & Norman LLP, is the owner of 106,953 shares of World Access common stock issued to Long Aldridge as payment for legal fees incurred from time to time. Riordan & McKinzie, a Professional Corporation, Los Angeles, California, will opine on matters with respect to the STAR merger for STAR, including STAR's corporate existence and good standing and other matters as may be reasonably requested by World Access. With respect to certain matters concerning Delaware law, STAR will rely on Richards, Layton & Finger, a Professional Corporation, Wilmington, Delaware. 237 251 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets as of June 30, 2000 (Unaudited), September 30, 1999 and 1998............................... F-3 Consolidated Statements of Operations for the nine months ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and each of the three years in the period ended September 30, 1999...................................................... F-4 Consolidated Statements of Shareholders' Deficit and Comprehensive Income/Loss for the nine months ended June 30, 2000 (Unaudited) and each of the three years in the period ended September 30, 1999........................... F-5 Consolidated Statements of Cash Flows for the nine months ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and each of the three years in the period ended September 30, 1999...................................................... F-6 Notes to Consolidated Financial Statements.................. F-7 TELDAFAX AG Independent Auditors' Report................................ F-28 Consolidated Balance Sheets as of June 30, 2000 (Unaudited), December 31, 1999 and 1998................................ F-29 Consolidated Statements of Operations for the six months ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and each of the three years in the period ended December 31, 1999...................................................... F-30 Consolidated Statements of Shareholders' Deficit and Comprehensive of Changes in Combined Equity Shareholder's Funds for the six months ended June 30, 2000 (Unaudited) and each of the three years in the period ended December 31, 1999.................................................. F-31 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 (Unaudited) and 1999 (Unaudited) and each of the three years in the period ended December 31, 1999...................................................... F-32 Notes to the Consolidated Financial Statements.............. F-33
F-1 252 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Communications Telesystems International d.b.a. WorldxChange Communications We have audited the consolidated balance sheets of Communications Telesystems International d.b.a. WorldxChange Communications as of September 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' deficit, and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Communications Telesystems International d.b.a. WorldxChange Communications at September 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP San Diego, California December 10, 1999, except for the fourth paragraph of Note 5 and the sixth paragraph of Note 13 as to which the date is May 22, 2000 F-2 253 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, SEPTEMBER 30, ----------- -------------------- 2000 1999 1998 ----------- --------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 6,913 $ 38,030 $ 20,917 Accounts receivable, net of allowance of $14,173 at June 30, 2000 (unaudited) and $9,590 and $10,690 at September 30, 1999 and 1998, respectively......................... 103,172 54,991 38,966 Prepaid expenses and other current assets................. 32,566 8,224 3,825 --------- --------- -------- Total current assets............................... 142,651 101,245 63,708 Equipment and leasehold improvements, net................... 193,494 114,765 49,697 Intangible assets........................................... 90,162 12,194 -- Other assets................................................ 4,105 6,798 6,724 --------- --------- -------- Total assets....................................... $ 430,412 $ 235,002 $120,129 ========= ========= ======== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accrued network costs..................................... $ 174,830 $ 83,993 $ 49,796 Accounts payable.......................................... 23,682 13,770 14,144 Other accrued liabilities................................. 44,758 16,333 15,377 Payable to related parties................................ 2,396 -- 468 Deferred revenue.......................................... 2,493 3,941 686 Current portion of long-term debt and subordinated debentures.............................................. 187,020 9,799 13,421 Current portion of capital lease obligations.............. 14,805 10,582 6,851 --------- --------- -------- Total current liabilities.......................... 449,984 138,418 100,743 Long-term debt.............................................. 38,447 100,324 75,287 Subordinated debentures..................................... -- -- 1,182 Capital lease obligations................................... 32,382 29,395 22,844 Other long-term liabilities................................. 5,547 1,918 2,397 --------- --------- -------- Total liabilities.................................. 526,360 270,055 202,453 Minority interest........................................... -- -- 7,269 Shareholders' deficit: Preferred Stock, no par value; Authorized shares -- 10,000,000: Series A Cumulative Preferred Stock; Issued and outstanding 30,000 at June 30, 2000 (unaudited) and September 30, 1999, and 23 at September 30, 1998; liquidation preference of $1,000 per share............ 30,000 30,000 7 Series B Cumulative Preferred Stock; Issued and outstanding -- zero at June 30, 2000 (unaudited) and zero at September 30, 1999 and 1998; liquidation preference of $1,000 per share........................ -- -- -- Common Stock, no par value; Authorized shares -- 100,000,000, Issued and outstanding 42,613,954 at June 30, 2000 (unaudited), 36,965,911 at September 30, 1999 and 28,576,552 at September 30, 1998........... 148,056 99,047 10,297 Notes receivable from shareholders........................ (1,937) (1,474) -- Accumulated other comprehensive loss...................... (12,900) (2,405) (3,529) Accumulated deficit....................................... (259,167) (160,221) (96,368) --------- --------- -------- Total shareholders' deficit........................ (95,948) (35,053) (89,593) --------- --------- -------- Total liabilities and shareholders' deficit........ $ 430,412 $ 235,002 $120,129 ========= ========= ========
See accompanying notes. F-3 254 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED JUNE 30, YEARS ENDED SEPTEMBER 30, ------------------- ------------------------------ 2000 1999 1999 1998 1997 -------- -------- -------- -------- -------- (UNAUDITED) Revenues.................................... $423,913 $304,324 $421,580 $398,867 $331,660 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)...................... 337,814 238,599 328,334 287,312 235,027 Selling, general and administrative....... 124,014 88,431 124,112 114,897 113,459 Depreciation and amortization............. 35,131 12,394 17,705 12,332 8,677 -------- -------- -------- -------- -------- Total operating expenses.......... 496,959 339,424 470,151 414,541 357,163 Operating loss.............................. (73,046) (35,100) (48,571) (15,674) (25,503) Interest expense............................ 22,694 12,448 16,883 11,947 8,682 Other expense, net.......................... 822 222 648 1,378 3,366 -------- -------- -------- -------- -------- Loss before minority interest............... (96,562) (47,770) (66,102) (28,999) (37,551) Minority interest........................... -- (1,782) 2,251 1,546 473 -------- -------- -------- -------- -------- Net loss.................................... $(96,562) $(45,988) $(63,851) $(27,453) $(37,078) Preferred stock dividends................... 2,384 -- 2 7 13 -------- -------- -------- -------- -------- Net loss applicable to common stockholders........................... $(98,946) $(45,988) $(63,853) $(27,460) $(37,091) ======== ======== ======== ======== ========
See accompanying notes. F-4 255 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME/LOSS (DOLLARS IN THOUSANDS)
SERIES A SERIES B CUMULATIVE CUMULATIVE PREFERRED STOCK PREFERRED STOCK COMMON STOCK NOTES RECEIVABLE ------------------ ------------------ --------------------- FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS ------- -------- ------- -------- ---------- -------- ---------------- BALANCE AT SEPTEMBER 30, 1996...... 82 $ 36 -- -- 27,572,000 $ 196 $ -- Repurchase of Series A Cumulative Preferred Stock................... (59) (29) -- -- -- -- -- Dividends on Series A Cumulative Preferred Stock................... -- -- -- -- -- -- -- Exercise of options/warrants....... -- -- -- -- 162,000 62 -- Comprehensive loss: Net loss........................... -- -- -- -- -- -- -- Foreign currency translation adjustment........................ -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- -------- ------- BALANCE AT SEPTEMBER 30, 1997...... 23 7 27,734,000 258 -- Dividends on Series A Preferred Stock.................... -- -- -- -- -- -- -- Issuance of Common Stock........... -- -- -- -- 788,127 10,000 -- Exercise of options/warrants....... -- -- -- -- 54,425 39 -- Comprehensive loss: Net loss........................... -- -- -- -- -- -- -- Foreign currency translation adjustment........................ -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- -------- ------- BALANCE AT SEPTEMBER 30, 1998...... 23 7 -- -- 28,576,552 10,297 -- Repurchase of Series A Cumulative Preferred Stock......... (23) (7) -- -- -- -- -- Dividends on Series A Preferred Stock.................... -- -- -- -- -- -- -- Issuance of Series A Cumulative Preferred Stock......... 30,000 30,000 -- -- -- -- -- Issuance of Common Stock........... -- -- -- -- 8,153,120 87,102 -- Exercise of options/warrants....... -- -- -- -- 236,239 1,648 -- Notes receivable for sales of common stock...................... -- -- -- -- -- -- (1,474) Comprehensive loss: Net loss........................... -- -- -- -- -- -- -- Foreign currency translation adjustment........................ -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- -------- ------- BALANCE AT SEPTEMBER 30, 1999...... 30,000 $30,000 -- -- 36,965,911 $99,047 $(1,474) ------ ------- ------- ------- ---------- -------- ------- Dividends on Series A Cumulative Preferred Stock (unaudited)....... -- -- -- -- -- -- -- Issuance of Series B Cumulative Preferred Stock net of issuance cost of $1,342 (unaudited)..................... -- -- 50,000 48,658 -- -- -- Conversion of Series B Cumulative Preferred Stock into Common Stock (unaudited)....................... -- -- (50,000) (48,658) 5,555,550 48,658 -- Exercise of options/warrants (unaudited)....................... -- -- -- -- 92,493 351 -- Notes receivable for sales of common stock (unaudited).......... -- -- -- -- -- -- (463) Comprehensive loss: Net loss (unaudited)............... -- -- -- -- -- -- -- Foreign currency translation adjustment (unaudited)............ -- -- -- -- -- -- -- Total comprehensive loss (unaudited)................. ------ ------- ------- ------- ---------- -------- ------- BALANCE AT JUNE 30, 2000 (UNAUDITED)....................... 30,000 $30,000 -- $ -- 42,613,954 $148,056 $(1,937) ====== ======= ======= ======= ========== ======== ======= ACCUMULATED OTHER COMPREHENSIVE TOTAL ACCUMULATED INCOME SHAREHOLDERS' DEFICIT (LOSS) DEFICIT ----------- ------------- ------------- BALANCE AT SEPTEMBER 30, 1996...... $ (31,817) $ (434) $ (32,019) Repurchase of Series A Cumulative Preferred Stock................... -- -- (29) Dividends on Series A Cumulative Preferred Stock................... (13) -- (13) Exercise of options/warrants....... -- -- 62 Comprehensive loss: Net loss........................... (37,078) -- (37,078) Foreign currency translation adjustment........................ -- 197 197 --------- Total comprehensive loss..... (36,881) --------- -------- --------- BALANCE AT SEPTEMBER 30, 1997...... (68,908) (237) (68,880) Dividends on Series A Preferred Stock.................... (7) -- (7) Issuance of Common Stock........... -- -- 10,000 Exercise of options/warrants....... -- -- 39 Comprehensive loss: Net loss........................... (27,453) -- (27,453) Foreign currency translation adjustment........................ -- (3,292) (3,292) --------- Total comprehensive loss..... (30,745) --------- -------- --------- BALANCE AT SEPTEMBER 30, 1998...... (96,368) (3,529) (89,593) Repurchase of Series A Cumulative Preferred Stock......... -- -- (7) Dividends on Series A Preferred Stock.................... (2) -- (2) Issuance of Series A Cumulative Preferred Stock......... -- -- 30,000 Issuance of Common Stock........... -- -- 87,102 Exercise of options/warrants....... -- -- 1,648 Notes receivable for sales of common stock...................... -- -- (1,474) Comprehensive loss: Net loss........................... (63,851) -- (63,851) Foreign currency translation adjustment........................ -- 1,124 1,124 --------- Total comprehensive loss..... (62,727) --------- -------- --------- BALANCE AT SEPTEMBER 30, 1999...... $(160,221) $ (2,405) $ (35,053) --------- -------- --------- Dividends on Series A Cumulative Preferred Stock (unaudited)....... (2,384) -- (2,384) Issuance of Series B Cumulative Preferred Stock net of issuance cost of $1,342 (unaudited)..................... -- -- 48,658 Conversion of Series B Cumulative Preferred Stock into Common Stock (unaudited)....................... -- -- -- Exercise of options/warrants (unaudited)....................... -- -- 351 Notes receivable for sales of common stock (unaudited).......... -- -- (463) Comprehensive loss: Net loss (unaudited)............... (96,562) -- (96,562) Foreign currency translation adjustment (unaudited)............ -- (10,495) (10,495) --------- Total comprehensive loss (unaudited)................. (107,057) --------- -------- --------- BALANCE AT JUNE 30, 2000 (UNAUDITED)....................... $(259,167) $(12,900) $ (95,948) ========= ======== =========
See accompanying notes. F-5 256 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED JUNE 30, YEARS ENDED SEPTEMBER 30, --------------------- ---------------------------------- 2000 1999 1999 1998 1997 --------- --------- ---------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss........................................ $ (96,562) $ (45,988) $ (63,851) $ (27,453) $ (37,078) Adjustments to reconcile net loss to net cash used in operating activities: Provision for bad debt........................ 15,148 11,005 15,202 15,170 22,348 Depreciation and amortization................. 35,131 12,394 17,705 12,332 8,677 Deferred revenue.............................. (3,654) 1,825 3,255 (2,275) 2,714 Impairment of long-lived assets............... - - - - 659 Minority interest............................. - (1,782) (2,251) (1,546) (473) Changes in operating assets and liabilities: Accounts receivable......................... (25,455) (26,214) (31,227) (391) (48,411) Receivables from related parties............ - (1,037) (1,448) (1,864) 1,317 Prepaid expenses and other assets........... (6,707) (2,536) (4,740) (5,551) (3,478) Accrued network costs....................... 68,246 39,966 34,629 (12,255) 21,200 Accounts payable............................ 364 2,613 (1,031) (1,584) 12,136 Other accrued liabilities................... (24,387) 5,248 2,208 (6,318) 13,183 --------- --------- ---------- --------- --------- Net cash used in operating activities........................... (37,876) (4,506) (31,549) (31,735) (7,206) INVESTING ACTIVITIES Acquisition of equipment and leasehold improvements.................................. (5,163) (25,125) (27,633) (11,990) (10,871) Acquisition of ACC Europe, net of cash acquired...................................... (55,745) - - - - --------- --------- ---------- --------- --------- Net cash used in investing activities........................... (60,908) (25,125) (27,633) (11,990) (10,871) FINANCING ACTIVITIES Proceeds from revolving credit agreement........ 257,713 179,011 283,485 256,535 154,961 Repayments on revolving credit agreement........ (252,649) (178,820) (278,407) (255,885) (128,598) Proceeds from issuance of long-term debt........ 35,725 - - 55,152 - Repayment of long-term debt, subordinated debentures, loans payable and capital leases........................................ (21,800) (24,604) (30,433) (5,299) (16,602) Payment of dividends on Preferred Stock......... - (2) (2) (7) (11) Proceeds from the issuance of Preferred Stock... 48,658 - 30,000 - - Proceeds from issuance of Common Stock.......... 20 71,286 71,648 10,039 62 Repurchase of Preferred Stock................... - (7) (7) - (30) Proceeds from issuance of subsidiary common stock to minority holders..................... - - - - 9,001 --------- --------- ---------- --------- --------- Net cash provided by financing activities........................... 67,667 46,864 76,284 60,535 18,783 Effect of exchange rate changes on cash......... - 47 11 (219) 197 --------- --------- ---------- --------- --------- Net increase (decrease) in cash and cash equivalents..................... (31,117) 17,280 17,113 16,591 903 Cash and cash equivalents at beginning of period........................................ 38,030 20,917 20,917 4,326 3,423 --------- --------- ---------- --------- --------- Cash and cash equivalents at end of period...... $ 6,913 $ 38,197 $ 38,030 $ 20,917 $ 4,326 ========= ========= ========== ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest...................................... $ 14,665 $ 8,244 $ 9,248 $ 6,686 $ 7,176 Income taxes.................................. - 2 2 8 102 NON-CASH INVESTING AND FINANCING ACTIVITIES Assets acquired by incurring capital lease obligations or long-term debt................. 27,386 32,638 53,391 10,421 8,533 Common stock issued in exchange for the acquisition of certain minority interest...... - - 17,102 - - Debt issued in conjunction with acquisition of ACC........................................... 53,000 - - - -
See accompanying notes. F-6 257 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 1. BUSINESS ACTIVITY Communications TeleSystems International d/b/a WorldxChange Communications ("WorldxChange"), a California corporation, is a facilities-based telecommunications carrier that provides international and domestic long-distance service to retail and carrier customers. Our retail base is comprised of residential and commercial customers. Our wholesale base is comprised of other U.S. and foreign telecommunications carriers and resellers. We have established retail and carrier operations in the United States, the Pacific Rim, Canada, Europe and Latin America. WorldxChange also provides operator, debit/calling card service, toll free, private line and other enhanced services. WorldxChange has established operations in the United Kingdom, France, Germany, Belgium, The Netherlands, Australia, New Zealand and Canada through wholly-owned subsidiaries. WorldxChange has additional subsidiaries domiciled in various other countries; however, the activity of these subsidiaries to date has not been significant. The revenue from WorldxChange's international operations continues to increase as a percentage of total revenue. For the years ended September 30, 1997, 1998 and 1999 international revenue, including Canada, represented approximately 13%, 20% and 22% of WorldxChange's total revenue, respectively. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared assuming that WorldxChange will continue as a going concern. WorldxChange has experienced recurring losses and has a deficiency in working capital and shareholders' equity. WorldxChange's rapid growth and investments for additional anticipated growth have required significant capital. Historically, WorldxChange's capital needs have been met primarily through a combination of a revolving credit facility, debt, lease financing, cash flows from operations and private placement equity offerings. During the year ended September 30, 1999, WorldxChange raised approximately $100 million in private placement offerings (Note 8). Management believes its available cash, $30 million of financing received from World Access (Note 13), $15 million of available credit facility from a shareholder (Note 13), vendor committed financing, along with the existing credit facility will be adequate to meet WorldxChange's domestic and international capital requirements through September 30, 2000. Management also believes that WorldxChange's ability to raise additional financing will enable the continuation of its global expansion. However, without additional financing, WorldxChange will be required to delay, reduce the scope of and/or eliminate certain of its future expansion plans, and/or reduce its planned expenditures on infrastructure and marketing activities. Interim Financial Information (Unaudited) The accompanying financial statements at June 30, 2000 and for the nine months ended June 30, 1999 and 2000 are unaudited but include all adjustments (consisting of normal recurring accruals), which, in the opinion of management, are necessary for a fair statement of the financial position and the operating results and cash flows for the interim date and periods presented. Results for the interim period ended June 30, 2000 are not necessarily indicative of results for the entire year or future periods. F-7 258 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) Consolidation The accompanying consolidated financial statements include the accounts of WorldxChange and its wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash Equivalents Cash equivalents are highly liquid investments purchased with maturities of three months or less when purchased to be cash equivalents. Foreign Currency Assets and liabilities of operations outside the United States, for which the functional currency is not U.S. dollars, are translated into U.S. dollars using the exchange rate in effect at each period end. Revenues and expenses are translated at the average exchange rate prevailing during the period. Cumulative translation adjustments are included as a separate component of shareholders' deficit. Exchange gains and losses from foreign currency transactions are included in "Other (income) expense," in the accompanying Consolidated Statements of Operations. Concentration of Credit Risk WorldxChange's customer base is comprised of several hundred carrier customers and over 750,000 residential and commercial users of its direct dial long distance telephone services, as well as hotels and other users of its operator-assisted long distance telephone services. These customers are located principally throughout the United States (U.S.), and to a much lesser extent in the Pacific Rim, Europe, Latin America, and Canada. WorldxChange's U.S. revenues from residential and smaller commercial users are billed and collected by local exchange carriers (LECs). These LECs pass through to WorldxChange their collection experience with customers billed under these billing agreements. WorldxChange direct bills carrier and certain commercial customers in the U.S. and direct bills all customers in its international markets. WorldxChange performs credit evaluations of the financial condition of these direct bill customers, and may require a deposit in certain circumstances. Revenue is reported net of estimated customer credits which are provided for in the financial statements at the same time the corresponding revenue is recognized. The Company periodically estimates its reserve requirements for uncollectable accounts, and the bad debt expense is included in selling, general and administrative expense. No one customer accounted for more than 10% of revenues for any period during fiscal 1999, 1998 and 1997 and for the nine months ended June 30, 2000. Equipment and Leasehold Improvements Equipment and leasehold improvements are recorded at cost and are depreciated or amortized using the straight-line method over the estimated useful lives of the assets (generally two to seven years) Equipment under capital leases are recorded at the net present value of the minimum lease payments and are amortized over the shorter of the useful life of the asset or the lease term (ranging from three to seven years). Interests in international undersea and on-land fiber-optic cable systems are amortized over their estimated useful lives, typically 20 years. F-8 259 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) Installation Costs Installation costs consists of costs incurred by WorldxChange for the expansion of its switching capacity and related network. These costs also include dialer installation costs incurred upon establishing network services with certain operator services customers. These costs are amortized using the straight-line method over three years. Accrued Network Costs Accrued network costs represent an estimate for cost of network services received from third party telecommunications companies for which WorldxChange has not been invoiced. The estimates are based upon vendor contract rates and actual minutes utilized per WorldxChange's records. Minority Interest Certain of WorldxChange's subsidiaries have sold stock to outside investors. Income or losses from these operations are allocated to minority shareholders based on ownership percentages. Losses in excess of the amounts invested by the minority shareholders are absorbed by WorldxChange. In September 1999, WorldxChange issued 1,554,763 shares of its common stock in exchange for the shares held by certain minority shareholders of its Australian subsidiary and a related holding company (Note 8). At September 30, 1999 a 2.2% minority interest remains in a WorldxChange subsidiary. Stock-Based Compensation As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, WorldxChange accounts for compensation expense under its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Pro forma disclosure of net loss, as if the fair value-based method had been applied in measuring compensation expense, is presented in Note 8. Revenue Recognition Revenue is recognized as long distance telecommunications services are provided. Prepaid calling card revenue is reported net of selling discounts and recorded when minutes are used. Deferred revenue relates to amounts received from or billed to customers prior to WorldxChange providing telecommunications services. Cost of Services Cost of services is exclusive of depreciation and amortization related to the services network which is included in "Depreciation and amortization" presented separately on the consolidated statements of operations. Advertising WorldxChange charges advertising costs to expense as the costs are incurred. Total advertising expense was $15,836,000, and $13,898,000 for the nine months ended June 30, 2000 and 1999. Total advertising expense was $17,201,000, $14,117,000 and $19,118,000 for the years ended September 30, 1997, 1998, and 1999, respectively. F-9 260 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income Effective April 1, 1998, WorldxChange adopted SFAS No. 130, Reporting Comprehensive Income. This statement requires that all components of comprehensive income be reported, net of any related tax effect, in the financial statements in the period in which they are recognized. The components of comprehensive income for WorldxChange include net loss and foreign currency translation adjustments. Segment Information Effective October 1, 1998, WorldxChange adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement requires disclosures of certain information about WorldxChange's operating segments, products, geographic areas in which it operates and its major customers. This information is presented in Note 12. Fair Values of Financial Instruments WorldxChange believes that the carrying amounts of its cash, cash equivalents, accounts receivable, accounts payable, accrued liabilities, and notes payable approximate their fair market values due to their short-term nature or variable interest rates. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In May 1999, the FASB voted to delay the effective date of SFAS No. 133 by one year. The Company will be required to adopt FAS 133 for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under SFAS No. 133, all derivatives must be recognized as assets and liabilities and measured at fair value. WorldxChange does not expect the adoption of SFAS No. 133 to have a material impact on its consolidated financial position or results of operations. Reclassifications Certain prior period amounts have been reclassified to conform with the current period presentation. 3. ACQUISITIONS In December 1998, WorldxChange completed a business combination with CTS Telcom, Inc. and WorldxChange Limited, affiliates under common ownership and management control, both of which have been accounted for in a manner similar to a pooling-of-interests. WorldxChange issued 278,000 shares in connection with the acquisition of WorldxChange Limited, and no consideration was paid for the acquisition of CTS Telcom. The accompanying pooled consolidated financial statements are derived from F-10 261 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) the combined historical financial statements of CTS Telcom, WorldxChange Limited and WorldxChange. All significant intercompany accounts and transactions have been eliminated. Net revenues and net loss for fiscal 1997 and 1998 preceding the merger by entity are as follows (in thousands):
NET NET INCOME REVENUES (LOSS) -------- ---------- 1997: WxC....................................................... $328,517 $(35,349) CTS Telcom................................................ 17,884 (2,184) WxL New Zealand........................................... 18,342 455 Eliminations.............................................. (33,083) -- -------- -------- Combined.................................................. $331,660 $(37,078) ======== ======== 1998: WxC....................................................... $394,232 $(24,932) CTS Telcom................................................ 16,343 (2,099) WxL New Zealand........................................... 21,204 (422) Eliminations.............................................. (32,912) -- -------- -------- Combined.................................................. $398,867 $(27,453) ======== ========
4. BALANCE SHEET INFORMATION Sale of Accounts Receivable with Recourse WorldxChange sells certain receivables, subject to full recourse provisions, to Zero Plus Dialing Incorporated (ZPDI), one of WorldxChange's providers of billing and collection services. At June 30, 2000 the outstanding balance of such accounts for which WorldxChange is contingently liable was zero. At September 30, 1998 and 1999 the outstanding balance of such accounts for which WorldxChange is contingently liable was approximately $4,019,000 and $1,962,000, respectively. Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following (in thousands):
SEPTEMBER 30, JUNE 30, ------------------- 2000 1999 1998 ----------- -------- -------- (UNAUDITED) Telecommunications equipment and cables............... $216,065 $125,190 $ 56,091 Computer equipment and software....................... 32,955 15,365 9,985 Office furniture, equipment and vehicles.............. 12,955 9,745 9,335 Leasehold improvements................................ 7,194 3,147 1,614 Equipment in progress................................. -0- 10,266 4,932 -------- -------- -------- 269,169 163,713 81,957 Accumulated depreciation and amortization............. (75,675) (48,948) (32,260) -------- -------- -------- $193,494 $114,765 $ 49,697 ======== ======== ========
F-11 262 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) Telecommunications equipment and cables include eight indefeasible rights of use in cable systems amounting to $41,892,000 and $825,000 and eleven ownership interests in international cables amounting to $15,605,000 and $4,224,000 at September 30, 1999 and 1998, respectively. As of June 30, 2000, WorldxChange had indefeasible rights of use in cable systems amounting to $56,868,000 and ownership interests in international cables amounting to $16,728,000. These assets are amortized over the life of the agreements of 15 to 20 years. Other Assets Other assets consist of the following (in thousands):
SEPTEMBER 30, JUNE 30, --------------- 2000 1999 1998 ----------- ------ ------ (UNAUDITED) Deposits.................................................. $3,331 $4,240 $3,417 Debt issuance costs, net of accumulated amortization of $2,272, $1,686 and $97 at June 30, 2000, September 30, 1999 and 1998, respectively............................. 613 1,718 3,307 Offering Costs............................................ -- 652 -- Other..................................................... 161 188 -- ------ ------ ------ $4,105 $6,798 $6,724 ====== ====== ======
Accrued Liabilities Other accrued liabilities consist of the following (in thousands):
SEPTEMBER 30, JUNE 30, ----------------- 2000 1999 1998 ----------- ------- ------- (UNAUDITED) Accrued taxes.......................................... $19,437 $ 3,734 $ 1,766 Accrued commissions.................................... 1,039 1,575 2,311 Accrued compensation and benefits...................... 3,519 3,144 3,384 Accrued settlements (Note 11).......................... -- 1,211 2,059 Accrued interest....................................... 7,116 634 901 Other.................................................. 13,647 6,035 4,956 ------- ------- ------- $44,758 $16,333 $15,377 ======= ======= =======
5. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
SEPTEMBER 30, JUNE 30, ------------------- 2000 1999 1998 ----------- -------- -------- (UNAUDITED) Unsecured subordinated note balance due December 2000 with interest payable at maturity of 12%............ $ 53,000 $ -- $ --
F-12 263 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
SEPTEMBER 30, JUNE 30, ------------------- 2000 1999 1998 ----------- -------- -------- (UNAUDITED) Secured subordinated note, balance due November 2000 with interest payable quarterly at 12.5%............ $ 45,200 $ 45,200 $ 55,000 Unsecured note due February 2002 with varying monthly principal payments from $300,000 to $1,250,000. The unpaid principal bears interest at 13.0%, which is payable at maturity................................. 18,316 -- -- Term loan due October 2000, with principal reductions of $300,000 due monthly and interest payable monthly at prime plus 5.00% (14.5% at June 30, 2000) and prime plus 6.75% (15.00% at September 30, 1999 and 1998, respectively)................................. 3,800 4,600 5,125 Loan and security agreement payable upon collections of accounts receivable with interest payable monthly at prime rate plus 1.75% (11.25% at June 30, 2000) and prime plus 2.75% (11.00% at September 30, 1999 and 1998 respectively).............................. 27,762 24,362 21,888 Term loan due February 2001 with interest payable at a per annum rate equal to 11.0%....................... 35,725 -- -- Secured subordinated note with interest payable quarterly at 10%.................................... -- -- 1,200 Note payable due March 2004, with principal and interest payments payable in monthly installments of $183,518 at 12.00%.................................. 6,507 7,521 -- Notes payable due June 2004 to March 2005, with aggregate monthly principal and interest payments at 12% due in monthly installments of $355,410 at June 30, 2000 and $197,222 at September 30, 1999......... 14,129 8,693 -- Note payable due May 2004, with principal and interest payments payable in monthly installments of $322,632 at 11.5%............................................ 11,956 13,742 -- Note payable due August 2004, with principal and interest payments payable in monthly installments of $73,235 at 11.5%.................................... 2,853 3,247 -- Note payable due June 2004, with principal and interest payments payable in monthly installments of $56,777 at 10%...................................... 2,201 2,568 -- Note Payable due June 2002 with quarterly payments of $67,000............................................. 536 -- --
F-13 264 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
SEPTEMBER 30, JUNE 30, ------------------- 2000 1999 1998 ----------- -------- -------- (UNAUDITED) Note payable due May 2004 with principal and interest payments made payable in monthly installments of $93,044 at 11%...................................... $ 3,294 $ -- $ -- Secured and unsecured notes, with principal and interest payments payable in quarterly installments, maturing at various dates through June 2000. Interest rates ranging from 10% to 14.25%........... 188 190 429 --------- -------- -------- 225,467 110,123 83,642 Less current portion.................................. (187,020) (9,799) (8,355) --------- -------- -------- $ 38,447 $100,324 $ 75,287 ========= ======== ========
In March 1997, WorldxChange entered into its credit facility, which consists of an accounts receivable-based revolving credit facility and a term loan. In February 2000, the credit facility was amended to increase the maximum borrowing capacity, add a bridge loan, extend the maturity date of the revolving credit agreement and term loan and reduce the interest rate charge. The credit facility allows WorldxChange to borrow up to a maximum of $65.0 million, subject to certain restrictions and borrowing base limitations. The maximum available borrowing base under the revolving credit agreement is $30.0 million and is determined as a specified percentage of eligible accounts receivable. The balance outstanding on the revolving credit agreement is reduced by the application of payments received on collections of accounts receivable. The accounts receivable revolving credit facility had an outstanding balance of approximately $27.8 million at June 30, 2000, and $2.2 million available for borrowing pursuant to the borrowing base limitations. This facility bears interest at the prime rate plus 1.75% and is repaid through collections of accounts receivable. The term loan was issued in the amount of $5.0 million, which at June 30, 2000 had an outstanding balance of approximately $3.8 million, bears interest at the prime rate plus 5.00% and requires monthly reductions of principal of $300,000 plus interest. The bridge loan has a maximum borrowing availability of $30.0 million, bears interest at 11% and matures on February 11, 2001. The maturity date may be extended until October 1, 2003 by the bridge loan participant. As part of the amended agreement and the WorldxChange merger agreement, World Access agreed to participate in the bridge loan and agreed to fund the $30.0 million under the agreement. As of June 30, 2000, the outstanding balance on the bridge loan was $35.7 million and $9.3 million was available for borrowing. In total, as of June 30, 2000, WorldxChange had $67.3 million borrowed under the credit facility and $11.5 million available for borrowing. The revolving credit agreement and the term loan with Foothill totaling $67 million on June 30, 2000 matures on October 1, 2000, unless both the $55 million of subordinated promissory notes due November 30, 2000 and the $53 million of ACC Europe acquisition notes due December 28, 2000 are retired prior to October 1, 2000, in which case the revolving credit agreement and the term loans with Foothill mature October 1, 2003. As of June 30, 2000, WorldxChange was in compliance with the restrictive covenants under the credit facility. WorldxChange's obligations under the credit facility are secured by a first position in substantially all of its assets. F-14 265 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) In May 2000, the credit facility was amended to increase the maximum borrowing capacity to $80.0 million. The $15.0 million increase in the borrowing capacity consists of an additional $15.0 million under the bridge loan, under the same terms and conditions. As of September 30, 1998 and 1999, and June 30, 2000, WorldxChange was in compliance with these covenants, as amended and restructured in order to reflect the debt and equity financings discussed below and in Note 8 and the acquisition of two affiliated companies during fiscal 1999 as discussed in Note 3. WorldxChange's obligations under this agreement are secured by a first position in substantially all of its assets, excluding equipment where encumbrances already exist. From May through August 1998, WorldxChange issued and sold subordinated promissory notes in the aggregate principal amounts of $55.0 million. These notes bear interest at 12.5% per annum, provide for quarterly payments of interest only and mature on November 30, 2000. These notes provide the lender the right to require WorldxChange to use a portion of the net proceeds from any private placement or public offering of WorldxChange's common stock to repay the notes. As such, the outstanding balance at September 30, 1999 has been reduced to $45,200,000. As of June 30, 2000 the outstanding balance was $45,200,000. In addition, WorldxChange also issued a promissory note in August 1998 in the amount of $1.2 million representing accrued interest on the subordinated promissory notes. This note bears interest at the rate of 10.0% per annum, provides for quarterly payments of interest only and matures on November 30, 2000. In accordance with the terms of the note, this balance was repaid out of the proceeds of the private placement equity offerings. In July 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a transatlantic telecommunications cable system for $4,000,000. At June 30, 2000 the outstanding balance related to this agreement was $3,294,000. In October 1998, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a transatlantic telecommunications cable system for $8,250,000. The purchase was vendor financed with a note that bears interest at 12.0% per annum and provides for monthly payments of principal and interest. WorldxChange's obligations under this agreement are secured by a first-priority security interest in the leased capacity. At June 30, 2000 and September 30, 1999, the outstanding balance related to this agreement was $6,507,000 and $7,521,000, respectively. In February 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a nationwide fiber optic communications system. The initial fee for each capacity segment is calculated based on mileage between cities, as defined per the agreement. This purchase was vendor financed with notes that bear interest at 12.0% per annum and provide for payments in equal monthly installments of principal and interest. At June 30, 2000 and September 30, 1999, the outstanding balances related to this agreement were $14,129,000 and $8,693,000 respectively. In March 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a nationwide telecommunications network. Pursuant to this agreement, WorldxChange signed notes payable to the vendor for the purchase price. These notes bear interest at 11.5% per annum and provide for monthly payments of principal and interest. WorldxChange's obligations under this agreement are secured by a security interest in the leased capacity. At June 30, 2000 and September 30, 1999, the aggregate outstanding balance were approximately $14,809,000 and $16,989,000, respectively, which was F-15 266 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) comprised of two separate notes with balances outstanding of $11,956,000 and $2,853,000 at June 30, 2000. In June 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a fiber optic communications system for $2,969,000. The purchase was vendor financed with a note that bears interest at 10.0% per annum and provides for payments in equal monthly installments of principal and interest, which are inclusive of all operation and maintenance fees. At June 30, 2000 and September 30, 1999, the outstanding balances related to this agreement were $2,201,000 and $2,568,000 respectively. Subordinated debentures consisted of the following as of September 30, 1998 (in thousands): 10% subordinated debentures maturing through December 31, 1999...................................................... $ 807 15% subordinated debentures maturing through December 31, 1999...................................................... 5,441 ------- 6,248 Less current portion........................................ (5,066) ------- $ 1,182 =======
As of September 30, 1999, WorldxChange has repaid all amounts outstanding relating to the 10% and 15% subordinated debentures. Maturities of long-term debt as of September 30, 1999 are as follows (in thousands):
YEAR ENDING SEPTEMBER 30, ------------------------- 2000........................................................ $ 9,799 2001........................................................ 77,741 2002........................................................ 7,717 2003........................................................ 8,653 2004........................................................ 6,213 -------- Total............................................. $110,123 ========
6. COMMITMENTS AND CONTINGENCIES Leases WorldxChange leases its primary operating facilities under noncancellable operating leases which expire at various dates through March 2015. Certain of these leases contain escalation clauses based on inflation or fixed amounts and the leases generally require WorldxChange to pay utilities, insurance, taxes and other operating expenses. Rental expense under such leases was $6,299,000, $3,426,000, $4,783,000, and $3,129,000, respectively, for the nine months ended June 30, 2000 and June 30, 1999 and the years ended September 30, 1999 and 1998. WorldxChange leases its switches and certain other telecommunication and computer equipment under capital leases, most of which contain bargain or fair market value purchase options. At June 30, 2000 and September 30, 1999 and 1998 assets acquired under these leases have an original cost of $51,985,000, $42,958,000 and $40,099,000, respectively, and accumulated amortization of $30,992,000, $24,375,000, and $18,515,000, respectively. The amortization of these assets is included with depreciation and amortization expense presented in the Consolidated Statements of Operations. F-16 267 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) Future minimum payments for capital leases and noncancellable operating leases with initial or remaining terms of one year or more as of September 30, 1999 are as follows (in thousands):
CAPITAL OPERATING YEAR ENDING SEPTEMBER 30, LEASES LEASES - ------------------------- -------- --------- 2000........................................................ $ 13,292 $3,198 2001........................................................ 11,475 2,317 2002........................................................ 11,535 1,264 2003........................................................ 7,206 247 2004........................................................ 3,530 138 Thereafter.................................................. 123 451 -------- ------ Total minimum lease payments................................ 47,161 $7,615 ====== Less amount representing interest........................... (7,184) -------- Present value of minimum lease payments..................... 39,977 Less current portion........................................ (10,582) -------- Amounts due after one year.................................. $ 29,395 ========
Commitments for Undersea Cable and Land-based Fiber Optic Cable Systems WorldxChange has entered into three agreements to increase its ownership of undersea cables. These commitments will continue WorldxChange's further expansion in international markets, and are expected to require incremental capital expenditures of approximately $18.0 million. Of this balance, $4.0 million will be vendor financed at 11% interest, with monthly principal and interest payments over a four year amortization period. The remaining $14.0 million will be paid in installments of $6.8 million upon service delivery date and payments of $3.0 million and $4.2 million on the 1st and 2nd anniversaries of the service delivery dates, respectively. As of September 30, 1999 and June 30, 2000 these obligations remain outstanding. WorldxChange entered into an agreement during the year ended September 30, 1999 to acquire $25.0 million of capacity in land-based fiber optic cable systems. The vendor has agreed to finance 90% of the commitment at 12% interest, with monthly principal and interest payments over a five year amortization period. At September 30, 1999, WorldxChange has purchased for cash of approximately $10.0 million, leaving $15.0 million to be ordered. As of June 30, 2000, $7.2 million remained to be ordered. 7. INCOME TAXES Income taxes are provided for in accordance with the provisions of FASB Statement No. 109, Accounting for Income Taxes. Under this method, WorldxChange recognizes deferred tax assets and liabilities for the expected future tax effects of temporary differences between the carrying amounts and the tax bases of assets and liabilities, as well as operating loss carryforwards. F-17 268 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) The significant components of WorldxChange's deferred tax assets and liabilities as of September 30, 1998 and 1999 are shown below (in thousands). At September 30, 1999, a valuation allowance of $51,113,000 has been recorded as realization of such net deferred assets is uncertain:
SEPTEMBER 30, ------------------- 1999 1998 -------- -------- Deferred tax assets: U.S. net operating loss carryforward...................... $ 28,541 $ 16,704 Foreign net operating loss carryforwards.................. 19,263 9,275 Accrued liabilities and reserves.......................... 4,263 3,720 Other..................................................... -- 336 -------- -------- 52,067 30,035 Deferred tax liabilities: Depreciation and amortization............................. (1,153) (2,145) Other..................................................... 199 (56) -------- -------- Net deferred tax assets..................................... 51,113 27,834 Deferred tax assets valuation allowance..................... (51,113) (27,834) -------- -------- $ -- $ -- ======== ========
At September 30, 1999, WorldxChange had net operating loss carryforwards available for federal, state and foreign tax purposes of approximately $74,200,000, $45,000,000 and $55,000,000 respectively. The federal tax loss carryforwards will begin expiring in 2007, unless previously utilized. The state tax loss carryforwards began expiring in 1999 and will continue to expire through 2003, unless previously utilized. The Canadian and Netherlands net operating loss carryforwards in the amounts of $6,200,000 and $5,500,000, respectively, will begin expiring in 2003. Other foreign loss carryforwards may be carried forward indefinitely. The realization of future domestic benefits from net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code if certain cumulative changes occur in WorldxChange's ownership. 8. SHAREHOLDERS' DEFICIT Common Stock In September 1998, WorldxChange completed a private placement for the issuance of 1,659,214 shares of common stock. WorldxChange issued 788,127 shares of common stock in September 1998 for $10,000,000. The remaining 871,087 shares of common stock were issued in December 1998 for another $10,000,000. During fiscal 1999, WorldxChange issued 5,727,000 shares of common stock for proceeds of $60,000,000. In September 1999, WorldxChange issued 1,554,763 shares of its common stock in exchange for minority interests held in certain of its subsidiaries. The acquisition was accounted for under the purchase method of accounting at a value of $17,102,000, or $11.00 per share. The excess value of the stock issued over the minority interest balance at September 30, 1999 was recorded as goodwill of $12,194,000. This intangible asset is being amortized on a straight-line basis over 20 years. F-18 269 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) Preferred Stock As of September 30, 1998, WorldxChange had 23 shares of Series A Cumulative Preferred Stock outstanding. The shares were non-voting and entitled the holders to certain annual cumulative dividends. During fiscal 1999, all 23 shares were repurchased by WorldxChange. In August 1999, WorldxChange issued 30,000 shares of Series A Convertible Preferred Stock for $30,000,000. The holders of the Series A Convertible Preferred Stock are entitled to receive an annual cash dividend of $40 per share (an aggregate of $100,000 at September 30, 1999). The holders of the Series A Convertible Preferred Stock are entitled to certain antidilution rights and have liquidation rights senior to those of common shareholders. Each share of Series A Convertible Preferred Stock is convertible into 90.9091 shares of common stock. The stock is convertible at the option of the holder six months after issuance provided WorldxChange has not completed a public offering and no such offering is pending. The stock is automatically convertible: (i) six months from a completed registered public offering, provided there has been no other registered public offering during the course of the six months and no registered public offering is pending, or (ii) in the event there is no registered public offering, two years from the date of issuance, provided there is no registered public offering pending. Stock Options WorldxChange's 1996 Stock Option Plan provides for the granting of stock options to purchase, and the issuance of, up to 3 million shares to employees, non-exempt directors and consultants. Generally, options are granted at prices at least equal to fair value of WorldxChange's common stock on the date of grant as determined by WorldxChange's Board of Directors. In addition, certain officers and directors have been granted stock options outside the Plan. Pro forma information regarding net loss is required by SFAS No. 123, and has been determined as if WorldxChange had accounted for its employee stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the minimum value method and the following weighted average assumptions for fiscal year 1997, 1998 and 1999, respectively: risk free interest rate of 6.20%, 5.25% and 5.75%; expected option life of seven years; and no annual dividends. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of such options. The effects of applying SFAS 123 for pro forma disclosure purposes are not likely to be representative of the effects on pro forma net income or loss in future years because they do not take into consideration pro forma compensation expenses related to grants made prior to fiscal 1996. WorldxChange's pro forma information follows:
1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Pro forma net loss..................................... $(65,016) $(28,176) $(37,432) ======== ======== ========
F-19 270 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) A summary of WorldxChange's stock option activity, including those issued outside of the plans and related information are as follows:
SHARES WEIGHTED- AVAILABLE NUMBER PRICE AVERAGE FOR GRANT OF SHARES PER SHARE EXERCISE PRICE ----------- ----------- ------------- -------------- Balance as of September 30, 1996............................ 1,377,600 1,622,400 $ 0.42-$5.00 $ 1.54 Grants.......................... (1,977,559) 1,977,559 4.33-7.00 4.94 Exercises....................... -- (90,000) 0.42 0.42 Cancellations................... 1,312,525 (1,312,525) 4.33-5.00 4.57 ----------- ----------- ------------- ------ Balance as of September 30, 1997............................ 712,566 2,197,434 0.42-7.00 2.84 Additional shares reserved...... 1,008,166 -- -- -- Grants.......................... (1,377,453) 1,377,453 7.00-10.00 9.67 Exercises....................... -- (54,425) 0.67-7.00 0.72 Cancellations................... 320,162 (320,162) 4.33-5.00 5.00 ----------- ----------- ------------- ------ Balance as of September 30, 1998............................ 663,441 3,200,300 0.42-10.00 5.73 Additional shares reserved...... 4,000,000 -- -- -- Grants.......................... (1,273,752) 1,273,752 10.00-11.00 10.34 Exercises....................... -- (236,239) 0.67-11.00 6.98 Cancellations................... 495,391 (495,391) 5.00-10.00 9.06 ----------- ----------- ------------- ------ Balance as of September 30, 1999............................ 3,885,080 3,742,422 0.42-11.00 6.85 Grants (unaudited).............. (621,581) 621,581 10.00-13.00 11.67 Exercises (unaudited)........... -- (92,486) 0.42-10.00 3.80 Cancellations (unaudited)....... 740,662 (740,662) 5.00-11.00 9.68 ----------- ----------- ------------- ------ Balance as of June 30, 2000 (unaudited)..................... 4,011,659 3,530,855 0.42-13.00 $ 7.02 =========== =========== ============= ======
The following table summarizes significant ranges of outstanding and exercisable options at June 30, 2000 (unaudited):
OUTSTANDING OPTIONS ------------------------------------------- OPTIONS EXERCISABLE WEIGHTED -------------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING LIFE AVERAGE AVERAGE EXERCISE PRICES SHARES IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE - --------------- --------- -------------- -------------- --------- -------------- $0.42-$0.67 909,575 2.75 $ 0.58 909,575 $ 0.58 $5.00-$9.00 721,951 6.10 6.21 570,326 5.87 $10.00-$10.00 1,254,528 8.48 10.00 613,609 10.00 $11.00-$13.00 644,801 9.27 11.21 78,223 11.29 --------- ---- ------ --------- ------ 3,530,855 6.66 $ 7.02 2,171,733 $ 5.02 ========= ==== ====== ========= ======
The weighted average fair value at date of grant for options granted during fiscal 1997, 1998 and 1999 were $1.43, $1.88 and $2.52 per share, respectively, and $3.46 per share for the nine months ended June 30, 2000. F-20 271 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 9. RELATED PARTY TRANSACTIONS Affiliated Long Distance Companies In fiscal 1996, WorldxChange began utilizing long distance services from four affiliated companies owned by a relative of WorldxChange's officers/shareholders. Billings by the four affiliates for long distance services provided to WorldxChange were approximately $12,607,000, $5,409,000 and $1,705,000 for the years ended September 30, 1997, 1998 and 1999, respectively. WorldxChange had accounts payable to the four affiliates of $468,000 at September 30, 1998 and no such amounts outstanding at September 30, 1999. Effective January 1999, WorldxChange terminated the agreements with these affiliates. 10. SAVINGS PLAN In January 1996, WorldxChange adopted a 401(k) Savings Plan covering substantially all employees that have been employed for at least one year and meet other age and eligibility requirements. Participants may elect to contribute up to six percent of their compensation. WorldxChange matches 25% of participant contributions. WorldxChange's matching contribution totaled $62,000, $82,000 and $100,000 during the years ended September 30, 1997, 1998 and 1999, respectively. 11. LITIGATION AND REGULATION WorldxChange is required under federal law and regulations to file tariffs showing rates, terms and conditions affecting its services. WorldxChange has filed interstate long distance tariffs with the FCC. The FCC has adopted an order that, with certain exceptions, rescinds the requirement that carriers such as WorldxChange maintain FCC tariffs and mandates that tariffs be withdrawn. The FCC stayed its order pending judicial review. If tariffs are eliminated, it will probably be necessary for WorldxChange to secure contractual agreements with its customers providing for many of the terms of its existing tariffs. Absent tariffs and contracts, WorldxChange believes that disputes could arise concerning the respective rights of WorldxChange and its customers, which could hinder WorldxChange's ability to collect its accounts receivable, increase WorldxChange's overall bad debt losses and collection expenses, and increase WorldxChange's exposure to unlimited damage claims. The FCC has not proposed to change its requirements that tariffs for international services be filed, and WorldxChange continues to file such tariffs. The intrastate long distance operations of WorldxChange are also subject to various state laws. The majority of states require certification or registrations. WorldxChange has secured the ability to offer intra-state service in forty-one states. Many states require tariff filing as well. WorldxChange has been successful in obtaining all necessary regulatory approvals to date, although revision of tariffs, authorities and approvals are being made on a continuing basis and many such requests are pending at any one time. Some states may assess penalties on long distance service providers for traffic sold prior to tariff approval. Such states may require refunds to be made to customers. It is the opinion of management that such penalties and refunds, if any, would not have a material adverse effect on the consolidated results of operations, financial position or liquidity of WorldxChange. In May 1997, the California Public Utilities Commission issued an order, which became effective in October 1997, revoking WorldxChange's Certificate of Public Convenience and Necessity in California and F-21 272 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) imposing certain other fines and penalties against WorldxChange based on the California Public Utilities Commission's findings that WorldxChange violated California laws and regulations requiring WorldxChange to obtain prior consumer authorization before switching consumers' long distance carriers. As a result of the revocation for WorldxChange's Certificate of Public Convenience and Necessity, WorldxChange cannot provide intrastate telecommunication services in California. In addition, WorldxChange must, among other things, (i) pay a $19.6 million fine to the state of California, $2 million of which has been paid with the balance suspended so long as WorldxChange is not found to have committed any future violations of California law or California Public Utilities Commission directives; (ii) reimburse the California Public Utilities Commission for $100,000 in prosecution costs which has also been paid; and (iii) pay approximately $1.9 million in reparations to consumers, of which $1,211,000 remains payable at September 30, 1999 and $0 remains payable at June 30, 2000. Under the California Public Utilities Commission's order, the suspension of WorldxChange's Certificate of Public Convenience and Necessity and the other sanctions and fines imposed on WorldxChange are binding on any successor of WorldxChange. WorldxChange may apply to the California Public Utilities Commission for reinstatement of the Certificate of Public Convenience and Necessity after October 22, 2000, although there can be no assurance that such reinstatement would be granted. In addition, WorldxChange is subject to certain legal, regulatory and administrative proceedings, claims and inquiries arising in the ordinary course of business, some of which involve claims for substantial amounts of damages. The ultimate outcome of such proceedings, claims or inquiries cannot be predicted at this time. It is management's opinion, after consultation with its legal counsel, that any such liability or possible restrictions placed on WorldxChange's operations resulting from the ultimate resolution of such proceedings, claims, and inquiries, beyond that provided, would not have a material effect on WorldxChange's consolidated financial position or WorldxChange's future consolidated results of operations or cash flows. 12. SEGMENT INFORMATION In 1999, WorldxChange adopted SFAS 131. The prior year's segment information has been restated to present three reportable operating segments. WorldxChange's segments are organized on the basis of geographic location and include North America, Pacific Rim and Europe. None of WorldxChange's operating segments have been aggregated. WorldxChange evaluates performance and allocates resources based on profit or loss from operations before interest expense, other income (loss) and minority interest. The accounting policies of the reportable segments are the same as those described in the basis of presentation and summary of significant accounting policies. Intersegment sales and transfers between geographic regions are accounted for at prices that approximate arm's length transactions. No single customer accounted for 10% or more of revenues in fiscal 1999, 1998 or 1997. WorldxChange's regional segments earn revenue from direct-dial long distance services as well as operator, debit/calling card, toll free, private line and other enhanced services to residential customers, other telecommunications carriers, and small to medium-sized businesses. Each of WorldxChange's reportable regions represents a strategic business segment that functions in an environment with common economic characteristics determined based on historical and expected future performance. F-22 273 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) The Company markets its products domestically and internationally, with its principal international markets being Australia and Europe. The tables below contain information about the geographical areas in which the Company operates and represent information utilized by management to evaluate its operating segments. Revenues are attributed to countries based on location in which the sale originated. Long-lived assets are based on the country of domicile.
NORTH PACIFIC AMERICA RIM EUROPE TOTALS -------- ------- -------- ---------- June 30, 2000, and for the nine months then ended (in thousands) Sales to unaffiliated customers.................... $246,063 $38,178 $139,672 $ 423,913 Intersegment revenues.............................. 28,091 4,015 10,957 43,063 -------- ------- -------- ---------- Segment revenues................................... 274,154 42,193 150,629 466,976 Depreciation and amortization...................... 15,176 2,088 17,867 35,131 Segment operating loss............................. (32,894) (8,707) (31,445) (73,046) Segment assets..................................... 639,668 29,952 379,632 1,049,252 Expenditures for long-lived assets................. 2,889 527 1,747 5,163 Reconciliations: NET LOSS Total operating loss for reportable segments....... $ (73,046) Interest expense................................... (22,694) Other expense, net................................. (822) Minority interest.................................. -- ---------- Total consolidated net loss................ $ (96,562) ========== ASSETS Total assets for reportable segments............... $1,049,252 Elimination of intercompany receivables............ (618,840) ---------- Total consolidated assets.................. $ 430,412 ==========
June 30, 1999 and for the nine months then ended (in thousands) Sales to unaffiliated customers.................... $238,013 $42,975 $ 23,336 $ 304,324 Intersegment revenues.............................. 35,551 9,953 4,987 50,491 -------- ------- -------- ---------- Segment revenues................................... 273,564 52,928 28,323 354,815 Depreciation and amortization...................... 9,823 1,298 1,273 12,394 Segment operating loss............................. (22,405) (3,785) (8,910) (35,100) Segment assets..................................... 364,006 24,183 55,657 443,846 Expenditures for long-lived assets................. 15,765 1,742 7,618 25,125 Reconciliations: NET LOSS Total operating loss for reportable segments......... $ (35,100) Interest expense................................... (12,448) Other expense, net................................. (222) Minority interest.................................. 1,782 ---------- Total consolidated net loss................ $ (45,988) ==========
F-23 274 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
ASSETS Total assets for reportable segments............... $ 443,846 Elimination of intercompany receivables............ (244,177) ---------- Total consolidated assets.................. $ 199,669 ========== September 30, 1999, and for the year then ended (in thousands) Sales to unaffiliated customers.................... $337,457 $55,619 $ 28,504 $ 421,580 Intersegment revenues.............................. 48,345 11,025 6,169 65,539 -------- ------- -------- ---------- Segment revenues................................... 385,802 66,644 34,673 487,119 Depreciation and amortization...................... 13,871 1,948 1,887 17,705 Segment operating loss............................. (24,619) (5,166) (18,786) (48,571) Segment assets..................................... 444,250 18,273 111,987 574,510 Expenditures for long-lived assets................. 15,731 1,842 10,060 27,633 Reconciliations: NET LOSS Total operating loss for reportable segments....... $ (48,571) Interest expense................................... (16,883) Other expense, net................................. (648) Minority interest.................................. 2,251 ---------- Total consolidated net loss................ $ (63,851) ========== ASSETS Total assets for reportable segments............... $ 574,510 Elimination of intercompany receivables............ (339,508) ---------- Total consolidated assets.................. $ 235,002 ========== September 30, 1998, and for the year then ended (in thousands) Sales to unaffiliated customers.................... $321,763 $58,382 $ 18,722 $ 398,867 Intersegment revenues.............................. 44,650 22,605 7,576 74,831 -------- ------- -------- ---------- Segment revenues................................... 366,413 80,987 26,298 473,698 Depreciation and amortization...................... 9,988 1,484 860 12,332 Segment operating loss............................. (5,547) (3,041) (7,086) (15,674) Segment assets..................................... 176,678 19,883 28,705 225,266 Expenditures for long-lived assets................. 11,790 200 -- 11,990 Reconciliations: NET LOSS Total operating loss for reportable segments......... $ (15,674) Interest expense................................... 11,947 Other expense, net................................. 1,378 Minority interest.................................. 1,546 ---------- Total consolidated net loss................ $ (27,453) ========== ASSETS Total assets for reportable segments............... $ 225,266 Elimination of intercompany receivables............ (105,137) ---------- Total consolidated assets.................. $ 120,129 ==========
F-24 275 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
September 30, 1997, and for the year then ended (in thousands) Sales to unaffiliated customers.................... $291,633 $24,437 $ 15,590 $ 331,660 Intersegment revenues.............................. 39,326 19,333 2,712 61,371 -------- ------- -------- ---------- Segment revenues................................... 330,959 43,770 18,302 393,031 Depreciation and amortization...................... 7,474 548 655 8,677 Segment operating profit (loss).................... (23,439) 2,433 (4,497) (25,503) Other significant noncash item: Write down of impaired long-lived assets........ 659 -- -- 659 Segment assets..................................... 136,355 17,796 17,583 171,734 Expenditures for long-lived assets................. 8,691 2,180 -- 10,871 Reconciliations: NET LOSS Total operating loss for reportable segments....... $ (25,503) Interest expense................................... (8,682) Other expense, net................................. (3,366) Minority interest.................................. 473 ---------- Total consolidated net loss................ $ (37,078) ========== ASSETS Total assets for reportable segments............... $ 171,734 Elimination of intercompany receivables............ (67,989) ---------- Total consolidated assets.................. $ 103,745 ==========
The following table summarizes revenue by region and by type of customer for the years ended September 30, 1997, 1998 and 1999 and nine months ended June 30, 1999 and 2000:
NINE MONTHS ENDED JUNE 30, YEARS ENDED SEPTEMBER 30, --------------- --------------------------- 2000 1999 1999 1998 1997 ------ ------ ------- ------- ------- (UNAUDITED) (IN MILLIONS) REVENUE BY REGIONS: United States................................. $240.0 $233.5 $330.0 $318.1 $287.4 North America (other)......................... 6.0 4.5 7.5 3.7 4.3 ------ ------ ------ ------ ------ North America total........................... 246.0 238.0 337.5 321.8 291.7 Pacific Rim................................... 38.2 43.0 55.6 58.4 24.4 Europe........................................ 139.7 23.3 28.5 18.7 15.6 ------ ------ ------ ------ ------ Total............................... $423.9 $304.3 $421.6 $398.9 $331.7 ====== ====== ====== ====== ====== REVENUE BY CUSTOMERS: Carrier....................................... $172.9 $138.1 $186.9 $166.1 $163.3 Residential................................... 175.5 125.5 185.3 161.1 116.9 Operator Services............................. 7.6 17.7 22.9 41.1 28.7 Commercial.................................... 67.9 23.0 26.5 30.6 22.8 ------ ------ ------ ------ ------ Total............................... $423.9 $304.3 $421.6 $398.9 $331.7 ====== ====== ====== ====== ======
F-25 276 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 13. SUBSEQUENT EVENTS On November 4, 1999, WorldxChange acquired the outstanding shares of certain European subsidiaries of ACC Corp, a subsidiary of AT&T. The operations of these subsidiaries are located in the United Kingdom, Germany, France and Italy. As part of this transaction, WorldxChange also acquired from ACC Corp a switch located in the United States and certain indefeasible rights of use of a transatlantic telecommunications cable system. The $113 million purchase price for this transaction was comprised of $60 million cash and a $53 million, 12% per annum interest rate note due on or before December 28, 2000. The acquisition has been accounted for as a purchase, and accordingly, the excess purchase price over the fair value of the net assets acquired of approximately $85.0 million has been preliminarily allocated to goodwill and customer base based on management's estimates. Goodwill will be amortized on a straight-line basis over twenty years and the customer base will be amortized over five years. WorldxChange financed $50 million of the cash payment through the issuance in November 1999 of 50,000 shares of Series B Convertible Preferred Stock to two existing shareholders for $50 million. The Series B Convertible Preferred Stock has a liquidation preference of $1,000 per share. Unless previously converted prior to 180 days after the issuance date, on the 180th day each share of Series B Stock shall be convertible automatically, without any additional consideration by the holder thereof, into 111.111 fully paid and non-assessable common shares. Assuming that the acquisition of ACC Corp. had occurred on the first day of WorldxChange's fiscal year ended September 30, 1998, pro forma condensed consolidated results of operations would have been as follows (in thousands):
YEARS ENDED SEPTEMBER 30, -------------------- 1999 1998 --------- -------- (UNAUDITED) Revenues.................................................... $ 581,826 $517,670 Net loss.................................................... (128,654) (47,765)
In January 2000, WorldxChange secured a loan, which allows for borrowing of up to $15 million from a shareholder. The loans bear interest at 15% and becomes payable on December 31, 2000. In February 2000, WorldxChange signed an Agreement and Plan of merger with World Access, Inc. Concurrent with the signing of the Agreement and Plan of merger, World Access, Inc. agreed to participate in WorldxChange's existing loan and security agreement with a financial institution whereby the existing line increased by $30 million. The $30 million consists of a term loan, which bears interest at 11% and is payable in total on February 11, 2001. In May 2000, the loan and security agreement was amended to increase the term loan to $45 million. In January 2000, WorldxChange negotiated payment terms with a network provider to finance outstanding invoices payable to the carrier. Under the terms of the agreement, the Company agreed to pay to the carrier a total of $24.1 million for services through August 31, 1999. Payments in the aggregate of $4.3 million are due and payable in monthly installments through September 30, 2000 and the remainder is payable in monthly installments of $1.25 million beginning October 2000. The financing bears interest at 13%. F-26 277 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO JUNE 30, 2000 AND FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED) 14. RECENT EVENT (UNAUDITED) Effective August 1, 2000, WorldxChange has entered into an Executive Management Services Agreement with World Access under which World Access will manage the operations and business affairs of WorldxChange as if World Access and WorldxChange had already completed the merger. The agreement will terminate on the first to occur of the following: - the parties terminate the WorldxChange merger agreement, - the completion of the WorldxChange merger, - World Access gives WorldxChange 15 days notice or WorldxChange materially breaches the services agreement, or - World Access materially breaches the services agreement. F-27 278 Herrn Dr. Henning F. Klose Vorsitzender des Vorstands TelDaFax AG Postfach 22 06 35010 Marburg INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of TelDaFax AG as of December 31, 1999, 1998 and 1997, and the related consolidated statements of operations, retained earnings, and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 TelDaFax AG as of December 1999, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. As discussed in Note 11, the Company's 1999 financial statements have been restated to account for the acquisition of Demuth & Dietl only from the acquisition date, October 4, 1999. Wiesbaden, August 2, 2000 BDO Deutsche Warentreuhand Aktiengesellschaft Wirtschaftsprufungsgesellschaft /s/ BUNGERS /s/ KARLIK - ------------------------------ ------------------------------ H.G. Bungers Karlik
F-28 279 TELDAFAX GROUP CONSOLIDATED BALANCE SHEETS (ALL AMOUNTS IN DM '000)
DECEMBER 31, JUNE 30, ----------------- 2000 1999 1998 ----------- ------- ------- (UNAUDITED) Current assets: Cash and equivalents...................................... 53,882 178,287 159,011 Accounts receivable, less allowance for doubtful accounts of DM 556 as of June 30, 2000 (unaudited) and DM 1,128 and DM 3,115 as of December 31, 1999 and 1998, respectively........................................... 86,569 80,260 63,853 Inventories............................................... 4,908 4,129 68 Prepaid expenses and other current assets................. 57,579 29,422 7,843 Total current assets.............................. 202,938 292,098 230,775 Equipment and leasehold improvements, net................... 133,199 137,929 67,355 Intangible assets........................................... 32,261 16,451 13,624 Loan to related parties..................................... 1,385 1,411 -- Financial assets............................................ 4,461 -- -- Deferred tax assets, net.................................... 17,394 3,255 -- Other assets................................................ 3,340 4,027 815 ------- ------- ------- Total assets...................................... 394,978 455,171 312,569 ======= ======= ======= Current liabilities: Accounts payable.......................................... 150,353 196,041 90,699 Accrued expenses.......................................... 10,784 6,575 12,094 Other current liabilities................................. 8,856 4,778 -- Current portion of long-term debt......................... 1,424 1,553 -- Current portion of capital lease obligations.............. 13,390 13,761 4,818 ------- ------- ------- Total current liabilities......................... 184,807 222,708 107,611 Long-term debt.............................................. 1,549 1,572 -- Capital lease obligations................................... 37,873 44,251 10,076 Deferred tax liabilities.................................... -- -- 2,794 Other long-term liabilities................................. 707 721 753 ------- ------- ------- Total long-term liabilities....................... 40,129 46,544 13,623 Minority interests.......................................... 1,811 (160) -- Shareholders' equity: Common stock, Eur 2,60 as of June 30, 2000 (unaudited) and December 31, 1999 and DM 5 par value as of December 31, 1998, 33,828,600 authorized, issued and outstanding as of June 30, 2000 (unaudited) and December 31, 1999 and 1998, respectively..................................... 172,024 172,024 169,143 Additional paid in capital................................ 15,787 15,787 15,787 Retained earnings......................................... (19,580) (1,732) 6,405 ------- ------- ------- Total shareholders' equity........................ 168,231 186,079 191,335 ------- ------- ------- Total liabilities and shareholders' equity........ 394,978 455,171 312,569 ======= ======= =======
F-29 280 TELDAFAX GROUP CONSOLIDATED STATEMENTS OF OPERATIONS (ALL AMOUNTS IN DM '000, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ----------------------- ----------------------------------- 2000 1999 1999 1998 1997 ---------- ---------- ---------- ---------- --------- (UNAUDITED) Sales................................. 307,704 305,896 611,018 263,050 32,271 Cost of services...................... (279,607) (248,879) (548,110) (202,359) (31,085) Gross profit.......................... 28,097 57,017 62,908 60,691 1,186 Sales expenses........................ (41,783) (26,257) (50,716) (31,417) (3,434) General administration expenses....... (17,305) (2,808) (17,723) (8,570) (2,797) Other operating income................ 2,260 829 791 327 76 Other operating expenses.............. (4,751) (5,307) (9,625) (2,969) (1,448) Operating income (loss)............... (33,482) 23,474 (14,365) 18,062 (6,417) Financial result...................... 197 1,494 764 425 (1,104) Taxes................................. 13,691 (12,052) 7,009 (9,713) 1,667 Minority interests.................... 1,746 140 1,336 -- -- Net income (loss)..................... (17,848) 13,056 (5,256) 8,774 (5,854) Income (loss) per Common Share from Continuing Operations: Basic and Diluted................... (0.53) 0.39 (0.16) 0.45 (5.16) Weighted Average Shares Outstanding: Basic and Diluted................... 33,828,600 33,828,600 33,828,600 19,296,826 1,133,525
F-30 281 TELDAFAX GROUP CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE OF CHANGES IN COMBINED EQUITY SHAREHOLDER'S FUNDS
ADDITIONAL COMMON STOCK PAID SHARE RETAINED SHARES AMOUNT IN CAPITAL CAPITAL EARNINGS TOTAL ------------ ------- ------------- ------- -------- ------- PIECES DM'000 DM'000 DM'000 DM'000 BALANCE AT DECEMBER 31, 1996...... -- -- -- 4,000 (7,732) (3,732) Issuance of common stock.......... 20,000 100 100 Issuance of common stock.......... 1,648,000 8,240 8,240 Issuance of common stock.......... 714,860 3,574 14,450 18,024 Retirement of share capital....... (4,000) (4,000) Loss of predecessor company....... (3,663) 3,663 -- Contribution in kind.............. 7,554 7,554 Loss for the period............... (5,854) (5,854) ---------- ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1997...... 2,382,860 11,914 10,787 -- (2,369) 20,332 Issuance of common stock.......... 1,000,000 5,000 5,000 10,000 Issuance of IPO -- public......... 9,725,722 48,629 48,629 Issuance of IPO -- old shareholders.................... 20,720,018 103,600 103,600 Cash dividends.................... -- Transfer to legal reserve......... 334 (334) -- Profit for the period............. 8,774 8,774 ---------- ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1998...... 33,828,600 169,143 16,121 -- 6,071 191,335 Issue of share capital (Euro), Dec 17, 1999........................ -- 2,881 (2,881) -- Loss for the period............... (5,256) (5,256) ---------- ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1999...... 33,828,600 172,024 16,121 -- (2,066) 186,079 Loss for the period (unaudited)... (17,848) (17,848) ---------- ------- ------ ------ ------- ------- BALANCE AT JUNE 30, 2000.......... 33,828,600 172,024 16,121 -- (19,914) 168,231 ========== ======= ====== ====== ======= =======
F-31 282 CONSOLIDATED STATEMENTS OF CASH FLOWS TELDAFAX GROUP (ALL AMOUNTS IN DM '000)
SIX MONTHS ENDED YEAR ENDED JUNE 30 DECEMBER 31 ----------------------- ----------------------------- 2000 1999 1999 1998 1997 ---------- ---------- -------- -------- ------- (Unaudited) Net income (loss)...................................... (19,594) 12,916 (5,256) 8,774 (5,854) Minority interests..................................... 1,746 140 (1,336) -- -- Amortization and depreciation.......................... 22,269 13,290 33,630 18,086 5,040 Depreciation of current assets......................... 2,860 -- -- -- -- Loss on the sale of property, plant and equipment...... 6 -- 3,800 6 -- Decrease (increase) in deferred tax assets............. (14,139) -- (3,255) -- -- Increase (decrease) in deferred tax liabilities........ -- -- (2,794) -- -- -------- -------- -------- -------- ------- (6,852) 26,346 24,789 26,866 (814) -------- -------- -------- -------- ------- Decrease (increase) in accounts receivable trade, net of bad debts......................................... (6,309) (14,013) (16,407) (59,817) (2,759) Increase (decrease) in inventories..................... (779) -- (4,061) -- -- Decrease (increase) in prepaid expenses and other current assets....................................... (28,157) (25,413) (21,579) (8,376) -- Decrease (increase) in other assets.................... 687 815 (3,112) 130 -- Increase (decrease) in accounts payable................ (45,688) 11,106 105,342 48,856 7,205 Increase (decrease) in other accrued liabilities....... 8,287 (729) 5,469 34,164 3,091 Increase (decrease) in tax provisions.................. -- 11,905 (6,210) 6,179 31 Increase (decrease) in provision for deferred taxes.... -- (89) -- (60) 2,854 Decrease (increase) in deferred taxes from loss carryforwards........................................ -- -- -- 4,525 (4,525) Increase (decrease) in other long-term liabilities..... (500) (18) 927 2,121 (1,674) Adjustment for effects of acquisition of subsidiaries......................................... (889) 821 4,472 -- -- -------- -------- -------- -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES................... (80,200) 10,731 89,630 54,588 3,409 -------- -------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................................... (10,450) (29,029) (110,397) (65,796) (30,718) Acquisitions........................................... (27,340) (30) (4,757) (350) -- -------- -------- -------- -------- ------- (37,790) (29,059) (115,154) (66,146) (30,718) -------- -------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from capital increases........................ -- -- -- 157,229 2,199 Loans to related parties............................... -- -- (1,411) -- -- Proceeds in respect of share premium amounts........... -- -- -- 5,000 7,512 Proceeds from outstanding amounts due in respect of capital subscribed................................... -- -- -- 9,615 -- Proceeds from outstanding amounts due in respect of share premium amounts................................ -- -- -- 3,275 -- Payments on debt....................................... (23) (22) -- (6) (86) Proceeds from issuance of debt......................... -- 22 3,125 (9,519) 9,519 Payments on capital lease obligations.................. (6,378) -- -- (12,066) -- Proceeds from long-term accounts payable............... -- 4,505 43,118 10,076 -- Payments on other long-term liabilities................ (14) (18) (32) (64) -- Other proceeds from paid-in capital.................... -- -- -- -- 3,663 Proceeds from issuance of other long-term debt......... -- -- -- -- 10,546 -------- -------- -------- -------- ------- (6,415) 4,487 44,800 163,540 33,353 -------- -------- -------- -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (124,405) (13,841) 19,276 151,982 6,044 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 178,287 159,011 159,011 7,029 985 CASH AND CASH EQUIVALENTS AT END OF PERIOD............. 53,882 145,170 178,287 159,011 7,029 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: 12,815 7,729 26,812 5,468 1,106 Interest............................................. 1,617 700 3,415 5,425 1,106 Income taxes......................................... 11,198 7,029 23,397 43 -- NON-CASH INVESTING AND FINANCING ACTIVITIES............ 475 9,283 57,695 10,821 9,519 Assets acquired by incurring capital lease obligations or................................................... 525 9,283 56,086 20,340 -- long term debt......................................... (50) -- 1,609 (9,519) 9,519
F-32 283 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DM IN THOUSANDS) 1. DESCRIPTION OF BUSINESS TelDaFax Telefon-, Daten- und Fax Transfer GmbH & Co. KG was founded in March 1995. On July 1, 1997, TelDaFax Telefon-, Daten und Fax Transfer GmbH & Co. KG transferred all of its business assets to TelDaFax GmbH. TelDaFax AG was then established through a change in the legal form of TelDaFax GmbH. The transfer of the business assets was a contribution-in-kind to TelDaFax GmbH in exchange for new shares. The assets were contributed at their fair market value. The step-up amounts were treated as contributed capital. Following a resolution, of the General Meeting of Shareholders on May 27, 1998, the legal form was changed again to that of a stock corporation in accordance with Sections 190ff and 238ff of the law governing changes in legal form. The incorporation into TelDaFax AG was entered in the Commercial Register on June 10, 1998. TelDaFax AG ("TelDaFax"), a German company, provides voice telephony, fax and data transmission services along with mobile hardware and mobile phone cards throughout Germany. TelDaFax provides fixed-to-mobile, -international and - -domestic connections to commercial and residential customers through a communication network of dedicated lines leased from Deutsche Telekom AG. Prior to January 1, 1998, these services were provided solely to commercial customers. The receipt of a Category 4 License from the Federal Ministry for Post and Telecommunications for fixed-line telecommunication services on September 30, 1997 and the full liberalization of the German telecommunications market on January 1, 1998 allowed TelDaFax to expand these services to residential customers under the carrier number "01030". TelDaFax also provides internet access through its majority-owned subsidiary GeoNet Systems GmbH and mobile phone hardware and calling cards through its majority-owned subsidiaries Demuth & Dietl + Co. Kommunikationselektronic GmbH and Netztel Plus Drillish AG. TelDaFax also wholly owns BNC Kommunikationssysteme GmbH & Co. KG, an operating division responsible for monitoring TelDaFax router system, and TelDaFax Vertriebs GmbH, an operating division consisting of TelDaFax's sales organization. The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles, referred to as US GAAP. TelDaFax maintains its financial records in accordance with German statutory regulations which represents generally accepted accounting principles in Germany. Generally, accepted accounting principles in Germany vary in certain respects from US GAAP. Accordingly, TelDaFax has recorded certain adjustments in order that these financial statements be in accordance with US GAAP. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information (Unaudited) The unaudited consolidated balance sheet as of June 30, 2000 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the six month periods ended June 30, 2000 and 1999, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All adjustments, in the opinion of management, that are necessary for the fair statement of the financial position and the operating results and cash flows for the interim periods have been presented. Results of operations for the six month periods ended June 30, 2000 and 1999 are not necessarily indicative of the results that may be achieved for the entire years or future periods. Principles of Consolidation The accompanying consolidated financial statements include the accounts of TelDaFax and its wholly-and majority-owned financial subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. F-33 284 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Cash and Cash Equivalents TelDaFax considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Concentration of credit risk with respect to trade receivables is limited as the outstanding total represents a large number of customers with individually small balances. The Company does not require collateral or other security interests against trade receivable balances; however, it does maintain reserves for potential credit losses and such losses have been within management's expectations. Substantially all of the Company's cash and cash equivalents are deposited in financial institutions in Germany. Inventories Inventories are stated at the lower of cost or market and are valued using the weighted-average method. Property, Plant and Equipment Property, plant and equipment, is valued at acquisition or production cost and depreciated or amortized over their estimated useful lives, using the straight-line method. Equipment under capital leases are recorded at the net present value of the minimum lease payments and are amortized over the shorter of the useful life of the asset or the lease term using the straight-line method. The range of depreciable lives are as follows:
YEARS ------ Technical equipment, plant and machinery.................... 4 - 7 Operational, office and other equipment..................... 4 - 20
Intangible Assets Intangible assets mainly relate to goodwill, acquired software, acquired technical know-how and the license for fixed-line telecommunication services. Goodwill is amortized on a straight-line basis over 15 years. Goodwill as of June 30, 2000 and December 31, 1999, 1998 and 1997, net of accumulated amortization, was DM 25,363, DM 8,049, DM 3,852 and DM 2,694, respectively. Software is capitalized when it is purchased from a third party, either in the ordinary course of business or, in the case of the acquisition of subsidiaries, as allocated goodwill. It is amortized over 4 years. Technical know-how is capitalized as allocated goodwill in the case of the acquisition of subsidiaries. It is amortized over 4 years. Technical know-how as of June 30, 2000 and December 31, 1999, 1998 and 1997, net of accumulated amortization, was DM 841, DM 1,245, DM 2,054 and DM 2,614, respectively. TelDaFax evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, there were no material adjustments to the carrying value of long-lived assets during the six month period ended June 30, 2000 and 1999 and the years ended December 31, 1999, 1998 and 1997. F-34 285 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition Telecommunication revenue is recognized as services are provided. Mobile hardware revenue is reported when the customer takes possession of the product and prepaid mobile calling card revenue is recorded when the minutes are used. Advertising TelDaFax expenses advertising costs as incurred. Total advertising costs were DM 8,320 DM 5,041, DM 24,696, DM 12,321 and DM 3,434 for the six month periods ended June 30, 2000 and 1999 and the years ended December 31, 1999, 1998 and 1997, respectively. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, SFAS No. 133 was amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS 133". As a result of this amendment, SFAS No. 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In accordance with SFAS No. 133, an entity is required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial position or results of operations. Use of Estimates 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 could differ from those estimates. Reclassification Certain amounts in prior years financial statements have been reclassified to conform with the presentation in 1999. 3. INVENTORIES Inventories consist of:
JUNE 30, DECEMBER 31, ----------- ------------ 2000 1999 1998 ----------- ----- ---- (UNAUDITED) Raw materials............................................... -- -- 68 Work-in-progress............................................ -- 1,027 -- Finished goods.............................................. 4,908 3,102 -- ----- ----- -- 4,908 4,129 68 ===== ===== ==
F-35 286 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following:
JUNE 30, DECEMBER 31, ----------- -------------- 2000 1999 1998 ----------- ------ ----- (UNAUDITED) Contractual claim of purchase reduction for traffic services.................................................. 2,313 -- -- Prepaid income taxes........................................ 28,104 16,858 -- Short-term portion of prepaid commissions................... 8,344 5,090 -- Other....................................................... 18,818 7,474 7,843 ------ ------ ----- Total............................................. 57,579 29,422 7,843 ====== ====== =====
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, consist of:
JUNE 30, DECEMBER 31, ----------- ----------------- 2000 1999 1998 ----------- ------- ------- (UNAUDITED) Technical equipment, plant and machinery.................. 168,573 160,723 75,755 Other equipment, operational and office equipment......... 20,042 18,769 8,657 Construction in progress.................................. 2,662 578 570 ------- ------- ------- Total cost...................................... 191,277 180,070 84,982 Accumulated depreciation and amortization................. (58,078) (42,141) (17,627) ------- ------- ------- Net book value.................................. 133,199 137,929 67,355 ======= ======= =======
6. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, DECEMBER 31, ----------- ------------- 2000 1999 1998 ----------- ----- ----- (UNAUDITED) Loan due November 2002 with a yearly principal reduction of DM 34.787 and an interest rate of 5.5 %................... 49 72 -- Term loan due September, 2003 with interest payable at per annum rate equal to 6.75 %................................ 1,500 1,500 -- ----- ----- ----- Total............................................. 1,549 1,572 -- ===== ===== =====
Aggregate maturities of long-term debt as of December 31, 1999 are as follows:
PRINCIPAL INTEREST TOTAL --------- -------- -------- 2001........................................................ 35 101 136 2002........................................................ 37 100 137 2003........................................................ 1,500 74 1,574 2004........................................................ -- -- -- Thereafter.................................................. -- -- -- ----- --- ----- Total............................................. 1,572 275 1,847 ===== === =====
F-36 287 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The loans are secured by transfers of ownership by way of security, blank assignments as well as land charges of Demuth & Dietl. 7. CAPITAL LEASE OBLIGATIONS The future minimum lease payments as of December 31, 1999 under capital leases consist of the following:
CAPITAL LEASES -------------- 2000........................................................ 16,609 2001........................................................ 15,213 2002........................................................ 14,803 2003........................................................ 13,641 2004........................................................ 4,226 Thereafter.................................................. -- ------- Total minimum lease payments................................ 64,492 Less amount representing interests.......................... 6,480 ------- Present value of minimum lease payments..................... 58,012 Less current portion........................................ (13,761) ------- Amounts due after one year........................ 44,251 =======
8. INCOME TAXES Income taxes are provided for in accordance with the provisions of FASB Statement No. 109, Accounting for Income Taxes. Under this method, TelDaFax recognizes deferred tax assets and liabilities for the expected future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities, as well as operating loss carryforwards. The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, --------------------------- 1998 1999 ------------ ------------ Current income taxes: Payment for 1998 in 1999.................................. -- 989 Corporate tax claim from loss carryback 1999 to 1998...... -- (950) Prepaid trade taxes....................................... (25) -- Prepaid corporate taxes................................... (475) -- Provision from trade taxes................................ (732) -- Provision from corporate taxes............................ (5,500) -- ------ ----- (6,732) 39 Deferred taxes: Provision from trade taxes................................ (1,042) 2,278 Provision from corporate taxes............................ (1,934) 4,231 ------ ----- (2,976) 6,509 ------ ----- Total provision for income taxes.................. (9,708) 6,548 ====== =====
F-37 288 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes consist of the following:
YEAR ENDED DECEMBER 31, --------------- 1998 1999 ------ ----- Deferred tax liabilities: On Amortization of intangible assets........................ 2,794 1,589 Elimination of intermediate earnings from tangible assets...................................... -- (535) Differences in value assessment............................. -- 211 ------ ----- Total deferred tax liabilities.................... 2,794 1,265 Deferred tax assets: Tax loss carry forward...................................... -- 4,520 ------ ----- Total deferred tax assets......................... -- 4,520 ------ ----- Net deferred tax assets........................... (2,794) 3,255 ====== =====
The provision for income taxes differs from the amount of income tax provision computed by applying the Germany federal income tax rate to income before income taxes and minority interest. A reconciliation of the differences is as follows: Loss before income taxes and minority interest:............. DM (13,486) Income tax rate............................................. 46% Expected income tax:........................................ DM (6,204) Prior year payment.......................................... DM (989) Differences in value assessment............................. DM (211) Elimination of intermediate earnings........................ DM 535 Higher tax rate on loss carryback........................... DM 321 ------------- Total provision for income taxes.................. DM (6,548) =============
9. SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ------- ------- ------- DM '000 DM '000 DM '000 Profit (loss) for the period................................ (5,854) 8,774 (5,256) Loss of predecessor company................................. 3,663 -- -- Increase contributed capital................................ 10,787 5,000 -- Capital increase............................................ 15,468 -- -- Issue of share capital...................................... -- 157,229 -- ------ ------- ------- Net changes in combined equity shareholder's funds.......... 24,064 171,003 (5,256) Opening combined equity shareholder's funds................. (3,732) 20,332 191,335 ------ ------- ------- Closing combined equity shareholder's funds....... 20,332 191,335 186,079 ====== ======= =======
The share capital is divided into 33,828,600 non par value bearer shares with a theoretical nominal value of EUR 2,60. The executive board is authorized, with the approval of the supervisory board, to increase the share capital of TelDaFax in the period up to June 9, 2004 at one time or on several occasions by up to a total amount of EUR 42,900,000.00 through the issue of new no par value bearer shares with a theoretical nominal value of EUR 2,60 each against payment in cash or contribution in kind (authorized capital). Shareholder's are to be granted subscription rights with respect thereto. However, subject to the approval of the supervisory board may decide on the exclusion of subscription rights for existing shareholders. F-38 289 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The executive board is authorized, with the approval of the supervisory board, at one time or on several occasions in the period up to June 9, 2004, to grant bearer options and/or convertible bonds with up to a total nominal amount of EUR 858,000,000.00 and a term of no longer than 20 years and to grant option rights to the bearers of convertible debenture stock or to grant the bearers of convertible bonds right of conversion for new shares of TelDaFax with stake in share capital of up to EUR 42,900,000.00 -- or up to 16,500,000 shares -- within the limits of the conditions for options or bonds. 10. COMMITMENTS AND CONTINGENCIES Operating Leases Certain buildings and automobiles are under noncancellable operating lease agreements expiring in various years. Minimum future lease obligations, by year and in aggregate, as of December 31, 1999 are as follows:
OPERATING LEASES ---------------- 2000........................................................ 2,033 2001........................................................ 1,888 2002........................................................ 1,470 2003........................................................ 1,218 2004........................................................ 1,167 Thereafter.................................................. 17,505 ------ Total minimum lease payments...................... 25,281 ======
Legal Proceedings TelDaFax and certain of its suppliers have entered into legal proceedings regarding the cost, functionality and period of services provided. TelDaFax has two such disputes outstanding which individually amount to DM 21,000 and DM 5,000, respectively. TelDaFax has refused payment of these amounts because of defective delivery or cancellation of the supplier contracts. TelDaFax has accrued amounts, including legal fees, which it believes reflect the amounts for which it will ultimately settle these disputes. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of TelDaFax's management, based on information available at this time, that the expected outcome of these matters, individually, or in the aggregate, will not have an adverse effect on the results of operations and financial condition of TelDaFax. 11. ACQUISITIONS On July 1, 1997, TelDaFax acquired 100% of the stock of BNC Kommunikationssysteme GmbH & Co. KG, a router management service provider, for DM 3,037. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 1,374 and goodwill allocated to technical know-how of DM 2,987. On January 1, 1998, TelDaFax acquired 100% of the stock of TelDaFax Vertriebs GmbH, a sales organization, for DM 250. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 115. On December 8, 1998, TelDaFax acquired 75% of the stock of GeoNet Systems GmbH, an internet access provider, for DM 400. TelDaFax recorded the acquisition in accordance with purchase accounting as of January 1, 1999 (the acquisition was classified as an investment as of December 31, 1998) resulting in goodwill of DM 1,478. F-39 290 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On October 4, 1999, TelDaFax acquired 51% of the stock of Demuth & Dietl + Co. Kommunikationselektronik GmbH, a provider of mobile hardware and calling cards, for DM 5,200. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 3,414. Previously, the financial statements reflected the acquisition of Demuth & Dietl from January 1, 1999 in accordance with the terms to the agreement between TelDaFax and the sellers but, under US GAAP, the Company subsequently determined that it did not "control" Demuth & Dietl until the transaction closed in October, 1999. Unaudited pro forma information with respect to TelDaFax as if the 1998, 1999 and 2000 acquisitions had occurred on January 1, 1998, is as follows:
NET INCOME YEAR ENTITY NET REVENUE (LOSS) - ---- ------ ----------- ----------- (UNAUDITED) (UNAUDITED) 1999 TelDaFax................................................. 630,232 (10,911) Demuth & Dietl........................................... 58,787 (181) Netztel.................................................. 17,781 (613) Eliminations............................................. (19,214) 5,579 ------- ------- Combined................................................. 687,586 (6,126) ======= ======= 1998 TelDaFax................................................. 292,033 16,890 Demuth & Dietl........................................... 107,204 (50) Netztel.................................................. -- (204) Eliminations............................................. (28,983) (8,116) ------- ------- Combined................................................. 370,254 8,520 ======= =======
12. RELATED PARTY TRANSACTIONS In conjunction with TelDaFax's acquisition of Demuth & Dietl + Co. Kommunikationselektronic GmbH, a DM 1,411 loan was made to a division of the acquired company excluded from the transaction with payments beginning in 2000. 13. BUSINESS SEGMENT INFORMATION TelDaFax provides telecommunication products and services to its customers in Germany in three distinct business segments organized around the different services provided: Fixed Network, Mobile and Internet. The Fixed Network is made up of one operating unit: TelDaFax. TelDaFax provides fixed-to-mobile, - -international and -domestic telephony, fax and data connections to commercial and residential customers through its communication network leased from Deutsche Telekom AG. Mobile services, which consist of hardware sales and calling cards provided through a distribution network consisting of over 1,500 retailer dealers in Germany, are provided by Demuth + Dietl + Co. Kommunikationselektronic GmbH and Netztel Plus Drillish. Internet services, which consists of internet access, is provided by GeoNet Systems GmbH. F-40 291 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tables below present information about the business segments in which TelDaFax operates and represent information utilized by management to evaluate its business segments. TELDAFAX FINANCIAL DATA PER SEGMENT
SIX MONTHS ENDED JUNE 30, 1999 --------------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- ------- (IN THOUSAND DM) Sales to unaffiliated customers............................. 305,065 831 -- 305,896 Intersegment revenues....................................... -- -- -- -- Segment revenues............................................ 305,065 831 -- 305,896 Depreciation and amortization............................... (13,229) (61) -- (13,290) Segment operating profit (loss)............................. 23,463 (818) -- 22,645 Segment assets.............................................. 353,992 953 -- 354,945 Expenditures for long-lived assets.......................... 28,529 530 -- 29,059 Reconciliations: NET RESULT Total operating result for the reportable segments........ 22,645 Other income.............................................. 829 Financial result.......................................... 1,494 Other expense, net........................................ (12,052) Minority interest......................................... 140 Total consolidated profit (loss).................. 13,056 ASSETS Total assets for reportable segments...................... 354,945 Elimination of intercompany receivables................... (4,191) Total consolidated assets......................... 350,754
SIX MONTHS ENDED JUNE 30, 2000 --------------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- ------- (IN THOUSAND DM) Sales to unaffiliated customers............................. 255,275 3,810 48,619 307,704 Intersegment revenues....................................... -- -- -- -- Segment revenues............................................ 255,275 3,810 48,619 307,704 Depreciation and amortization............................... (22,501) (460) (2,168) (25,129) Segment operating profit (loss)............................. (24,551) (6,987) (4,204) (35,742) Segment assets.............................................. 380,081 1,575 42,477 424,133 Expenditures for long-lived assets.......................... 36,670 144 976 37,790 Reconciliations: NET RESULT Total operating result for the reportable segments........ (35,742) Other income.............................................. 2,260 Financial result.......................................... 197 Other expense, net........................................ 13,691 Minority interest......................................... 1,746 Total consolidated profit (loss).................. (17,848) ASSETS Total assets for reportable segments...................... 424,133 Elimination of intercompany receivables................... (29,155) Total consolidated assets......................... 394,978
F-41 292 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999, AND FOR THE YEAR THEN ENDED ----------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- ------- (IN THOUSAND DM) Sales to unaffiliated customers........................... 587,299 4,124 19,595 611,018 Intersegment revenues..................................... -- -- -- -- Segment revenues.......................................... 587,299 4,124 19,595 611,018 Depreciation and amortization............................. (33,391) (183) (56) (33,630) Segment operating profit (loss)........................... (10,279) (4,843) (34) (15,156) Segment assets............................................ 458,507 3,587 14,154 476,248 Expenditures for long-lived assets........................ 108,185 1,367 845 110,397 Reconciliations: NET RESULT Total operating result for the reportable segments........ (15,156) Other income.............................................. 791 Financial result.......................................... 764 Other expense, net........................................ 7,009 Minority interest......................................... 1,336 Total consolidated profit (loss).................. (5,256) ASSETS Total assets for reportable segments...................... 476,248 Elimination of intercompany receivables................... (21,077) Total consolidated assets......................... 455,171
DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED ----------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- -------- (IN THOUSAND DM) Sales to unaffiliated customers....................... 263,050 -- -- 263,050 Intersegment revenues................................. -- -- -- -- Segment revenues...................................... 263,050 -- -- 263,050 Depreciation and amortization......................... (18,086) -- -- (18,086) Segment operating profit (loss)....................... 17,735 -- -- 17,735 Segment assets........................................ 314,392 -- -- 314,392 Expenditures for long-lived assets.................... 66,146 -- -- 66,146 Reconciliations: NET RESULT Total operating result for the reportable segments.... 17,735 Other income.......................................... 327 Financial result...................................... 425 Other expense, net.................................... (9,713) Minority interest..................................... -- Total consolidated profit (loss).............. 8,774 ASSETS Total assets for reportable segments.................. 314,392 Elimination of intercompany receivables............... (1,823) Total consolidated assets..................... 312,569
F-42 293 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED ---------------------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL -------- ----------- ----------- ------- (IN THOUSAND DM) Sales to unaffiliated customers..................... 32,271 -- -- 32,271 Intersegment revenues............................... -- -- -- -- Segment revenues.................................... 32,271 -- -- 32,271 Depreciation and amortization....................... (5,040) -- -- (5,040) Segment operating profit (loss)..................... (6,493) -- -- (6,493) Segment assets...................................... 61,885 -- -- 61,885 Expenditures for long-lived assets.................. 30,718 -- -- 30,718 Reconciliations: NET RESULT Total operating result for the reportable segments......................................... (6,493) Other income........................................ 76 Financial result.................................... (1,104) Other expense, net.................................. 1,667 Minority interest................................... -- Total consolidated profit (loss)............ (5,854) ASSETS Total assets for reportable segments................ 61,885 Elimination of intercompany receivables............. -- Total consolidated assets................... 61,885
Other Information TelDaFax is dependent upon one significant supplier for the leasing of transmission lines and billing operations for call-by-call customers. TelDaFax's reliance on this external source can be shifted, over a period of time, to alternative sources should the changes be necessary. However, there may be a material adverse effect on the business, financial and operations of TelDaFax. 14. SUBSEQUENT EVENTS Investment in Netztel Plus Drillish AG On February 3, 2000, TelDaFax acquired an 81.9% of the stock of Netztel Plus Drillish AG, a mobile phone calling card provider, for DM 15,000. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 13,658. Investment in Internet AG On April 5, 2000, TelDaFax acquired a 32% interest in Internet AG, a provider of e-commerce solutions with integrated payment systems, on-line shops and electronic market places. TelDaFax's investment totaled Euro 2,275. F-43 294 ANNEX A AGREEMENT AND PLAN OF MERGER AMONG WORLD ACCESS, INC. STAR TELECOMMUNICATIONS, INC. AND STI MERGER CO. 295 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of February 11, 2000 (this "Agreement"), is made and entered into among WORLD ACCESS, INC., a Delaware corporation ("WAXS"), STI Merger Co., a Delaware corporation and wholly-owned subsidiary of WAXS ("Merger Sub"), and STAR TELECOMMUNICATIONS, INC., a Delaware corporation ("STAR"). W I T N E S S E T H: WHEREAS, the Boards of Directors of STAR and WAXS deem it advisable and in the best interests of each corporation and its respective stockholders that STAR and WAXS engage in a business combination in order to advance the long-term strategic business interests of STAR and WAXS; WHEREAS, the combination of STAR and WAXS shall be effected by the terms of this Agreement through a merger as outlined below (the "Merger"); WHEREAS, in furtherance thereof, the respective Boards of Directors of STAR, Merger Sub and WAXS have approved the Merger, upon the terms and subject to the conditions set forth in this Agreement, pursuant to which each share of common stock, par value $0.001 per share, of STAR ("STAR Common Stock") issued and outstanding immediately prior to the Effective Time (as defined in Section 1.3) will be converted into the right to receive the consideration set forth in Section 1.6; WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder; and WHEREAS, simultaneously with the execution and delivery of this Agreement, WAXS and Christopher E. Edgecomb and Samer Tawfik (the "Principal Stockholders") are entering into an agreement (the "Voting and Stock Transfer Restriction Agreement") pursuant to which each Principal Stockholder will agree to, among other things, vote in favor of the Merger and certain restrictions on the transfer of the consideration received in the Merger. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), STAR shall be merged with and into Merger Sub at the Effective Time (as defined below). Following the Merger, the separate corporate existence of STAR shall cease and Merger Sub shall continue as the surviving corporation (the "Surviving Corporation"). 1.2 Closing. Subject to the satisfaction or waiver of the conditions set forth in Article VI, the closing of the Merger and the transactions contemplated by this Agreement (the "Closing") will take place on the second business day following the satisfaction or waiver of such conditions, unless another time or date is agreed to in writing by the parties hereto (the date of the Closing being referred to herein as the "Closing Date"). The Closing shall be held at the offices of Long Aldridge & Norman LLP, 303 Peachtree Street, Suite 5300, Atlanta, Georgia 30303, unless another place is agreed to by the parties hereto. 1.3 Effective Time. On the Closing Date the parties shall (i) file a certificate of merger (the "Certificate of Merger") in such form as is required by, and executed in accordance with, the relevant provisions of the DGCL and (ii) make all other filings or recordings required under the DGCL in A-1 296 connection with the Merger. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Delaware Secretary of State or at such subsequent time as WAXS and STAR shall agree and as shall be specified in the Certificate of Merger (the date and time the Merger becomes effective being the "Effective Time"). 1.4 Effects of the Merger. At and after the Effective Time, the Merger will have the effects set forth in the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers, licenses, authorizations and franchises of Merger Sub and STAR shall be vested in the Surviving Corporation, and all debts, liabilities and duties of Merger Sub and STAR shall become the debts, liabilities and duties of the Surviving Corporation. 1.5 Certificate of Incorporation/Bylaws. The certificate of incorporation and bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation and bylaws of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law. 1.6 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of WAXS, Merger Sub, STAR or the holders of any of the following securities: (a) [Intentionally omitted.] (b) Each share of STAR Common Stock issued and outstanding and directly or indirectly owned or held by STAR or a Subsidiary thereof at the Effective Time shall, by virtue of the Merger, cease to be outstanding and shall be canceled and retired and no capital stock of WAXS or other consideration shall be delivered in exchange therefor. (c) Subject to Section 2.4, each share of STAR Common Stock issued and outstanding immediately prior to the Effective Time (other than the Dissenter's Shares (as defined in Section 8.12)) shall be converted into the right to receive, at the election of WAXS by written notice to STAR prior to the Closing, (i) the number of shares of WAXS Common Stock obtained by solving for "X" in the following formula (the "Exchange Ratio"): X = 7.81 + Z -------- 20 or (ii) such number of shares of WAXS Common Stock as shall equal sixty percent (60%) of the Exchange Ratio and an amount in cash equal to forty percent (40%) of the sum of $7.81 plus "Z" (as defined below); provided, however, that WAXS and STAR expressly agree that, notwithstanding anything in this Agreement to the contrary, in order to ensure that the Merger satisfies the continuity of interest requirement under Treasury Regulation Section 1.368-1(e), that in no event shall WAXS issue cash for more than forty-five percent (45%) of the outstanding shares of STAR Common Stock, including for purposes of this calculation cash paid for fractional shares pursuant to Section 2.4 and cash paid for Dissenters' Shares. For purposes of this Section 1.6, "Z" shall equal the PT-1 Excess Proceeds (as defined in Section 8.12) divided by 62,856,702. All shares of STAR Common Stock, at the Effective Time, shall no longer be outstanding and shall automatically be canceled and retired and each holder of a certificate representing any such shares (a "Certificate") shall cease to have any rights with respect thereto, except as set forth in this Section 1.6(c), Section 2.4 or at law. The shares of WAXS Common Stock issued pursuant to this Section 1.6(c) together with any cash in lieu of fractional shares paid pursuant to Section 2.4 shall be referred to herein as the "Merger Consideration." 1.7 STAR Stock Options. (a) At the Effective Time, by virtue of the Merger and without any further action on the part of STAR, WAXS, Merger Sub or the holder of any outstanding option, warrant or other right to acquire STAR capital stock (a "STAR Stock Option"), each STAR Stock Option will be automatically converted into a WAXS Stock Option (as defined in Section 3.1(b)) to purchase shares of WAXS Common Stock in an amount equal to the number of shares of STAR Common Stock covered under A-2 297 such STAR Stock Option multiplied by the Exchange Ratio (rounded to the nearest whole number of shares of WAXS Common Stock) at a price per share of WAXS Common Stock equal to the per share option exercise price specified in the STAR Stock Option divided by the Exchange Ratio (rounded to the nearest whole cent). Each such WAXS Stock Option shall contain terms and provisions which are substantially similar to those terms, conditions and provisions governing the original STAR Stock Option, except that references to STAR in such STAR Stock Option will be deemed to refer to WAXS and the date of grant of the STAR Stock Option shall be deemed to be the date of grant of such WAXS Stock Option. At the Effective Time, for purposes of interpretation of such new WAXS Stock Option, (i) all references in any stock option plan of STAR shall be deemed to refer to WAXS; (ii) any stock option plan of STAR which governs the STAR Stock Option shall continue to govern the WAXS Stock Option substituted therefor; and (iii) WAXS shall, as soon as practicable after the Effective Time, issue to each holder of an outstanding STAR Stock Option a document evidencing the foregoing issued and substituted WAXS Stock Option by WAXS. It is the intention of the parties: (1) that, subject to applicable law, STAR Stock Options assumed by WAXS qualify, following the Effective Time, as incentive stock options, as defined in Section 422 of the Code, to the extent that STAR Stock Options qualified as incentive stock options prior to the Effective Time, (2) that each holder of a STAR Stock Option shall receive a new WAXS Stock Option which preserves (but does not increase) the excess of the fair market value of the shares subject to such STAR Stock Option immediately before the Effective Time over the aggregate option price of such shares immediately before the Effective Time, if any such excess then exists, (3) that the terms, conditions, restrictions and provisions of the WAXS Stock Option be substantially similar to the terms, conditions, restrictions and provisions of the STAR Stock Option, and (4) any terms conditions, restrictions or provisions of a STAR Stock Option applicable to a number of shares rather than a percentage or fraction of shares should be appropriately adjusted based upon the Exchange Ratio. Without the prior written consent of WAXS (which may be withheld in its discretion), no new options shall be issued by STAR on or after the date hereof, including, without limitation, under any stock option plan currently maintained by STAR. (b) With respect to each STAR Stock Option converted into a WAXS Stock Option pursuant to Section 1.7(a), and with respect to the shares of WAXS Common Stock underlying such option, WAXS shall file and keep current all requisite registration statements, on Form S-8 or other appropriate form, for as long as such options remain outstanding, which registration statement shall include a prospectus meeting the requirements of General Instruction C to Form S-8 with respect to affiliates of STAR, subject at all times to compliance with all applicable federal and state securities laws. (c) After the date of this Agreement, STAR agrees that it will not grant any restricted stock, stock appreciation rights or limited stock appreciation rights and also agrees that it will not permit cash payments to holders of STAR Stock Options in lieu of the substitution therefor of WAXS Stock Options, as described in this Section 1.7. 1.8 Certain Adjustments. If between the date hereof and the Effective Time, the outstanding WAXS Common Stock or STAR Common Stock shall have been changed into a different number of shares or different class by reason of any reclassification, recapitalization, stock split, split-up, combination, exchange of shares or similar capital stock event or a stock dividend or dividend payable in any other securities shall be declared with a record date within such period, or any similar event shall have occurred, the Exchange Ratio shall be appropriately adjusted to provide to the holders of STAR Common Stock and the holders of STAR Stock Options the same economic effect as contemplated by this Agreement prior to such event. A-3 298 ARTICLE II EXCHANGE OF CERTIFICATES 2.1 Exchange Fund. At least five (5) days prior to the mailing of the Joint Proxy Statement/Prospectus (as defined in Section 5.1), WAXS shall appoint a commercial bank or trust company reasonably acceptable to STAR to act as exchange agent hereunder (the "Exchange Agent") for the purpose of exchanging Certificates for the Merger Consideration. Immediately prior to the Effective Time, WAXS shall deposit with the Exchange Agent, in trust for the benefit of holders of shares of STAR Common Stock, cash payable and certificates representing the WAXS Common Stock issuable pursuant to Section 1.6 in exchange for outstanding shares of STAR Common Stock. WAXS agrees to deposit with the Exchange Agent from time to time as needed, cash sufficient to pay cash in lieu of fractional shares pursuant to Section 2.4 and any dividends and other distributions pursuant to Section 2.3. Any cash and certificates of WAXS Common Stock deposited with the Exchange Agent shall hereinafter be referred to as the "Exchange Fund". 2.2 Exchange Procedures. As soon as reasonably practicable after the Effective Time, WAXS shall cause the Exchange Agent to mail to each holder of a Certificate (other than to holders of Dissenter's Shares) (i) a letter of transmittal which shall advise such holder of the effectiveness of the Merger and specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, and which letter shall be in customary form and have such other provisions as WAXS may reasonably specify and (ii) instructions for effecting the surrender of such Certificates in exchange for the applicable Merger Consideration. Upon surrender of a Certificate to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor promptly (A) one or more shares of WAXS Common Stock (which shall be in uncertificated book entry form unless a physical certificate is requested) representing, in the aggregate, the whole number of shares that such holder has the right to receive pursuant to Section 1.6 (after taking into account all shares of STAR Common Stock then held by such holder), and (B) a check in the amount equal to the cash that such holder has the right to receive pursuant to the provisions of Section 1.6(c), if any, and this Article II, including cash in lieu of any additional shares of WAXS Common Stock pursuant to Section 2.4 and dividends and other distributions pursuant to Section 2.3. No interest will be paid or will accrue on any cash payable pursuant to 1.6(c), Section 2.3 or Section 2.4. In the event of transfer of ownership of STAR Common Stock which is not registered in the transfer records of STAR, one or more shares of WAXS Common Stock evidencing, in the aggregate, the proper number of shares of WAXS Common Stock, a check in the proper amount of cash in lieu of any additional shares of WAXS Common Stock pursuant to Section 2.4, a check in the proper amount of cash pursuant to Section 1.6(c) and any dividends or other distributions to which such holder is entitled pursuant to Section 2.3, may be issued with respect to such STAR Common Stock to such a transferee if the Certificate representing such shares of STAR Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. 2.3 Distributions with Respect to Unexchanged Certificates. No dividends or other distributions declared or made with respect to shares of WAXS Common Stock with a record date after the Effective Time shall be paid to the holder of any unexchanged Certificate with respect to the shares of WAXS Common Stock that such holder would be entitled to receive upon surrender of such Certificate and no cash payment in lieu of fractional shares of WAXS Common Stock shall be paid to any such holder pursuant to Section 2.4 until such holder shall surrender such Certificate in accordance with Section 2.2. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to such holder of shares of WAXS Common Stock issuable in exchange therefor, without interest, (a) promptly after the time of such surrender, the amount of any cash payable in lieu of fractional shares of WAXS Common Stock to which such holder is entitled pursuant to Section 2.4 and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of WAXS Common Stock, and (b) at the appropriate payment date, the amount of A-4 299 dividends or other distributions with a record date after the Effective Time but prior to such surrender and a payment date subsequent to such surrender payable with respect to such shares of WAXS Common Stock. 2.4 No Fractional Shares of WAXS Common Stock. (a) No certificates or scrip or shares of WAXS Common Stock representing fractional shares of WAXS Common Stock or book-entry credit of the same shall be issued upon the surrender for exchange of Certificates and such fractional share interests will not entitle the owner thereof to vote or to have any rights of a stockholder of or a holder of shares of WAXS Common Stock. (b) Notwithstanding any other provision of this Agreement, each holder of shares of STAR Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of WAXS Common Stock (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to the product of (i) such fractional part of a share of WAXS Common Stock multiplied by (ii) the average of the daily closing price for a share of WAXS Common Stock on the Nasdaq for the ten (10) consecutive trading days in which such shares are traded on the Nasdaq, ending at the close of trading on the date of the Effective Time or, if such date is not a business day, the business day immediately preceding the date on which the Effective Time occurs. As promptly as practicable after the determination of the amount of cash, if any, to be paid to holders of fractional interests, the Exchange Agent shall so notify WAXS, and WAXS shall promptly deposit such amount with the Exchange Agent and shall cause the Exchange Agent to promptly forward payments to such holders of fractional interests subject to and in accordance with the terms hereof. 2.5 No Further Ownership Rights in STAR Common Stock. As applicable, all shares of WAXS Common Stock issued and cash paid upon conversion of shares of STAR Common Stock in accordance with the terms of Article I and this Article II (including any cash paid pursuant to Section 2.4) shall be deemed to have been issued or paid in full satisfaction of all rights pertaining to the shares of STAR Common Stock. 2.6 Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of Certificates for six (6) months after the Effective Time shall be delivered to the Surviving Corporation or otherwise on the instruction of the Surviving Corporation, and any holders of the Certificates who have not theretofore complied with this Article II shall thereafter look only to the Surviving Corporation and WAXS for the Merger Consideration with respect to the shares of STAR Common Stock formerly represented thereby to which such holders are entitled pursuant to Section 1.6 and Section 2.2, any cash in lieu of fractional shares of WAXS Common Stock to which such holders are entitled pursuant to Section 2.4 and any dividends or distributions with respect to shares of WAXS Common Stock to which such holders are entitled pursuant to Section 2.3. Any such portion of the Exchange Fund remaining unclaimed by holders of shares of STAR Common Stock five (5) years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity (as defined in Section 3.1(c)(3)) shall, to the extent permitted by law, become the property of the Surviving Corporation free and clear of any claims or interest of any Person previously entitled thereto. 2.7 No Liability. None of WAXS, Merger Sub, STAR, the Surviving Corporation or the Exchange Agent shall be liable to any Person in respect of any Merger Consideration from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 2.8 Investment of the Exchange Fund. The Exchange Agent shall invest any cash included in the Exchange Fund as directed by the Surviving Corporation on a daily basis. Any interest and other income resulting from such investments shall promptly be paid to the Surviving Corporation. 2.9 Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such Person of a bond in such reasonable amount as A-5 300 the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will deliver in exchange for such lost stolen or destroyed Certificate the applicable Merger Consideration with respect to the shares of STAR Common Stock formerly represented thereby, any cash in lieu of fractional shares of WAXS Common Stock, and unpaid dividends and distributions on shares of WAXS Common Stock deliverable in respect thereof, pursuant to this Agreement. 2.10 Withholding Rights. Each of the Surviving Corporation and WAXS shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of STAR Common Stock such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code and the rules and regulations promulgated thereunder, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Surviving Corporation or WAXS, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of STAR Common Stock in respect of which such deduction and withholding was made by the Surviving Corporation or WAXS, as the case may be. 2.11 Stock Transfer Books. The stock transfer books of STAR shall be closed immediately upon the Effective Time and there shall be no further registration of transfers of shares of STAR Common Stock thereafter on the records of STAR. On or after the Effective Time, any Certificates presented to the Exchange Agent or WAXS for any reason shall be converted as provided in Articles I and II hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of WAXS and Merger Sub. Except as set forth in the WAXS SEC Reports (as defined below) filed and publicly available prior to the date hereof or the WAXS Disclosure Schedule delivered by WAXS to STAR prior to the execution of this Agreement (the "WAXS Disclosure Schedule") (each section of which qualifies the correspondingly numbered representation and warranty or covenant to the extent specified therein), WAXS and Merger Sub represent and warrant to STAR as follows: (a) Organization; Standing and Power; Subsidiaries. (1) Each of WAXS, its Subsidiaries (as defined in Section 8.12) and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Material Adverse Effect on WAXS, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary other than in such jurisdictions where the failure to so qualify or to be in good standing would not have a Material Adverse Effect on WAXS. The copies of the certificate of incorporation and bylaws of WAXS and Merger Sub which were previously furnished or made available to STAR are true, complete and correct copies of such documents as in effect on the date of this Agreement. (2) Exhibit 21.1 to WAXS's Annual Report on Form 10-K for the year ended December 31, 1998 includes all the Subsidiaries of WAXS which as of the date of this Agreement are Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X of the SEC). All the outstanding shares of capital stock of, or other equity interests in, each such Significant Subsidiary have been validly issued and are fully paid and nonassessable and are owned directly or indirectly by WAXS, free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively "Liens") and free of any other restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). Neither WAXS nor any of its Subsidiaries directly or A-6 301 indirectly owns any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity (other than the Subsidiaries of WAXS) that is or would reasonably be expected to be material to WAXS and its Subsidiaries taken as a whole. (b) Capital Structure. As of February 7, 2000: (1) The authorized capital stock of WAXS consists of (A) 150,000,000 shares of WAXS Common Stock, of which 53,787,805 shares are outstanding and no shares are held in the treasury of WAXS and (B) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which 50,000 shares designated as 4.25% Cumulative Senior Perpetual Convertible Preferred Stock, Series A, par value $.01 per share (the "Series A Preferred Stock"), and 350,259.875 shares designated as Convertible Preferred Stock, Series C (the "Series C Preferred Stock"), are outstanding. WAXS has reserved or has available 4,347,827 shares of WAXS Common Stock for issuance upon conversion of the Series A Preferred Stock and 18,027,478 shares of WAXS Common Stock for issuance upon conversion of the Series C Preferred Stock. All issued and outstanding shares of the capital stock of WAXS are duly authorized, validly issued, fully paid and nonassessable, and no class of capital stock is entitled to preemptive rights. In addition to the rights described in Section 3.1(b) of the WAXS Disclosure Schedule, there are outstanding options, warrants or other rights (a "WAXS Stock Option") to acquire 13,133,837 shares of capital stock from WAXS. (2) No bonds, debentures, notes or other indebtedness of WAXS having the right to vote on any matters on which holders of capital stock of WAXS may vote ("WAXS Voting Debt") are issued or outstanding. (3) Except as otherwise set forth in this Section 3.1(b) and as contemplated by Section 1.5 and Section 1.6, there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which WAXS or any of its Subsidiaries is a party or by which any of them is bound obligating WAXS or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of WAXS or any of its Subsidiaries or obligating WAXS or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call right, commitment, agreement, arrangement or undertaking. There are no outstanding obligations of WAXS or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of WAXS or any of its Subsidiaries. (c) Authority; No Conflicts. (1) WAXS and Merger Sub have all requisite corporate power and authority to enter into this Agreement and to consummate the Merger and the other transactions contemplated hereby, subject, in the case of WAXS, to the approval by the stockholders of WAXS by the Required WAXS Vote (as defined in Section 3.1(g)) of this Agreement, the Merger and the other transactions contemplated hereby and, in the case of Merger Sub, the affirmative vote of WAXS, as sole stockholder thereof, of this Agreement, the Merger and the other transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of WAXS and Merger Sub, subject, in the case of WAXS, to the approval by the stockholders of WAXS of this Agreement, the Merger and the transactions contemplated hereby by the Required WAXS Vote and subject, in the case of Merger Sub, to the affirmative vote of WAXS, as sole stockholder thereof, of this Agreement, the Merger and the other transactions contemplated hereby. This Agreement has been duly executed and delivered by WAXS and Merger Sub and constitutes a valid and binding agreement of each of WAXS and Merger Sub, enforceable against it in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights A-7 302 generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (2) Subject, in the case of WAXS, to the approval by the stockholders of WAXS of this Agreement, the Merger and the transactions contemplated hereby by the Required WAXS Vote and, in the case of Merger Sub, the affirmative vote of WAXS, as sole stockholder thereof, of this Agreement, the Merger and the other transactions contemplated hereby, the execution and delivery of this Agreement by WAXS and Merger Sub does not, and the consummation by WAXS and Merger Sub of the Merger and the other actions contemplated hereby will not, conflict with, or result in any violation of, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation or the loss of a material benefit under, or the creation of a Lien on any assets (any such conflict, violation, default, right of termination, amendment, cancellation or acceleration, loss or creation, a "Violation") of: (A) any provision of the certificate of incorporation or bylaws of WAXS, any Subsidiary of WAXS or Merger Sub, or (B) except as would not have a Material Adverse Effect on WAXS and subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (3) below, any loan or credit agreement, note, mortgage, bond, indenture, lease, or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to WAXS, any Subsidiary of WAXS or their respective properties or assets. (3) No consent, approval, order or authorization of, or registration, declaration or filing with, any supranational, national, state, municipal, local or foreign government, any instrumentality, subdivision, court, administrative agency or commission or other authority thereof, or any quasi-governmental or private body exercising any supranational, national, state, municipal, local or foreign regulatory, taxing, importing or other governmental or quasi-governmental authority (a "Governmental Entity"), is required by or with respect to WAXS, any Subsidiary of WAXS or Merger Sub in connection with the execution and delivery of this Agreement by WAXS or Merger Sub or the consummation of the Merger and the other transactions contemplated hereby, except for those required under or in relation to (A) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (B) state securities or "blue sky" laws (the "Blue Sky Laws"), (C) the Communications Act of 1996, as amended (the "Communications Act"), and all applicable state public utilities laws, (D) the Securities Act, (E) the Exchange Act, (F) the DGCL with respect to the filing of the Certificate of Merger, (G) rules and regulations of Nasdaq, (H) antitrust or other competition laws of other jurisdictions, (I) such consents, approvals, orders, authorizations, registrations, declarations and filings as are required by applicable laws, regulations and rules governing the telecommunications business including, without limitation, those of the United States Federal Communication Commission (the "FCC"), (J) any filings and approvals expressly contemplated by this Agreement, and (K) such consents, approvals, orders, authorizations, registrations, declarations and filings the failure of which to make or obtain would not have a Material Adverse Effect on WAXS. Consents, approvals, orders, authorizations, registrations, declarations and filings required under or in relation to any of the foregoing clauses (A) through (K) are hereinafter referred to as "Necessary Consents". (d) Reports and Financial Statements. (1) WAXS has filed all required registration statements, prospectuses, reports, schedules, forms, statements and other documents required to be filed by it under the federal securities laws with the SEC since January 1, 1998 (collectively, including all exhibits thereto, the "WAXS SEC Reports"). No Subsidiary of WAXS, including, without limitation Merger Sub, is required to file any form, report, registration statement, prospectus or other document with the SEC not otherwise filed with a WAXS SEC Report. As of the respective times such documents were filed or, as applicable, became effective, or as subsequently amended, the WAXS SEC Reports A-8 303 complied as to form and content, in all material respects, with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations promulgated thereunder and, taken as a whole, the WAXS SEC Reports do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the financial statements (including the related notes) included in the WAXS SEC Reports (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) presents fairly, in all material respects, the consolidated financial position and consolidated results of operations and cash flows of WAXS and its Subsidiaries as of the respective dates or for the respective periods set forth therein all in conformity with GAAP consistently applied during the periods involved except as otherwise noted therein, and subject, in the case of the unaudited interim financial statements, to normal and recurring year-end adjustments that have not been and are not expected to be material in amount. All of such WAXS SEC Reports, as of their respective dates (or as of the date of any amendment to the respective WAXS SEC Report filed prior to the date of this Agreement), complied or will comply as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder. (2) Since December 31, 1998, WAXS and its Subsidiaries have not incurred any liabilities that are of a nature that would be required to be disclosed on a balance sheet of WAXS and its Subsidiaries or the footnotes thereto prepared in conformity with GAAP, other than (A) liabilities incurred in the ordinary course of business or (B) liabilities that would not have a Material Adverse Effect on WAXS. (e) Information Supplied. None of the information supplied or to be supplied by WAXS for inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus (as defined herein) will, on the date it is first mailed to WAXS's and STAR's stockholders, as applicable, or at the time of the WAXS Stockholders Meeting or the STAR Stockholders Meeting, as applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Joint Proxy Statement/Prospectus will, on the date it is first mailed to WAXS's and STAR's stockholders and at the time of the WAXS Stockholders Meeting and the STAR Stockholders Meeting, comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. (f) WAXS Board Approval. The Board of Directors of WAXS, by resolutions duly adopted by unanimous vote at a meeting duly called and held and not subsequently rescinded or modified in any way (the "WAXS Board Approval"), has duly (i) determined that this Agreement, the Merger and the other transactions contemplated hereby are fair to and in the best interests of WAXS and its stockholders, (ii) approved this Agreement, the Merger and the other transactions contemplated hereby and (iii) declared the advisability of this Agreement, the Merger and the other transactions contemplated hereby, and, further, (iv) recommended that the stockholders of WAXS approve and adopt this Agreement, the Merger and the other transactions contemplated hereby and directed that this Agreement and the transactions contemplated hereby be submitted for consideration by WAXS's stockholders at the WAXS Stockholders Meeting. (g) Required WAXS Stockholder Vote. The affirmative vote of holders of shares of WAXS Common Stock, Series A Preferred Stock and Series C Preferred Stock, voting together as a single class, representing a majority of the outstanding shares of WAXS Common Stock, Series A Preferred Stock and Series C Preferred Stock (the "Required WAXS Vote"), is the only vote of the holders of any class or series of WAXS capital stock necessary to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. (h) Required Merger Sub Board Approval. The Board of Directors of Merger Sub, by resolutions duly adopted by a unanimous written consent and not subsequently rescinded or modified A-9 304 in any way, has duly (i) determined that this Agreement, the Merger and the other transactions contemplated hereby are fair to and in the best interests of Merger Sub and its sole stockholder, WAXS, (ii) approved this Agreement, the Merger and the other transactions contemplated hereby and (iii) declared the advisability of this Agreement, the Merger and the other transactions contemplated hereby, and, further, (iv) recommended that WAXS adopt this Agreement and approve the Merger and the other transactions contemplated hereby and directed that this Agreement and the transactions contemplated hereby be submitted for consideration by WAXS at a meeting duly called. (i) Required Merger Sub Stockholder Vote. The affirmative vote of WAXS, as sole stockholder of Merger Sub, is the only vote of the holders of any class or series of Merger Sub capital stock necessary to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. (j) Litigation: Compliance with Laws. (1) There is no suit, investigation, action or proceeding pending or, to the Knowledge of WAXS, threatened, against or affecting WAXS or any Subsidiary of WAXS having, or which would have a Material Adverse Effect on WAXS, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against WAXS or any Subsidiary of WAXS having, or which would have a Material Adverse Effect on WAXS. (2) Except as would not have a Material Adverse Effect on WAXS, WAXS and its Subsidiaries hold all permits, licenses, variances, authorizations, exemptions, orders and approvals of all Governmental Entities including, without limitation, the FCC and state public utilities commissions, which are necessary for the operation of the businesses of WAXS and its Subsidiaries (the "WAXS Permits"). Such WAXS permits are valid and in full force and effect and WAXS and its Subsidiaries are in compliance with the terms of the WAXS Permits, except where the failure to be valid and in full force and effect or to so comply would not have a Material Adverse Effect on WAXS. The businesses of WAXS and its Subsidiaries are not being conducted in violation of, and WAXS has not received any notices of violations with respect to, any law, ordinance or regulation of any Governmental Entity, except for possible violations which would not have a Material Adverse Effect on WAXS. WAXS is not aware of any threatened suspension, cancellation or invalidation of any such WAXS Permit. Except as set forth in the WAXS SEC Reports or except as would not have a Material Adverse Effect on WAXS, neither WAXS nor any of its Subsidiaries has received notice from either the FCC or any state public utilities commissions of any complaint filed therewith concerning WAXS or any of its Subsidiaries, operations or services. (k) Absence of Certain Changes or Events. Except for liabilities incurred in connection with this Agreement or the transactions contemplated hereby, and except as permitted by Section 4.1, since December 31, 1998 through and including the date hereof, (i) WAXS and its Subsidiaries have conducted, in all material respects, their business only in the ordinary course and (ii) there has not been any change, circumstance or event which has had, or would reasonably be expected to have, a Material Adverse Effect on WAXS, other than any change, circumstance or effect relating (A) to the economy or financial markets in general, or (B) in general to the industries in which WAXS and its Subsidiaries operate and not specifically relating to WAXS and its Subsidiaries. (l) Intellectual Property. Except as would not have a Material Adverse Effect on WAXS: (i) WAXS and each of its Subsidiaries owns, or is licensed to use (in each case, free and clear of any Liens, or claim of rights therein by any third party) all Intellectual Property (as defined below) used in or necessary for the conduct of its business as currently conducted, (ii) the use of any Intellectual Property by WAXS and its Subsidiaries does not infringe on or otherwise violate the rights of any Person and is in accordance with any applicable license pursuant to which WAXS or any Subsidiary acquired the right to use any Intellectual Property; (iii) to the Knowledge of WAXS, no Person is challenging, infringing on or otherwise violating any right of WAXS or any of its Subsidiaries with respect to any Intellectual Property owned by and/or licensed to WAXS or its A-10 305 Subsidiaries; and (iv) neither WAXS nor any of its Subsidiaries has received any written notice of any pending claim with respect to any Intellectual Property used by WAXS and its Subsidiaries and to WAXS's Knowledge no Intellectual Property owned and/or licensed by WAXS or its Subsidiaries is being used or enforced in a manner that would result in the abandonment, cancellation or unenforceability of such Intellectual Property. For purposes of this Agreement, "Intellectual Property" shall mean trademarks, service marks, brand names, certification marks, trade dress and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not, in any jurisdiction; patents, applications for patents (including, without limitation, divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; non-public information, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not, in any jurisdiction; registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; any similar intellectual property or proprietary rights; and any claims or causes of action arising out of or relating to any infringement or misappropriation of any of the foregoing. (m) Brokers or Finders. No agent, broker, investment banker, financial advisor or other firm or Person is or will be entitled to any broker's or finder's fee or any other similar commission or fee in connection with any of the transactions contemplated by this Agreement based upon arrangements made by or on behalf of WAXS, except Donaldson, Lufkin & Jenrette Securities Corporation (the "WAXS Financial Advisor"), whose fees and expenses will be paid by WAXS in accordance with WAXS's agreement with such firm, a copy of which has been, or will be promptly when available, provided to STAR. (n) Opinion of WAXS Financial Advisor. WAXS has received the opinion of the WAXS Financial Advisor, dated the date of this Agreement, to the effect that as of such date, the Merger Consideration is fair, from a financial point of view, to WAXS and its stockholders, a copy of which has been provided to STAR. (o) Taxes. (1) (i) All material Tax Returns of WAXS and each of its Subsidiaries have been filed, or requests for extensions have been timely filed and have not expired; (ii) all Tax Returns filed by WAXS and its Subsidiaries are complete and accurate in all material respects; (iii) all Taxes shown to be due on such Tax Returns or on subsequent assessments with respect thereto have been paid or adequate reserves have been established for the payment of such Taxes, and no other material Taxes are payable by WAXS or any of its Subsidiaries with respect to items or periods covered by such Tax Returns (whether or not shown on or reportable on such Tax Returns) or with respect to any period prior to the date of this Agreement; (iv) there are no material liens on any of the assets of WAXS or any of its Subsidiaries with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that WAXS and its Subsidiaries is contesting in good faith through appropriate proceedings and for which appropriate reserves have been established; and (v) there is no audit, examination, deficiency or refund litigation or matter in controversy with respect to any Taxes of WAXS and its Subsidiaries that might reasonably be expected to result in a Tax determination which would have a Material Adverse Effect on WAXS. (2) There are no contracts, agreements, plans or arrangements, including but not limited to the provisions of this Agreement, covering any employee or former employee of WAXS or any of its Subsidiaries that, individually or collectively, could give rise to the payment of any amount (or portion thereof) that would not be deductible pursuant to Sections 280G, 404, or 162 of the Code. (3) Neither WAXS nor any of its Subsidiaries is a party to a Tax Sharing Agreement. A-11 306 (p) Certain Contracts. Neither WAXS nor any of its Subsidiaries is a party to or bound by (i) any "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any noncompetition agreement or any other agreement or arrangement that limits or otherwise restricts WAXS or any of its Subsidiaries or any successor thereto, from engaging or competing in any line of business or in any geographic area, which agreement or arrangement would have a Material Adverse Effect on WAXS or the Surviving Corporation after giving effect to the Merger, or (iii) any agreement or arrangement between WAXS or any of its Subsidiaries, on the one hand, and any affiliates, directors or officers of WAXS or its Subsidiaries, on the other hand, that is not on arm's-length terms. All contracts filed with the WAXS SEC Reports and the contracts listed on Section 3.1(p) of the WAXS Disclosure Schedule are valid, binding and are in full force and effect and enforceable in accordance with their respective terms, except to the extent that such enforceability may be subject to applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting the enforcement or creditors' rights generally or by general equitable principles, and other than such contracts which by their terms are no longer in force or effect. Neither WAXS nor its Subsidiaries are in violation or breach of or default under any such contract, nor to WAXS's and its Subsidiaries' Knowledge, is any other party to any such contract in violation or breach or other default under any such contract, except for any such violation, breach or default which would not have a Material Adverse Effect on WAXS. 3.2 Representations and Warranties of STAR. Except as set forth in the STAR SEC Reports (as defined below) filed and publicly available prior to the date hereof or the STAR Disclosure Schedule delivered by STAR to WAXS prior to the execution of this Agreement (the "STAR Disclosure Schedule") (each section of which qualifies the correspondingly numbered representation and warranty or covenant to the extent specified therein), STAR represents and warrants to WAXS as follows: (a) Organization; Standing and Power; Subsidiaries. (1) Each of STAR and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Material Adverse Effect on STAR, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary, other than in such jurisdictions where the failure to so qualify or to be in good standing would not have a Material Adverse Effect on STAR. The copies of the certificate of incorporation and bylaws of STAR which were previously furnished or made available to WAXS are true, complete and correct copies of such documents as in effect on the date of this Agreement. (2) Exhibit 21.1 to STAR's Annual Report on Form 10-K for the year ended December 31, 1998 includes all the Subsidiaries of STAR which as of the date of this Agreement are Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X of the SEC). All the outstanding shares of capital stock of, or other equity interests in, each such Significant Subsidiary have been validly issued and are fully paid and nonassessable and are owned directly or indirectly by STAR, free and clear of all Liens and free of any other restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). Neither STAR nor any of its Subsidiaries directly or indirectly owns any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity (other than the Subsidiaries of STAR), that is or would reasonably be expected to be material to STAR and its Subsidiaries taken as a whole. A-12 307 (b) Capital Structure. (1) The authorized capital stock of STAR consists of (A) 50,000,000 shares of STAR Common Stock, of which 58,683,131 shares are outstanding and no shares are held in the treasury of STAR and (B) 5,000,000 shares of preferred stock, par value $0.001 per share, of which no shares are outstanding. All issued and outstanding shares of the capital stock of STAR are duly authorized, validly issued, fully paid and nonassessable, and no class of capital stock is entitled to preemptive rights. There are outstanding options, warrants or other rights to acquire 4,173,571 shares of capital stock from STAR. Section 3.2(b) of the STAR Disclosure Schedule lists the exercise price and vesting schedule for each STAR Stock Option. (2) No bonds, debentures, notes or other indebtedness of STAR having the right to vote on any matters on which holders of capital stock of STAR may vote ("STAR Voting Debt") are issued or outstanding. (3) Except as otherwise set forth in this Section 3.2(b), there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which STAR or any of its Subsidiaries is a party or by which any of them is bound obligating STAR or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other voting securities of STAR or any of its Subsidiaries or obligating STAR or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. There are no outstanding obligations of STAR or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of STAR or any of its Subsidiaries. (c) Authority; No Conflicts. (1) STAR has all requisite corporate power and authority to enter into this Agreement and to consummate the Merger and the other transactions contemplated hereby, subject to the approval by the stockholders of STAR by the Required STAR Vote (as defined in Section 3.2(g)) of this Agreement, the Merger and the other transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of STAR, subject to the approval by the stockholders of STAR of this Agreement and the Merger and the other transactions contemplated hereby by the Required STAR Vote. This Agreement has been duly executed and delivered by STAR and constitutes a valid and binding agreement of STAR, enforceable against it in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (2) Subject to the approval by the stockholders of STAR of this Agreement, the Merger and the other transactions contemplated hereby by the Required STAR Vote, the execution and delivery of this Agreement by STAR does not, and the consummation by STAR of the Merger and the other actions contemplated hereby will not, conflict with, or result in a Violation of: (A) any provision of the certificate of incorporation or bylaws of STAR or a Shareholder or any Subsidiary of STAR or (B) except as would not have a Material Adverse Effect on STAR, subject to obtaining or making the consents, approvals, orders, authorizations, registrations, declarations and filings referred to in paragraph (3) below, any loan or credit agreement, note, mortgage, bond, indenture, lease, or other agreement, obligation, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to STAR, any Subsidiary of STAR or their respective properties or assets. (3) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to STAR or any Subsidiary of A-13 308 STAR in connection with the execution and delivery of this Agreement by STAR, or the consummation of the Merger and the other transactions contemplated hereby, except the Necessary Consents and such consents, approvals, orders, authorizations, registrations, declarations and filings the failure of which to make or obtain would not have a Material Adverse Effect on STAR. (d) Reports and Financial Statements. (1) STAR has filed all required registration statements, prospectuses, reports, schedules, forms, statements and other documents required to be filed by it under the federal securities laws with the SEC since January 1, 1998 (collectively, including all exhibits thereto, the "STAR SEC Reports"). No Subsidiary of STAR is required to file any form, report, registration statement or prospectus or other document with the SEC not otherwise filed with an STAR SEC Report. As of the respective times such documents were filed or, as applicable, became effective, or as subsequently amended, the STAR SEC Reports complied as to form and content, in all material respects, with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations promulgated thereunder, and, taken as a whole, the STAR SEC Reports do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Each of the financial statements (including the related notes) included in the STAR SEC Reports (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) presents fairly, in all material respects, the consolidated financial position and consolidated results of operations and cash flows of STAR and its Subsidiaries as of the respective dates or for the respective periods set forth therein, all in conformity with GAAP consistently applied during the periods involved except as otherwise noted therein, and subject, in the case of the unaudited interim financial statements, to normal and recurring year-end adjustments that have not been and are not expected to be material in amount. All of such STAR SEC Reports, as of their respective dates (or as of the date of any amendment to the respective STAR SEC Report filed prior to the date of this Agreement), complied or will comply as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder. (2) Since December 31, 1998, STAR and its Subsidiaries have not incurred any liabilities that are of a nature that would be required to be disclosed on a balance sheet of STAR and its Subsidiaries or the footnotes thereto prepared in conformity with GAAP, other than (A) liabilities incurred in the ordinary course of business or (B) liabilities that would not have a Material Adverse Effect on STAR. (e) Information Supplied. None of the information supplied or to be supplied by STAR for inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus will, on the date it is first mailed to WAXS's or STAR's stockholders, as applicable, or at the time of the WAXS Stockholders Meeting (as defined in Section 5.1) or the STAR Stockholders Meeting, as applicable, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (f) Board Approval. The Board of Directors of STAR, by resolutions duly adopted by unanimous vote at a meeting duly called and held and not subsequently rescinded or modified in any way (the "STAR Board Approval"), has duly (i) determined that this Agreement, the Merger and the other transactions contemplated hereby are fair to and in the best interests of STAR and its stockholders, (ii) approved this Agreement, the Merger and the other transactions contemplated hereby and (iii) declared the advisability of this Agreement, the Merger and the other transactions contemplated hereby, and, further, (iv) recommended that the stockholders of STAR approve and adopt this Agreement, the Merger and the other transactions contemplated hereby and directed that A-14 309 this Agreement and the transactions contemplated hereby be submitted for consideration by STAR's stockholders. (g) Required Stockholder Vote. The affirmative vote of the holders of a majority of the outstanding shares of STAR Common Stock (the "Required STAR Vote") is the only vote of the holders of any class or series of STAR capital stock necessary to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. (h) Litigation: Compliance with Laws. (1) There is no suit, investigation, action or proceeding pending or, to the Knowledge of STAR, threatened, against or affecting STAR or any Subsidiary of STAR having, or which would have a Material Adverse Effect on STAR, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against STAR or any Subsidiary of STAR having, or which would have a Material Adverse Effect on STAR. (2) Except as would not have a Material Adverse Effect on STAR, STAR and its Subsidiaries hold all permits, licenses, variances, authorizations, exemptions, orders and approvals of all Governmental Entities including, without limitation, the FCC and state public utilities commissions, necessary for the operation of the businesses of STAR and its Subsidiaries (the "STAR Permits"). Such STAR permits are valid and in full force and effect and STAR and its Subsidiaries are in compliance with the terms of the STAR Permits, except where the failure to be valid and in full force and effect or to so comply would not have a Material Adverse Effect on STAR. The businesses of STAR and its Subsidiaries are not being conducted in violation of, and STAR has not received any notices of violations with respect to, any law, ordinance or regulation of any Governmental Entity, except for possible violations which would not have a Material Adverse Effect on STAR. STAR is not aware of any threatened suspension, cancellation or invalidation of any STAR Permit. Except as set forth in the STAR SEC Reports or except as would not have a Material Adverse Effect on STAR, STAR has not received notice from either the FCC or any state public utilities commissions of any complaint filed therewith concerning STAR or any of its Subsidiaries, operations or services. (i) Absence of Certain Changes or Events. Except for liabilities incurred in connection with this Agreement or the transactions contemplated hereby, except as disclosed in the STAR SEC Reports filed prior to the date of this Agreement, and except as permitted by Section 4.2, since December 31, 1998 through and including the date hereof, (i) STAR and its Subsidiaries have conducted, in all material respects, their business only in the ordinary course and (ii) there has not been any change, circumstance or event which has had, or would reasonably be expected to have, a Material Adverse Effect on STAR, other than any change, circumstance or effect relating (A) to the economy or financial markets in general, or (B) in general to the industries in which STAR and its Subsidiaries operate and not specifically relating to STAR and its Subsidiaries. (j) Employee Benefits Matters. (1) Section 3.2(j)(l) of the STAR Disclosure Schedule sets forth a list of all material agreements, arrangements, commitments, and policies (i) which relate to employee benefits; (ii) which pertain to present or former employees, retirees, directors or independent contractors (or their beneficiaries, dependents or spouses) of STAR; and (iii) which are currently or expected to be adopted, maintained by, sponsored by, or contributed to by STAR or any other employer (a "STAR Affiliate") which, under Section 414 of the Code, would constitute a single employer with STAR (collectively referred to as "STAR Employee Benefit Plans"), including, but not limited to, all: (A) employee benefit plans as defined in Section 3(3) of ERISA; and (B) all other deferred compensation, incentive, profit-sharing, thrift, stock ownership, stock appreciation rights, bonus, stock option, stock purchase, vacation, or other benefit plans or arrangements. A-15 310 (2) STAR and all STAR Affiliates have complied with their respective substantive obligations with respect to all STAR Employee Benefit Plans (including, but not limited to, (i) filing or distributing all reports or notices required by ERISA or the Code and (ii) complying with all requirements of Part 6 of Title I of ERISA and Code Section 4980B) and have maintained the STAR Employee Benefit Plans in compliance with all applicable laws and regulations (including, but not limited to, ERISA and the Code), except where the failure to comply with such obligations would not result in a Material Adverse Effect on STAR. Each STAR Employee Benefit Plan that is intended to qualify under Code Section 401(a) has received a favorable determination letter (or other ruling indicating its tax-qualified status) from the IRS, and the IRS has not threatened or taken any action to revoke any favorable determination letter issued with respect to any such STAR Employee Benefit Plan. No statement, either oral or written, has been made by STAR or any STAR Affiliate (or any agent of either) to any Person regarding any STAR Employee Benefit Plans that is not in accordance with the terms of that plan that would have a Material Adverse Effect on STAR. (3) STAR has made available to WAXS true, correct and complete copies of all of the current documents relating to the STAR Employee Benefit Plans, including, but not limited to: (i) all plan texts (including any subsequent amendments), trust instruments and other funding arrangements adopted or entered into in connection with each of the STAR Employee Benefit Plans; (ii) the notices and election forms used to notify employees and their dependents of their continuation coverage rights under group health plans (under Code Section 4980B(f) and ERISA Section 606), if applicable; and (iii) the most recent Form 5500 annual reports (including all schedules thereto), summary plan descriptions and favorable determination letters, if applicable, for Employee Benefit Plans. Since the date such documents were supplied to WAXS, no plan amendments have been adopted and no such amendments or changes shall be adopted or made prior to the Closing Date without WAXS's approval, except as required by applicable law after the date hereof. (4) Neither STAR nor any STAR Affiliate has any agreement, arrangement, commitment or understanding to create any additional STAR Employee Benefit Plans or to continue, modify, change or terminate any existing STAR Employee Benefit Plans that could have a Material Adverse Effect on STAR. (5) None of the STAR Employee Benefit Plans (i) is currently under investigation, audit or review by the U.S. Department of Labor, the IRS, the Pension Benefit Guaranty Corporation or any other federal or state agency or (ii) is liable for any federal, state, local or foreign taxes that would have a Material Adverse Effect on STAR. Except for such liabilities that would not have a Material Adverse Effect on STAR, there is no transaction in connection with which STAR or any STAR Affiliate could be subject to either a civil penalty assessed pursuant to ERISA Section 502, a tax imposed by Code Section 4975 or liability for a breach of fiduciary responsibility under ERISA. (6) Other than routine claims for benefits payable to participants or beneficiaries in accordance with the terms of the STAR Employee Benefit Plans, or relating to qualified domestic relations orders (as defined in Section 414(p) of the Code), there are no claims, pending or threatened, by any participant or beneficiary against any of the STAR Employee Benefit Plans or any fiduciary of any of the STAR Employee Benefit Plans that could have a Material Adverse Effect on STAR. (7) Neither STAR nor any STAR Affiliate has at any time maintained, sponsored or contributed to any "pension plan" as defined in ERISA Section 3(2) which is subject to Title IV of ERISA or contributed to any pension plan which is a "multiemployer plan" as defined in ERISA Section 3(37)(A). (8) Section 3.2(j)(8) of the STAR Disclosure Schedule sets forth a list of all agreements, arrangements, commitments and STAR Employee Benefit Plans, under which (i) any benefits A-16 311 will be increased, (ii) the vesting or exercisability of benefits will be accelerated, (iii) amounts will become immediately payable, and/or (iv) the immediate funding for any benefits is required, upon the occurrence of the transaction contemplated by this Agreement. Section 3.2(j)(8) of the STAR Disclosure Schedule sets forth an estimate of the total value and/or cost of any such change in control benefits and/or funding and the time periods in which such payments must be made and/or funding obligations must be met, including but not limited to the value and/or costs of any gross up payments for tax purposes. (9) To the Knowledge of STAR, no key employee, or group of employees of STAR has any plans to terminate employment with STAR other than employees with plans to retire. STAR has complied in all material respects with all laws relating to the employment of labor, including provisions thereof relating to wages, hours and equal opportunity, and it does not have any material labor relations problems (including threatened or actual strikes or work stoppages or material grievances). (10) Neither STAR nor any of its Subsidiaries is a party to any collective bargaining agreement. (k) Intellectual Property. Except as would not have a Material Adverse Effect on STAR: (i) STAR and each of its Subsidiaries owns, or is licensed to use (in each case, free and clear of any Liens, or claims of rights therein by any third party), all Intellectual Property used in or necessary for the conduct of its business as currently conducted, (ii) the use of any Intellectual Property by STAR and its Subsidiaries does not infringe on or otherwise violate the rights of any Person and is in accordance with any applicable license pursuant to which STAR or any Subsidiary acquired the right to use any Intellectual Property; (iii) to the Knowledge of STAR, no Person is challenging, infringing on or otherwise violating any right of STAR or any of its Subsidiaries with respect to any Intellectual Property owned by and/or licensed to STAR or its Subsidiaries; and (iv) neither STAR nor any of its Subsidiaries has received any written notice of any pending claim with respect to any Intellectual Property used by STAR and its Subsidiaries and to STAR's Knowledge, no Intellectual Property owned and/or licensed by STAR or its Subsidiaries is being used or enforced in a manner that would result in the abandonment, cancellation or unenforceability of such Intellectual Property. (l) Brokers or Finders. No agent, broker, investment banker, financial advisor or other firm or Person is or will be entitled to any broker's or finder's fee or any other similar commission or fee in connection with any of the transactions contemplated by this Agreement, based upon arrangements made by or on behalf of STAR except Deutsche Bank Alex Brown (the "STAR Financial Advisor"), whose fees and expenses will be paid by STAR in accordance with STAR's agreement with such firm, a copy of which has been, or will be promptly when available, provided to WAXS. (m) Opinion of STAR Financial Advisor. STAR has received the opinion of the STAR Financial Advisor, dated the date of this Agreement, to the effect that as of such date, the Merger Consolidation is fair, from a financial point of view, to STAR and its stockholders, a copy of which has been provided to WAXS. (n) Taxes. (1) (i) All material Tax Returns of STAR and each of its Subsidiaries have been filed, or requests for extensions have been timely filed and have not expired; (ii) all Tax Returns filed by STAR and its Subsidiaries are complete and accurate in all material respects; (iii) all Taxes shown to be due on such Tax Returns or on subsequent assessments with respect thereto have been paid or the STAR SEC Reports reflect that adequate reserves have been established for the payment of such Taxes, and no other material Taxes are payable by STAR and its Subsidiaries with respect to items or periods covered by such Tax Returns (whether or not shown on or reportable on such Tax Returns) or with respect to any period prior to the date of this Agreement; (iv) STAR and each of its Subsidiaries have disclosed on its federal income Tax Return all positions taken therein that could give rise to a substantial understatement of income A-17 312 Tax within the meaning of Section 6662 of the Code; (v) there are no material liens on any of the assets of STAR or any of its Subsidiaries with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that STAR or any of its Subsidiaries is contesting in good faith through appropriate proceedings and for which the STAR SEC Reports reflect that appropriate reserves have been established; (vi) no power of attorney to deal with Tax matters or waiver or extension of any statute of limitations with respect to Taxes has been granted by STAR or any of its Subsidiaries; and (vii) there is no (X) audit, examination, deficiency or refund litigation or matter in controversy with respect to any Taxes of STAR and its Subsidiaries nor (Y) has the IRS nor any other Tax authority asserted any claim for Taxes in writing, or to the knowledge of STAR, is threatening to assert any claim for Taxes, that might reasonably be expected to result in a Tax determination which would have a Material Adverse Effect on STAR. (2) [Intentionally omitted.] (3) There are no contracts, agreements, plans or arrangements, including but not limited to the provisions of this Agreement, covering any employee or former employee of STAR or any of its Subsidiaries that, individually or collectively, could give rise to the payment of any amount (or portion thereof) that would not be deductible pursuant to Sections 280G, 404, or 162 of the Code. (4) Neither STAR nor any of its Subsidiaries is a party to (A) a Tax Sharing Agreement, (B) transactions which have produced deferred intercompany gains, losses or other intercompany items or excess loss accounts (within the meaning of Treas. Reg. sec. 1.1502-13 or 1.1502-19, respectively, or any predecessor regulations or any comparable items for state, local or non-United States Tax purposes), or (C) any joint venture, partnership, limited liability company or other arrangement or contract that should be treated as a partnership for federal income Tax purposes or as to which, an election has been made under Treas. Reg. sec. 301.7701-3 to have the entity disregarded for federal income Tax purposes as an entity separate from its owner. (5) None of STAR and its Subsidiaries (A) has or has had operations or assets outside the United States taxable as a "branch" by the United States or as a "permanent establishment" by any foreign country, (B) has received written notice of any claim made by a Tax authority in a jurisdiction where STAR or any of its Subsidiaries does not file Tax Returns that it is or may be subject to Taxes in such jurisdiction, (C) does business in or derives income from any state, local territorial or non-United States taxing jurisdiction other than those for which Tax Returns have been filed and made available to WAXS pursuant to Section 3.2 (n)(6) hereof, (D) is a "passive foreign investment company" within the meaning of the Code, (E) has participated in or cooperated with an international boycott or has been requested to do so in connection with any prior transaction or the transactions contemplated by this Agreement, and (F) has availed itself of any Tax amnesty, Tax holiday or similar relief in any jurisdiction. (6) STAR has made available to WAXS true copies of (A) all material Tax Returns that STAR or its Subsidiaries have filed since January 1, 1994 and (B) all material correspondence, including without limitation, closing agreements, private letter rulings, advance pricing agreements and gain recognition agreements and other written submissions to or communications with any Tax authorities. (o) Certain Contracts. Neither STAR nor any of its Subsidiaries is a party to or bound by (i) any "material contract" (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC), (ii) any noncompetition agreement or any other agreement or arrangement that limits or otherwise restricts STAR or any of its Subsidiaries or any successor thereto or that would, after the Effective Time, limit or restrict WAXS or the Surviving Corporation or any of its affiliates or any successor thereto, from engaging or competing in any line of business or in any geographic area, which agreement or arrangement would have a Material Adverse Effect on WAXS or the Surviving Corporation, (iii) any agreement or arrangement between STAR or any of its Subsidiaries, on the one hand, and any affiliates, directors or officers of STAR or its Subsidiaries, on the other hand, that is A-18 313 not on arm's-length terms or (iv) any agreement or arrangement that may require the payment of money or provision of services in excess of $500,000 annually or $1,000,000 over the term of such agreement or arrangement. All contracts filed with the STAR SEC Reports and the contracts listed on Section 3.2(o) of the STAR Disclosure Schedule are valid binding and are in full force and effect and enforceable in accordance with their respective terms, except to the extent that such enforceability may be subject to applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting the enforcement of creditors' rights generally or by general equitable principles, and other than such contracts which by their terms are no longer in force or effect. Neither STAR nor its Subsidiaries are in violation or breach of or default under any such contract, nor to STAR's Knowledge, is any other party to any such contract in violation or breach or other default under any such contract, except for any such violation, breach or default which would not have a Material Adverse Effect on STAR. ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS 4.1 Covenants of STAR. During the period from the date of this Agreement and continuing until the Effective Time, STAR agrees as to itself and its Subsidiaries that (except as expressly required, contemplated or permitted by this Agreement or the STAR Disclosure Schedule or as required by a Governmental Entity of competent jurisdiction or any law or regulation or to the extent that WAXS shall otherwise consent in writing, which consent shall not be unreasonably withheld, delayed or conditioned): (a) Ordinary Course. STAR and its Subsidiaries shall carry on their respective businesses in the usual, regular and ordinary course in all material respects, in substantially the same manner as heretofore conducted, and shall use all reasonable efforts to preserve intact their present lines of business, maintain their rights and franchises and preserve their relationships with customers, suppliers and others having significant business dealings with them. (b) Dividends; Changes in Share Capital. STAR shall not, and shall not permit any of its Subsidiaries to, and shall not propose to, (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, except for dividends by wholly-owned Subsidiaries of STAR, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its capital stock, except for any such action by a wholly-owned Subsidiary of STAR which remains a wholly-owned Subsidiary after consummation of such transaction, or (iii) repurchase, redeem or otherwise acquire any shares of capital stock of STAR or any of its Subsidiaries or any securities convertible into or exercisable for any shares of such capital stock except for the purchase from time to time by STAR of STAR Common Stock in the ordinary course of business consistent with past practice in connection with the STAR Employee Benefit Plans. (c) Issuance of Securities. STAR shall not, and shall not permit any of its Subsidiaries to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, any STAR Voting Debt or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any such shares or STAR Voting Debt, or enter into any agreement with respect to any of the foregoing, other than (i) the issuance of STAR Common Stock upon the exercise of STAR Stock Options or in connection with other stock-based Benefits Plans outstanding on the date hereof, in each case in accordance with their present terms, or (ii) issuances by a wholly-owned Subsidiary of STAR of capital stock to such Subsidiary's parent or another wholly-owned subsidiary of STAR. (d) Governing Documents. Except to the extent required by the rules and regulations of the Nasdaq, neither STAR nor any of its Subsidiaries shall amend or propose to amend their respective certificates of incorporation, by-laws or other governing documents. A-19 314 (e) Acquisitions. STAR shall not, and shall not permit any of its Subsidiaries to acquire or agree to acquire, by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets (other than the acquisition of assets used in the operations of the business of STAR and its Subsidiaries in the ordinary course). (f) Sales. Except as set forth in Section 4.1(f) of the STAR Disclosure Schedule, STAR shall not, and shall not permit any of its Subsidiaries to, sell or agree to sell by merging or consolidating with, or by selling or substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise sell or agree to sell any assets (other than the sale of assets used in the operations of the business of STAR and its Subsidiaries in the ordinary course; provided, however, STAR may enter into a definitive agreement for (and consummate) the PT-1 Sale on terms and conditions which would satisfy the condition set forth in Section 6.2(h) hereof). (g) Investments; Indebtedness. STAR shall not, and shall not permit any of its Subsidiaries to, (i) make any loans, advances or capital commitments to, or investments in, any other Person, other than (x) by STAR or a Subsidiary of STAR to or in STAR or in any Subsidiary of STAR or (y) pursuant to any contract or other legal obligation of STAR or any of its Subsidiaries existing at the date hereof or (ii) create, incur, assume or suffer to exist any indebtedness, issuances of debt or securities, guarantees, loans or advances not in existence as of the date hereof except pursuant to credit facilities, indentures and other arrangements in existence on the date hereof or in the ordinary course of business consistent with past practice, in each case as such credit facilities, indentures and other arrangements may be amended, extended, modified, refunded, renewed or refinanced after the date hereof. (h) Compensation. Other than as contemplated by Section 4.1(h) of the STAR Disclosure Schedule, STAR shall not increase the amount of compensation of any director or executive officer except in the ordinary course of business consistent with past practice or as required by an existing agreement, make any increase in or commitment to increase any employee benefits, issue any additional STAR Stock Options, adopt or make any commitment to adopt any additional employee benefit plan or make any contribution, other than regularly scheduled contributions, to any Employee Benefit Plan. (i) Accounting Methods; Income Tax Matters. STAR shall not change its methods of accounting in effect on December 31, 1998, except as required by changes in GAAP as concurred in by STAR's independent auditors. STAR shall not (i) change its fiscal year, (ii) make any material tax election, (iii) adopt or change any Tax accounting method, (iv) enter into any closing agreement, (v) settle or compromise a Tax liability with a Tax authority, (vi) surrender any right to claim a refund of Taxes, or (vii) take (or permit any Subsidiary of STAR to take) any other action which would have the effect of materially increasing the Tax liability or materially decreasing any Tax Asset of STAR or any of its Subsidiaries, other than in the ordinary course of business consistent with past practice. (j) Certain Agreements. STAR shall not, and shall not permit any of its Subsidiaries to, enter into any agreement or arrangement that limits or otherwise restricts STAR or any of its Subsidiaries or any of their respective affiliates or any successor thereto, or that could, after the Effective Time, limit or restrict WAXS or the Surviving Corporation or any of their respective affiliates or any successor thereto, from engaging or competing in any line of business or, in any geographic area which agreement or arrangement would reasonably be expected to have a Material Adverse Effect on WAXS or the Surviving Corporation. (k) Other Actions. Notwithstanding the fact that STAR may take certain actions as permitted under Article IV hereof, STAR agrees not to take any action which could reasonably be expected to A-20 315 cause the Merger to fail to qualify as a reorganization within the meaning of Section 368(a) of the Code. (l) Litigation. STAR shall not and shall not permit any of its Subsidiaries to settle or, compromise any litigation, except where the amount paid or payable, in each case, does not exceed $200,000. 4.2 Control of STAR's Business. Except as provided in Section 5.9, nothing contained in this Agreement shall give WAXS, directly or indirectly, the right to control or direct STAR's operations prior to the Effective Time. Prior to the Effective Time, STAR shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its operations. ARTICLE V ADDITIONAL AGREEMENTS 5.1 Preparation of Proxy Statement: Stockholders Meetings. (a) As promptly as reasonably practicable following the date hereof, WAXS and STAR shall prepare (in form and substance reasonably satisfactory to each of WAXS and STAR) and file with the SEC proxy materials which shall constitute the joint proxy statement and prospectus in connection with the WAXS Stockholders Meeting and the STAR Stockholders Meeting (such proxy statement and prospectus, and any amendments or supplements thereto, the "Joint Proxy Statement/Prospectus") and WAXS shall prepare (in form and substance reasonably satisfactory to each of WAXS and STAR) and file a registration statement on Form S-4 with respect to the issuance of WAXS Common Stock in the Merger (the "Registration Statement"). The Joint Proxy Statement/Prospectus will be included in and will constitute a part of the Registration Statement as WAXS's prospectus. The Registration Statement and the Joint Proxy Statement/Prospectus shall comply as to form in all material respects with the applicable provisions of the Securities Act and the Exchange Act and the rules and regulations thereunder. Each of WAXS and STAR shall use reasonable efforts to have the Registration Statement declared effective by the SEC as promptly as reasonably practicable after filing with the SEC and to keep the Registration Statement effective as long as is necessary to consummate the Merger and the actions contemplated thereby. WAXS and STAR shall, as promptly as practicable after receipt thereof, provide the other party copies of any written comments and advise the other party of any oral comments, with respect to the Joint Proxy Statement/Prospectus received from the SEC. WAXS will provide STAR with a reasonable opportunity to review and comment on any amendment or supplement to the Registration Statement prior to filing such with the SEC, and will provide STAR with a copy of all such filings made with the SEC. Notwithstanding any other provision herein to the contrary, no amendment or supplement (including by incorporation by reference) to the Joint Proxy Statement/Prospectus or the Registration Statement shall be made without the approval of both parties, which approval shall not be unreasonably withheld or delayed; provided, that with respect to documents filed by a party which are incorporated by reference in the Registration Statement or Joint Proxy Statement/Prospectus, this right of approval shall apply only with respect to information relating to the other party or its business, financial condition or results of operations. WAXS will use reasonable efforts to cause the Joint Proxy Statements/Prospectus to be mailed to WAXS's stockholders, and STAR will use reasonable efforts to cause the Joint Proxy Statement/Prospectus to be mailed to STAR's stockholders, in each case as promptly as practicable after the Registration Statement is declared effective under the Securities Act. WAXS shall also take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified or to file a general consent to service of process) required to be taken under any applicable state securities laws in connection with the issuance of WAXS Common Stock and STAR shall furnish all information concerning STAR and the holders of STAR Common Stock as may be reasonably requested in connection with any such action. Each party will advise the other party, promptly after it receives notice thereof, of the time when the Registration Statement has become effective, the issuance of any stop order, the suspension A-21 316 of the qualification of the WAXS Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Joint Proxy Statement/Prospectus or the Registration Statement. If at any time prior to the Effective Time any information relating to WAXS or STAR, or any of their respective affiliates, officers or directors, should be discovered by WAXS or STAR which should be set forth in an amendment or supplement to any of the Registration Statement or the Joint Proxy Statement/Prospectus so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party which discovers such information shall promptly notify the other party hereto and, to the extent required by law, rules or regulations, an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and disseminated to the stockholders of WAXS and STAR. (b) Subject to Section 5.4, STAR shall, as promptly as reasonably practicable following the execution of this Agreement, duly take all lawful action to call, give notice of, convene and hold a meeting of its stockholders (the "STAR Stockholders Meeting") (which meeting the parties intend to be held no later than thirty (30) days following the date on which the Registration Statement has been declared effective by the SEC) for the purpose of obtaining the Required STAR Vote with respect to the actions contemplated by this Agreement and shall take all lawful action to solicit the adoption of this Agreement by the Required STAR Vote. Subject to Section 5.4, the Board of Directors of STAR shall recommend adoption of this Agreement by the stockholders of STAR to the effect as set forth in Section 3.2(f), and shall not withdraw, modify or materially qualify in any manner adverse to WAXS such recommendation or take any action or make any statement in connection with the STAR Stockholders Meeting materially inconsistent with such recommendation (collectively, an "Adverse Change in the STAR Recommendation"); provided, however, that the foregoing shall not prohibit accurate disclosure of factual information regarding the business, financial condition or results of operations of WAXS or STAR or the fact that an Acquisition Proposal has been made, the identity of the party making such proposal or the material terms of such proposal (provided, that the Board of Directors of STAR does not withdraw, modify or materially qualify in any manner adverse to WAXS its recommendation) in the Registration Statement or the Joint Proxy Statement/Prospectus, to the extent such information, facts, identity or terms is required to be disclosed therein under applicable law. (c) WAXS shall, as promptly as reasonably practicable following the execution of this Agreement, duly take all lawful action to call, give notice of, convene and hold a meeting of its stockholders (the "WAXS Stockholders Meeting") (which meeting the parties intend to be held no later than thirty (30) days following the date on which the Registration Statement has been declared effective by the SEC) for the purpose of obtaining the Required WAXS Vote with respect to the transactions contemplated by this Agreement and shall take all lawful action to solicit the approval of the transactions contemplated hereby by the Required WAXS Vote. The Board of Directors of WAXS shall recommend approval of the transactions contemplated hereby by the stockholders of WAXS to the effect as set forth in Section 3.1(f), and shall not withdraw, modify or materially qualify in any manner adverse to STAR such recommendation or take any action or make any statement in connection with the WAXS Stockholders Meeting materially inconsistent with such recommendation; provided, however, that the foregoing shall not prohibit accurate disclosure of factual information regarding the business, financial condition or operations of WAXS or STAR. 5.2 Access to Information. Upon reasonable notice, each of STAR and WAXS shall (and shall cause its Subsidiaries to) afford to the officers, employees, accountants, counsel, financial advisors and other representatives of the other party hereto reasonable access during normal business hours, during the period prior to the Effective Time, to all its properties, books, contracts, commitments, records, officers and employees and, during such period, each of STAR and WAXS shall (and shall cause its Subsidiaries to) furnish promptly to the other party hereto (a) a copy of each report, schedule, registration statement and other document filed, published, announced or received by it during such period pursuant to the A-22 317 requirements of federal or state securities laws, as applicable (other than documents which such party is not permitted to disclose under applicable law), and (b) consistent with its legal obligations, all other information concerning it and its business, properties and personnel as such other party may reasonably request; provided, however, that either STAR or WAXS may restrict the foregoing access to the extent that any law, treaty, rule or regulation of any Governmental Entity applicable to such party requires such party or its Subsidiaries to restrict access to any properties or information. The parties will hold any such information which is non-public in confidence to the extent required by, and in accordance with, the provisions of the Confidentiality Agreement, dated December 17, 1999, between STAR and WAXS (the "Confidentiality Agreement"). Any investigation by WAXS or STAR shall not affect the representations and warranties made herein of STAR or WAXS, as the case may be. 5.3 Reasonable Efforts. (a) Subject to the terms and conditions of this Agreement, each party will use reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the Merger and the other transactions contemplated by this Agreement as soon as practicable after the date hereof, including (i) preparing and filing as promptly as practicable all documentation to effect all necessary applications, notices, petitions, filings, and other documents and to obtain as promptly as practicable all consents, waivers, licenses, orders, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any third party and/or any Governmental Entity in order to consummate the Merger or any of the other transactions contemplated by this Agreement and (ii) taking all reasonable steps as may be necessary to obtain all such material consents, waivers, licenses, registrations, permits, authorizations, tax rulings, orders and approvals. The parties each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by it or any of its Subsidiaries or affiliates from any Governmental Entity or third party with respect to the Merger or any of the other transactions contemplated by this Agreement, in each case, to the extent permitted by law or regulation or any applicable confidentiality agreements existing on the date hereof. (b) Promptly following execution of this Agreement, STAR and WAXS shall promptly prepare and file any required notifications with the United States Department of Justice and the Federal Trade Commission as required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). The parties shall cooperate with each other in connection with the preparation of such notifications and related matters, including sharing information concerning sales and ownership and such other information as may be needed to complete such notification, and providing a copy of such notifications to the other prior to filing; provided, that WAXS and STAR shall have the right to redact any dollar revenue information from the copies of such notifications provided to the other parties. The parties shall keep all information about the other obtained in connection with the preparation of such notification confidential pursuant to the terms of the Confidentiality Agreement. Each Person shall pay the filing fee required under the regulations promulgated pursuant to the HSR Act with respect to its own filing thereunder. 5.4 Acquisition Proposals. Without the prior written consent of WAXS, pending the Effective Time or earlier termination of this Agreement pursuant to Section 7.1, STAR agrees that neither it nor any of its Subsidiaries shall, and that it shall use its reasonable efforts to cause its employees, officers, directors, affiliates, agents and representatives (including any investment banker, financial advisor, attorney or accountant retained by any of them) not to, directly or indirectly, initiate, solicit, encourage or knowingly facilitate (including by way of furnishing information or engaging in discussions or negotiations) any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar action involving STAR, or any purchase or sale of a material portion of the assets of (including stock of Subsidiaries) of STAR, taken as a whole, or any purchase or sale of, or tender or exchange offer for, a material portion of the equity securities of STAR (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal"). STAR further agrees that neither it nor any of its Subsidiaries shall, and that it shall use its A-23 318 reasonable efforts to cause it and its Subsidiaries' officers, directors, affiliates, employees, agents and representatives (including any investment banker, financial advisor, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, have any discussion with or provide any confidential information or data to any Person relating to an Acquisition Proposal, or engage in any negotiations concerning an Acquisition Proposal, or knowingly facilitate any effort or attempt to make or implement an Acquisition Proposal or accept an Acquisition Proposal. STAR agrees that it and its Subsidiaries will, and will cause its officers, directors, affiliates, employees, agents and representatives to, immediately cease and cause to be terminated any activities, discussions or negotiations existing as of the date of this Agreement with any parties conducted heretofore with respect to any Acquisition Proposal. STAR agrees that it will promptly inform its directors, officers, affiliates, key employees, agents and representatives of the obligations undertaken in this Section 5.4. Notwithstanding anything contained in this Section 5.4 or otherwise in this Agreement to the contrary, STAR or its Board of Directors shall be permitted to (A) in response to an unsolicited bona fide written Acquisition Proposal by any Person, recommend approval of such an unsolicited bona fide written Acquisition Proposal to its stockholders or effect an Adverse Change in the STAR Recommendation or (B) engage in any discussions or negotiations with, or provide any information to, any person in response to an unsolicited bona fide written Acquisition Proposal by any such Person, if and only to the extent that, in any such case as is referred to in clause (A) or (B), (i) the STAR Stockholders Meeting shall not have occurred, (ii) its Board of Directors (x) in the case of clause (A) above, concludes in good faith that such Acquisition Proposal constitutes a Superior Proposal (as defined in Section 8.12) and terminates this Agreement pursuant to Section 7.1 (h) or (y) in the case of clause (B) above concludes in good faith that such Acquisition Proposal could reasonably be expected to result in a Superior Proposal, (iii) prior to providing any information or data to any Person in connection with an Acquisition Proposal by any such Person, its Board of Directors receives from such Person an executed confidentiality agreement containing confidentiality terms at least as stringent as those contained in the Confidentiality Agreement, and (iv) prior to providing any information or data to any Person or entering into discussions or negotiations with any such Person regarding such Acquisition Proposal, its Board of Directors notifies WAXS promptly of such inquiries, proposals or offers received by, any such information requested from, or any such discussions or negotiations sought to be initiated or continued with, any of its representatives indicating, in connection with such notice, the name of such Person and the material terms and conditions of any inquiries, proposals or offers. STAR agrees that it will promptly keep WAXS informed of the status and terms of any such proposals or offers and the status and terms of any such discussions or negotiations. STAR agrees that it will, and will cause its officers, directors and representatives to, immediately cease and cause to be terminated any activities, discussions or negotiations existing as of the date of this Agreement with any parties conducted heretofore with respect to any Acquisition Proposal. STAR agrees that it will promptly inform its directors, officers, key employees, agents and representative of the obligations undertaken in this Section 5.4. Nothing in this Section 5.4 shall (x) permit STAR or WAXS to terminate this Agreement (except as specifically provided in Article VII hereof) or (y) affect any other obligation of STAR or WAXS under this Agreement. 5.5 Fees and Expenses. All Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such Expenses. As used in this Agreement, "Expenses" includes all out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby. 5.6 Public Announcements. Neither WAXS nor STAR shall, without the prior consent of the other party, issue a press release or any other public statement with respect to this Agreement or the transactions contemplated hereby except pursuant to a joint communications plan, unless otherwise required by applicable law or by obligations pursuant to any listing agreement with, or rules of, any securities exchange, in which case the parties shall use reasonable efforts to consult with each other before issuing any press release or otherwise making any public statement with respect to this Agreement or the transactions contemplated hereby. A-24 319 5.7 Listing. So long as WAXS Common Stock is quoted on the Nasdaq or listed on any national securities exchange, WAXS, prior to the Effective Time, will cause to be quoted or listed, upon official notice of issuance, and keep quoted or listed on such system or exchange, all WAXS Common Stock issuable pursuant to Article I hereof. 5.8 Termination of Tax Sharing Agreement. As of the Effective Time, STAR shall cause all Tax Sharing Agreements to which STAR or any of its Subsidiaries is a party to be terminated and of no further force and effect after the Effective Time, thereby extinguishing any rights or obligations of any party thereunder. 5.9 Management Services. Subject to obtaining any necessary regulatory or third party consents and to the extent permitted under applicable law, WAXS and STAR intend to enter into a management agreement pursuant to which WAXS will provide, under the supervision and direction of the STAR board of directors, certain management services to STAR. Neither party shall have any obligation under this Section 5.9 and the provision of the foregoing services shall be subject to the negotiation of a definitive agreement satisfactory to each of WAXS and STAR in its sole discretion. 5.10 New Director of WAXS. WAXS shall take all appropriate action such that, immediately following the Effective Time, and without further action by WAXS, one (1) designee of STAR shall be elected to the Board of Directors of WAXS. Such STAR designee shall be Christopher E. Edgecomb, or such other person designated by STAR and agreed to by WAXS prior to the Effective time. 5.11 Further Assurances. At and after the Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of STAR or Merger Sub, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of STAR or Merger Sub, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all rights, properties, or assets acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. 5.12 Directors' and Officers' Indemnification and Insurance. (a) From the Effective Time through the sixth (6th) anniversary of the date on which the Effective Time occurs, WAXS shall indemnify and hold harmless each present (as of the Effective Time) or former officer or director of STAR and its Subsidiaries (the "Indemnified Parties"), against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys' fees and disbursements (collectively, "Costs"), incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to (i) the fact that the Indemnified Party is or was an officer or director of STAR or any of its Subsidiaries or (ii) matters existing or occurring at or prior to the Effective Time (including this Agreement and the transactions and actions contemplated hereby), whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under applicable law; provided that no Indemnified Party may settle any such claim without the prior approval of WAXS (which approval shall not be unreasonably withheld or delayed). Each Indemnified Party will be entitled to advancement of expenses incurred in the defense of any claim, action, suit, proceeding or investigation from WAXS within ten (10) business days of receipt by WAXS from the Indemnified Party of a request therefor; provided that any person to whom expenses are advanced provides an undertaking, to the extent required by the DGCL, to repay such advances if it is ultimately determined that such person is not entitled to indemnification. (b) WAXS shall maintain, at no expense to the beneficiaries, in effect for six years from the Effective Time the current policies of the directors' and officers' liability insurance maintained by STAR with respect to matters existing or occurring at or prior to the Effective Time (including the transactions contemplated by this Agreement); provided that WAXS may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less advantageous to any beneficiary thereof; and provided, further, that in no event shall WAXS be A-25 320 required to pay annual premiums for such insurance in excess of 125% of the annual premiums currently paid by STAR for such insurance. (c) Notwithstanding anything herein to the contrary, if any claim, action, suit, proceeding or investigation (whether arising before, at or after the Effective Time) is made against any Indemnified Party, on or prior to the sixth (6th) anniversary of the Effective Time, the provisions of this Section 5.12 shall continue in effect until the final disposition of such claim, action, suit, proceeding or investigation. (d) The covenants contained in this Section 5.12 are intended to be for the benefit of, and shall be enforceable by, each of the Indemnified Parties and their respective heirs and legal representatives and shall not be deemed exclusive of any other rights to which an Indemnified Party is entitled, whether pursuant to law, contract or otherwise. (e) In the event that the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, proper provision shall be made so that the successors or assigns of the Surviving Corporation or the purchaser of such properties and assets shall succeed to the obligations set forth in this Section 5.12. 5.13 Confidentiality. The parties each agree that the Confidentiality Agreement shall continue in full force and effect until the Effective Time, and if this Agreement is terminated or if the Merger is not consummated for any reason whatsoever, such Confidentiality Agreement shall thereafter remain in full force and effect in accordance with its terms. 5.14 Compliance with Dissenters' Rights Statute. STAR shall comply with all procedures and requirements applicable to it under Section 262 of the DGCL. 5.15 Interim Financing. The parties have agreed that WAXS will make available up to $25,000,000 in secured financing to STAR and up to $10,000,000 in secured financing to STAR's subsidiary, STAR Telecommunications GmbH, (collectively, the "Interim Financing") pursuant to the terms of the Loan Documents (as defined below). The Interim Financing will mature at the earlier of one year from the date hereof and ninety (90) days after any termination of this Agreement (other than a termination due to STAR's breach or default under this Agreement which will result in the Interim Financing becoming immediately due and payable). The Interim Financing will be made pursuant to, and subject to the finalization of, appropriate loan and security documents (the "Loan Documents") substantially in the form of, and as contemplated by, the draft Loan Documents distributed to STAR on or prior to the date hereof. ARTICLE VI CONDITIONS PRECEDENT 6.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of STAR and WAXS to effect the Merger are subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) HSR Act. The waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired. (b) Stockholder Approval. WAXS shall have obtained the Required WAXS Vote in connection with the approval of this Agreement and the Merger and STAR shall have obtained the Required STAR Vote in connection with the approval of this Agreement and the Merger. (c) Registration Statement. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated or, to the Knowledge of WAXS or STAR, threatened by the SEC. A-26 321 6.2 Additional Conditions to Obligations of WAXS. The obligations of WAXS to effect the Merger are subject to the satisfaction of, or waiver by WAXS, on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. Each of the representations and warranties of STAR set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent in either case that such representations and warranties speak as of another date, in which case any such representations and warranties shall be true and correct as of such date), except where any failures to be true and correct would not have a Material Adverse Effect on WAXS or the Surviving Corporation, and WAXS shall have received a certificate of the chief executive officer and the chief financial officer of STAR to such effect. (b) Performance of Obligations of STAR. STAR shall have performed or complied in all material respects with all material agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date, and WAXS shall have received a certificate of the chief executive officer and the chief financial officer of STAR to such effect. (c) Consents and Approvals. Other than the filing provided for under Section 1.3, all consents, approvals and actions of, filings with and notices to any Governmental Entity required to consummate the Merger and the other transactions contemplated hereby, or of any other third party required of STAR or any of its Subsidiaries to consummate the Merger and the other transactions contemplated hereby, the failure of which to be obtained or taken would have a Material Adverse Effect on WAXS or the Surviving Corporation, shall have been obtained; provided, however, that the provisions of this Section 6.2(c) shall not be available to WAXS, if its failure to fulfill its obligations pursuant to Section 5.3 shall have been the cause of, or shall have resulted in, the failure to obtain such consent or approval. (d) No Material Change. STAR and its Subsidiaries, taken as a whole, shall not have suffered, since the date hereof, a Material Adverse Effect, other than any change, circumstance or effect relating (i) to the economy or financial markets in general, (ii) in general to the industries in which STAR operates and not specifically relating to STAR or (iii) the trading price of STAR Common Stock. (e) Opinion of Counsel to STAR. WAXS shall have received from Riordan & McKinzie an opinion, dated the Closing Date, in form and substance reasonably satisfactory to WAXS. (f) No Injunctions or Restraints; Illegality. No laws shall have been adopted or promulgated, and no temporary restraining order, preliminary or permanent injunction or other order issued by a court or other Governmental Entity of competent jurisdiction shall be in effect (i) having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger or (ii) which otherwise would have a Material Adverse Effect on WAXS or the Surviving Corporation; provided, however, that the provisions of this Section 6.2(f) shall not be available to WAXS if its failure to fulfill its obligations pursuant to Section 5.3 shall have been the cause of, or shall have resulted in any such order or injunction. (g) Dissenters' Rights. STAR shall have complied with all procedures and requirements applicable to it under Section 262 of the DGCL, the period for exercising dissenters' rights of appraisal pursuant to the DGCL in connection with the Merger shall have expired, and holders of less than one percent (1%) of the shares of STAR Common Stock issued and outstanding immediately prior to the Closing shall have exercised such dissenters' rights of appraisal, and WAXS shall have received a certificate from an officer of STAR to all such effects. (h) Sale of PT-1. STAR shall have consummated the sale of the capital stock of PT-1 Communications, Inc. ("PT-1"), or the assets of PT-1 on a substantially equivalent basis, for Net PT-1 Sale Proceeds (as defined in Section 8.12 ) of at least $150,000,000 pursuant to an agreement in form and substance reasonably satisfactory to WAXS (the "PT-1 Sale"); provided, however, if A-27 322 (i) the PT-1 Sale has not been consummated prior to the Closing Date, (but STAR has entered into a definitive agreement, in form and substance satisfactory to WAXS, for the PT-1 Sale) and (ii) WAXS determines in its sole discretion to waive compliance with this Section 6.2(h) and proceed with the Merger, then WAXS and STAR agree that in such event, they shall amend this Agreement to provide that (A) the formula used to determine the Exchange Ratio shall be modified by deleting "Z" therefrom and (B) a holder of STAR Common Stock and STAR Stock Options immediately prior to the Effective Time shall have a right to receive such holder's pro rata share of an aggregate number of additional "contingent" shares of WAXS Common Stock, if and when the PT-1 Sale is consummated pursuant to such definitive agreement (or, in the case of a holder of STAR Stock Option, when such option is exercised), equal to the PT-1 Excess Proceeds divided by twenty (20) (the "Contingent Shares") and that the provisions of any such amendment to this Agreement concerning the issuance of such Contingent Shares will satisfy the requirements of Section 3.03 of IRS Revenue Procedure 77-37, as it has been amplified and superseded, which established the circumstances under which the Internal Revenue Service previously issued advanced rulings on contingent stock arrangements in mergers intended to qualify as "reorganizations" under Section 368(a) of the Code. (i) STAR shall have provided evidence satisfactory to WAXS that any and all obligations of STAR (or any of its affiliates) relating to or arising in connection with the China-U.S. Cable Network were fully satisfied by the reclamation of STAR's capacity in such network and neither STAR nor any of its affiliates has any further obligation or liability with respect thereto, including without limitation payment of the amounts claimed and owing by STAR according to that letter dated January 11, 2000 from Kou Yinsen, Director, CBP to Jim Kolsrud. 6.3 Additional Conditions to Obligations of STAR. The obligations of STAR to effect the Merger are subject to the satisfaction of, or waiver by STAR, on or prior to the Closing Date of the following additional conditions: (a) Representations and Warranties. Each of the representations and warranties of WAXS set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent in either case that such representations and warranties speak as of another date, in which case any such representations and warranties shall be true and correct as of such date), except where any failures to be true and correct would not have a Material Adverse Effect on WAXS, and STAR shall have received a certificate of the chief executive officer and the chief financial officer of WAXS to such effect. (b) Performance of Obligations of WAXS. WAXS shall have performed or complied in all material respects with all material agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date, and STAR shall have received a certificate of the chief executive officer and the chief financial officer of WAXS to such effect. (c) Consents and Approvals. Other than the filing provided for under Section 1.3, all consents, approvals and actions of, filings with and notices to any Governmental Entity required to consummate the Merger and the other transactions contemplated hereby, or of any other third party required of WAXS or any of its Subsidiaries to consummate the Merger and the transactions contemplated hereby, the failure of which to be obtained or taken would have a Material Adverse Effect on WAXS, shall have been obtained; provided, however, that the provisions of this Section 6.3(c) shall not be available to STAR if its failure to fulfill any of its obligations pursuant to Section 5.3 shall have been the cause of, or shall have resulted in, the failure to obtain such consent or approval. (d) No Material Change. WAXS shall not have suffered, since the date hereof, a Material Adverse Effect, other than any change, circumstance or effect relating (i) to the economy or financial markets in general, (ii) in general to the industries in which WAXS operates and not specifically relating to WAXS or (iii) the trading price of WAXS Common Stock. A-28 323 (e) Opinion of Counsel to WAXS. STAR shall have received from Long Aldridge & Norman LLP an opinion, dated the Closing Date, in form and substance reasonably satisfactory to STAR. (f) No Injunctions or Restraints; Illegality. No laws shall have been adopted or promulgated, and no temporary restraining order, preliminary or permanent injunction or other order issued by a court or other Governmental Entity of competent jurisdiction shall be in effect (i) having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger or (ii) which otherwise would have a Material Adverse Effect on WAXS after giving effect to the Merger; provided, however, that the provisions of this Section 6.3(g) shall not be available to STAR if its failure to fulfill its obligations pursuant to Section 5.3 shall have been the cause of, or shall have resulted in any such order or injunction. (g) Exchange Fund. An officer of the Exchange Agent shall have certified in writing to STAR that the deposit required to be made by WAXS into the Exchange Fund pursuant to Section 2.1 has been made in connection with the establishment thereof. ARTICLE VII TERMINATION AND AMENDMENT 7.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, by action taken or authorized by the Board of Directors of the terminating party or parties: (a) By mutual written consent of WAXS and STAR; (b) By either WAXS or STAR, if the other party shall have failed to comply in any material respect with any of its material covenants or agreements contained in this Agreement, which failure to so comply has not been cured within ten (10) business days following receipt by such other party of written notice of such failure to comply; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's reasonable efforts and for so long as the breaching party shall be so using its reasonable efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; and provided, further, that no party shall have the right to terminate this Agreement pursuant to this Section 7.1(b) if such party is then failing to comply in any material respect with any of its covenants or agreements contained in this Agreement; (c) By either WAXS or STAR, if there has been a breach by the other party of any representations or warranties, which breach has not been cured within ten (10) business days following receipt by such other party of written notice of such failure to comply; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's reasonable efforts and for so long as the breaching party shall be so using reasonable efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; and provided further, that this provision shall not apply to such breaches which would not have a Material Adverse Effect on WAXS or the Surviving Corporation; (d) By either STAR or WAXS, if the Effective Time shall not have occurred on or before September 30, 2000 (the "Termination Date"); provided, however, that the right to terminate this Agreement under this Section 7.1(d) shall not be available to any party whose action or failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before the Termination Date and any such action or failure constitutes a breach of this Agreement by such party; (e) By either STAR or WAXS if any Governmental Entity (i) shall have issued an order, decree or ruling or taken any other action (which the parties shall have used their reasonable efforts to resist, resolve or lift, as applicable, in accordance with Section 5.3) permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling, or other action shall have become final and nonappealable or (ii) shall have failed to A-29 324 issue an order, decree or ruling or to take any other action (which order, decree, ruling or other action the parties shall have used their reasonable efforts to obtain, in accordance with Section 5.3), which, in the case of each of (i) and (ii) is necessary to fulfill the conditions set forth in Section 6.2(f) with respect to WAXS or Section 6.3(g) with respect to STAR, and such denial of a request to issue such order, decree, ruling or take such other action shall have become final and nonappealable; provided, however, that the right to terminate this Agreement under this Section 7.1(e) shall not be available to any party whose action or failure to fulfill any obligation under this Agreement has been the cause of such action or inaction and any such action or failure constitutes a breach of this Agreement by such party; (f) By WAXS or STAR if the adoption of this Agreement by the stockholders of WAXS or the stockholders of STAR shall not have been obtained by reason of the failure to obtain the Required WAXS Vote or the Required STAR Vote, as applicable, in each case upon the taking of such vote at a duly held meeting of stockholders of WAXS or STAR, or at any adjournment thereof; (g) By WAXS if the Board of Directors of STAR, prior to the Required STAR Vote, shall make an Adverse Change in the STAR Recommendation (other than in connection with STAR's termination of this Agreement pursuant to Section 7.1(b)) or approve or recommend a Superior Proposal pursuant to Section 5.4 or shall resolve to take any such actions; (h) By STAR, at any time prior to the Required STAR Vote upon three (3) business days' prior notice to WAXS, if its Board of Directors shall have determined as of the date of such notice that an Acquisition Proposal is a Superior Proposal; provided, however, that (i) STAR shall have complied with Section 5.4, (ii) prior to such termination, STAR shall, if requested by WAXS in connection with a revised proposal by it, negotiate in good faith for such three (3) business day period with WAXS and (iii) the Board of Directors of STAR shall have concluded in good faith, as of the effective date of such termination, after taking into account any revised proposal by WAXS during such three (3) business day period, that an Acquisition Proposal is a Superior Proposal; and provided, further, that it shall be a condition to termination by STAR pursuant to this Section 7.1(h) that STAR shall have made the payment of the fee to WAXS pursuant to Section 7.2(b); (i) By WAXS, if (X) either STAR or any of its material Subsidiaries (1) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (2) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of STAR or any of its Subsidiaries or for all or a material portion of the property or assets of STAR or any of its Subsidiaries or (3) effects any general assignment for the benefit of creditors or (Y) a Governmental Entity having jurisdiction enters a decree or order for (a) relief in respect of STAR or any of its material Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (b) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of STAR or any of its Subsidiaries or for all or a material portion of the property and assets of STAR or any of its Subsidiaries or (c) the winding up or liquidation of the affairs of STAR or any of its material Subsidiaries and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; or (j) By WAXS if there has been an Event of Default under the Credit Agreement, of even date herewith, between WAXS and STAR. 7.2 Effect of Termination. (a) In the event of any termination of this Agreement by either STAR or WAXS, as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of WAXS or STAR or their respective officers or directors except with respect to Section 3.1(m), Section 3.2(l), the second sentence of Section 5.2, Section 5.5, Section 5.6, this Section 7.2, and Article VIII, which provisions shall survive such termination and except that, A-30 325 notwithstanding anything to the contrary contained in this Agreement, neither WAXS nor STAR shall be relieved or released from any liabilities or damages arising out of its breach of this Agreement; (b) If this Agreement is terminated by STAR pursuant to Section 7.1(h), STAR shall, prior to such termination, pay to WAXS $14,000,000 in immediately available funds (the "Termination Fee"); (c) If this Agreement is terminated by WAXS pursuant to Section 7.1(g), STAR shall, within three (3) days following such termination, pay to WAXS the Termination Fee; and (d) If this Agreement is terminated by WAXS or STAR pursuant to Section 7.1(f) because STAR's stockholders have failed to adopt this Agreement by the Required Star Vote and STAR enters into a definitive agreement with respect to a Business Combination within twelve (12) months following such termination, then STAR shall pay to WAXS the Termination Fee prior to or at the consummation thereof. 7.3 Amendment. This Agreement may be amended by STAR and WAXS, by action taken or authorized by their respective Boards of Directors or representatives or authorized officers, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of STAR and WAXS (including, without limitation, an amendment as described in Section 6.2(h)), but, after any such approval, no amendment shall be made which by law or in accordance with the rules of any relevant stock exchange or automatic quotations system requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of STAR and WAXS. 7.4 Extension, Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, representatives or authorized officers, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE VIII GENERAL PROVISIONS 8.1 Non-Survival of Representations, Warranties and Agreements. None of the representations, warranties, covenants and other agreements in this Agreement or in any instrument delivered pursuant to this Agreement including any rights arising out of any breach of such representations, warranties, covenants and other agreements, shall survive the Effective Time, except for those covenants and agreements contained herein and therein that by their terms apply or are to be performed in whole or in part after the Effective Time and this Article VIII. 8.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed duly given (a) on the date of delivery if delivered personally, or by telecopy or facsimile, upon confirmation of receipt, (b) on the first business day following the date of dispatch if delivered by a recognized next day courier service, or (c) on the tenth business day following the date of mailing if delivered by registered or certified mail return receipt requested, postage prepaid All notices hereunder A-31 326 shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the party to receive such notice: (a) If to WAXS or Merger Sub, to: World Access, Inc. Resurgens Plaza, Suite 2210 945 East Paces Ferry Road Atlanta, Georgia 30326 Facsimile No.: (404) 233-2280 Attention: John D. Phillips with a copy to Long Aldridge & Norman LLP 303 Peachtree Street, Suite 5300 Atlanta, Georgia 30308 Facsimile No.: (404) 527-4198 Attention: H. Franklin Layson (b) If to STAR to: STAR Telecommunications, Inc. 223 East De La Guerra Santa Barbara, California 93101 Facsimile No.: (805) 884-1137 Attention: Christopher E. Edgecomb with a copy to Riordan & McKinzie Twenty-Ninth Floor 300 South Grand Avenue Los Angeles, California 90071 Facsimile No.: (213) 229-8550 Attention: Richard J. Welch 8.3 Interpretation. When a reference is made in this Agreement to Sections, Exhibits, the WAXS Disclosure Schedule or the STAR Disclosure Schedule, such reference shall be to a Section of or Exhibit or schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". All Exhibits, the WAXS Disclosure Schedule and the STAR Disclosure Schedule are incorporated herein and made a part hereof. 8.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that both parties need not sign the same counterpart. 8.5 Entire Agreement; No Third Party Beneficiaries. (a) This Agreement and the Confidentiality Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, including, without limitation, that certain Letter of Intent, dated December 17, 1999, between WAXS and STAR, among the parties with respect to the subject matter hereof. A-32 327 (b) This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, except as provided for in Section 5.12. 8.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware (without giving effect to choice of law principles thereof). 8.7 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the actions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. 8.8 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. 8.9 Submission to Jurisdiction; Waivers. Each of WAXS and STAR irrevocably agrees that any legal action or proceeding with respect to this Agreement or for recognition and enforcement of any judgment in respect hereof brought by the other party hereto or its successors or assigns may be brought and determined in the Chancery or other Courts of the State of Delaware, and each of WAXS and STAR hereby irrevocably submits with regard to any such action or proceeding for itself and in respect to its property, generally and unconditionally, to the nonexclusive jurisdiction of the aforesaid courts. Each of WAXS and STAR hereby irrevocably waives, and agrees not to assert, by way of motion, as a defense, counterclaim or otherwise, in any action or proceeding with respect to this Agreement, (i) any right to trial by jury with respect to any action, suit or proceeding arising out of or relating to this Agreement, the Merger or any other transaction contemplated hereby, (ii) any claim that it is not personally subject to the jurisdiction of the above named courts for any reason other than the failure to lawfully serve process, (iii) that it or its property is exempt or immune from jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise), and (iv) to the fullest extent permitted by applicable law, that (a) the suit, action or proceeding in any such court is brought in an inconvenient forum, (b) the venue of such suit, action or proceeding is improper and (c) this Agreement, or the subject matter hereof, may not be enforced in or by such courts. 8.10 Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to specific performance of the terms hereof, this being in addition to any other remedy to which they are entitled at law or in equity. 8.11 Headings. The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 8.12 Definitions. As used in this Agreement: (a) "beneficial ownership" or "beneficially own" shall have the meaning under Section 13(d) of the Exchange Act and the rules and regulations thereunder. (b) "Board of Directors" means the Board of Directors of any specified Person and any committees thereof. A-33 328 (c) "Business Combination" means (i) a merger, reorganization, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving a party as a result of which either (A) such party's stockholders prior to such transaction (by virtue of their ownership of such party's shares) in the aggregate cease to own at least 65% of the voting securities of the entity surviving or resulting from such transaction (or the ultimate parent entity thereof) or, regardless of the percentage of voting securities held by such stockholders, if any Person shall beneficially own, directly or indirectly, at least 20% of the voting securities of such ultimate parent entity, or (B) the individuals comprising the board of directors of such party prior to such transaction do not constitute a majority of the board of directors of such ultimate parent entity, (ii) a sale, lease, exchange, transfer or other disposition of at least 50% of the assets of such party and its Subsidiaries, taken as whole, in a single transaction or a series of related transactions, or (iii) the acquisition, directly or indirectly, by a Person of beneficial ownership of 20% or more of the common stock of such party whether by merger, consolidation, share exchange, business combination, tender or exchange offer or otherwise. (d) "Dissenters' Shares" means shares of STAR Common Stock for which dissenter's rights of appraisal have been exercised pursuant to the DGCL. (e) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (f) "GAAP" means United States generally accepted accounting principles. (g) "Known" or "Knowledge" means, with respect to any party, the knowledge of such party's executive officers after reasonable inquiry. (h) "Material Adverse Effect" means, with respect to any entity, any change, circumstance or effect or any breach of the provisions of this Agreement that, individually or in the aggregate with all other changes, circumstances and effects or breaches, is or would reasonably be expected to be materially adverse to (i) the business, financial condition or results of operations of such entity and its Subsidiaries taken as a whole, or (ii) the ability of such entity (or the party owning such entity) to consummate the transactions contemplated by this Agreement. (i) "Nasdaq" means the National Market System of the NASDAQ Stock Market. (j) "Net PT-1 Proceeds" means the cash proceeds received by STAR at the consummation of the PT-1 Sale, net of all Taxes, fees, expenses and costs incurred in connection with the PT-1 Sale, including, without limitation: (1) fees or expenses for investment banking or other financial services; (2) agency, brokerage, finder's or other similar fees or commissions; (3) legal, accounting, consulting or other professional fees or expenses; (4) the cost of any remedial or corrective actions or measures; (5) the costs associated with the transfer or termination of any PT-1 employees; or (6) the costs of any right or obligation the vesting of which is accelerated by the PT-1 Sale. (k) "Person" means an individual, corporation, limited liability company, partnership, association, trust, unincorporated organization, other entity or group (as defined in the Exchange Act). (l) "Pre-Closing Price" means the closing price of WAXS Common Stock as reported on the Nasdaq for the trading day (in which such shares are traded on the Nasdaq) ending at the close of trading on the second (2nd) trading day preceding the Closing. (m) "PT-1 Excess Proceeds" means the Net PT-1 Proceeds in excess of $150,000,000. (n) "SEC" means the Securities and Exchange Commission. (o) "Securities Act" means the Securities Act of 1933, as amended. A-34 329 (p) "Subsidiary", when used with respect to any party means any corporation or other organization, whether incorporated or unincorporated, (i) of which such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the voting interests in such partnership) or (ii) at least a majority of the securities or other interests of which having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. (q) "Superior Proposal" means a written proposal made by a Person unaffiliated with STAR which is for (I) (i) a merger, reorganization, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving STAR as a result of which either (A) STAR's stockholders prior to such action (by virtue of their ownership of STAR's shares) in the aggregate cease to own at least 50% of the voting securities of the entity surviving or resulting from such transaction (or the ultimate parent entity thereof) or (B) the individuals comprising the board of directors of STAR prior to such transaction do not constitute a majority of the board of directors of such ultimate parent entity, (ii) a sale, lease, exchange, transfer or other disposition of at least 50% of the assets of STAR and its Subsidiaries, taken as a whole, in a single transaction or a series of related transactions, or (iii) the acquisition, directly or indirectly, by a Person of beneficial ownership of 50% or more of the common stock of STAR whether by merger, consolidation, share exchange, business combination, tender or exchange offer or otherwise, and which is (II) otherwise on terms which the Board of Directors of STAR in good faith concludes (after consultation with its financial advisors and outside legal counsel), taking into account among other things, all legal, financial, regulatory and other aspects of the proposal and the Person making the proposal, (i) would, if consummated, result in a transaction that is more favorable to its stockholders (in their capacities as stockholders), from a financial point of view, than the transactions contemplated by this Agreement and (ii) is reasonably capable of being completed. (r) "Tax" (and, with correlative meaning, "Taxes" shall mean: (i) all taxes, charges, fees, levies or other assessments, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including, but not limited to, federal income taxes and state income taxes), payroll and employee withholding taxes, unemployment insurance, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, employer tax, estimated, severance, telecommunications, occupation, goods and services, capital, profits, value added taxes, franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which the Person is required to pay, withhold or collect; and (ii) any liability for the payment of any amounts described in clause (i) as a result of being a successor to or transferee of any individual or entity or a member of an affiliated, consolidated or unitary group for any period (including pursuant to Treas. Reg. sec. 1.1502-6 or comparable provisions of state, local or foreign tax law); and (iii) any liability for the payment of amounts described in clause (i) or clause (ii) as a result of any express or implied obligation to indemnify any Person or as a result of any obligations under agreements or arrangements with any Person. (s) "Tax Asset" means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction or any other credit or tax attribute which could reduce Taxes (including, without limitation, credits related to alternative minimum Taxes). (t) "Tax Return" shall mean all reports, estimates, declarations of estimated tax, information statements and returns (including any attached schedules) or similar statement relating to, or required A-35 330 to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties. (u) "Tax Sharing Agreement" shall mean any and all existing Tax sharing agreements, or arrangements written or unwritten, express or implied, binding two or more Persons with respect to the payment of Taxes, including any agreements or arrangements which afford any other Person the right to receive any payment from one or more other Persons in respect to any Taxes or the benefit of any Tax Asset of one or more other Persons or require or permit the transfer or assignment of any income, revenue, receipts or gains. [SIGNATURES APPEAR ON FOLLOWING PAGE] A-36 331 IN WITNESS WHEREOF, WAXS, Merger Sub and STAR have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first above written. WAXS: WORLD ACCESS, INC. By: /s/ John D. Phillips ------------------------------------ Name: John D. Phillips Title: Chairman and Chief Executive Officer STAR: STAR TELECOMMUNICATIONS, INC. By: /s/ Christopher E. Edgecomb ------------------------------------ Name: Christopher E. Edgecomb Title: President MERGER SUB: STI MERGER CO. By: /s/ John D. Phillips ------------------------------------ Name: John D. Phillips Title: Chairman and Chief Executive Officer A-37 332 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Amendment"), dated as of June 7, 2000, by and among World Access, Inc., a Delaware corporation ("WAXS"), STI Merger Co., a Delaware corporation and wholly-owned subsidiary of WAXS ("Merger Sub"), and STAR Telecommunications, Inc., a Delaware corporation ("STAR"). WITNESSETH: WHEREAS, WAXS, Merger Sub and STAR are parties to that certain Agreement and Plan of Merger, dated as of February 11, 2000 (the "Merger Agreement"), pursuant to which STAR will merge with and into Merger Sub; WHEREAS, the parties have agreed to make certain amendments to the Merger Agreement; and WHEREAS, capitalized terms used, but not otherwise defined herein, shall have the meanings given to such terms in the Merger Agreement. NOW THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to hereby mutually agree as follows: 1. Section 1.6(c) of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "Subject to Section 2.4, each share of STAR Common Stock issued and outstanding immediately prior to the Effective Time (other than the Dissenter's Shares (as defined in Section 8.12)) shall be converted into the right to receive, at the election of WAXS by written notice to STAR prior to the Closing, (i) the number of shares of WAXS Common Stock obtained by solving for "X" in the following formula (the "Exchange Ratio"): X = 7.7319 + Z ------------- 20
or (ii) such number of shares of WAXS Common Stock as shall equal up to sixty percent (60%) of the Exchange Ratio and an amount in cash equal up to forty percent (40%) of the average closing price of the WAXS Common Stock on Nasdaq for the ten (10) trading day period ending at the close of trading on the trading day immediately preceding the Closing Date multiplied by "X"; provided, however, that WAXS and STAR expressly agree that, notwithstanding anything in this Agreement to the contrary, in order to ensure that the Merger satisfies the continuity of interest requirement under Treasury Regulation Section 1.368-l(e), in no event shall WAXS issue cash for more than forty-five percent (45%) of the outstanding shares of STAR Common Stock, including for purposes of this calculation cash paid for fractional shares pursuant to Section 2.4 and cash paid for Dissenters' Shares. For purposes of this Section 1.6, "Z" shall equal the PT-1 Excess Proceeds (as defined in Section 8.12) divided by 62,856,702. All shares of STAR Common Stock, at the Effective Time, shall no longer be outstanding and shall automatically be canceled and retired and each holder of a certificate representing any such shares (a "Certificate") shall cease to have any rights with respect thereto, except as set forth in this Section 1.6(c), Section 2.4 or at law. The shares of WAXS Common Stock issued pursuant to this Section 1.6(c) together with any cash in lieu of fractional shares paid pursuant to Section 2.4 shall be referred to herein as the "Merger Consideration." A-38 333 2. Section 5.15 of the Merger Agreement is hereby amended by appending the following to the end of such section: "Notwithstanding the foregoing, the amount of the Interim Financing available to STAR and STAR Telecommunications GmbH shall be reduced on a dollar-for-dollar basis for each dollar of additional financing provided to STAR or its Subsidiaries by MCI WorldCom Network Services, Inc., or any of its affiliates, from the date hereof, up to an aggregate of $30,000,000." 3. Section 6.2(d) of the Merger Agreement is hereby amended by deleting the word "or" prior to "(iii)"; and by appending the following to the end of such section: "or (iv) to an action taken by STAR at the specific request of World Access." 4. Section 6.2(h) of the Merger Agreement is hereby amended by appending the following sentence to the end of such section: "The condition set forth in this Section 6.2(h) shall be deemed satisfied provided that (a) STAR shall have consummated the sale of the assets of PT-1 pursuant to the terms and conditions of that certain Asset Purchase Agreement, dated as of June 6, 2000, between Counsel Communications LLC, a Delaware limited liability company, PT-1, and STAR, set forth as Schedule 6.2(h) hereto (the "Sale to Counsel") and (b) the Sale to Counsel shall have resulted in the Net PT-1 Sale Proceeds of at least $120,000,000. Solely for the purposes of determining whether the Sale to Counsel results in Net PT-1 Sale Proceeds of at least $120,000,000, the parties have agreed that with respect to the following items (and not to any other Tax, fee, expense or cost for which no agreement has been reached, including, without limitation, Taxes due with respect to the Sale to Counsel) the cost attributable to such items will be fixed at the amounts set forth below:
ITEM AMOUNT - ---- ---------- (i) Switch Partition Services Agreement Credit............................... $1,000,000 (ii) Tax refunds forgone in order to apply 1999 net operating losses against any gain which results from the Sale to Counsel.............................. $6,700,000"
5. Section 6.2(i) of the Merger Agreement is hereby deleted in its entirety and replaced with the following: "STAR (or any of its affiliates) shall not have received notification, and WAXS shall not have any reasonable reason to believe, that any and all obligations of STAR (or any of its affiliates) relating to or arising in connection with the China-U.S. Cable Network were not fully satisfied by the reclamation of STAR's capacity in such network and that neither STAR nor any of its affiliates has any further obligation or liability with respect thereto." 6. Except as expressly set forth in this Amendment, the Merger Agreement shall remain in full force and effect and shall not be deemed to have been modified or amended by this Amendment. 7. This Amendment constitutes the entire understanding of the parties with respect to the subject matter hereof, and any other prior or contemporaneous agreements, whether written or oral, with respect thereto are expressly superseded hereby. 8. This Amendment may be executed in two or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. [SIGNATURES APPEAR ON FOLLOWING PAGE] A-39 334 IN WITNESS WHEREOF, WAXS, Merger Sub and STAR have caused this Amendment to be signed by their respective officers thereunto duly authorized, all as of the date first above written. WAXS: WORLD ACCESS, INC. By: /s/ W. TOD CHMAR ------------------------------------ Name: W. Tod Chmar Title: Executive Vice President STAR: STAR TELECOMMUNICATIONS, INC. By: /s/ CHRISTOPHER E. EDGECOMB ------------------------------------ Name: Christopher E. Edgecomb Title: Chief Executive Officer MERGER SUB: STI MERGER CO. By: /s/ W. TOD CHMAR ------------------------------------ Name: W. Tod Chmar Title: President A-40 335 SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER This SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is entered into this 6th day of October, 2000 by and among World Access, Inc., a Delaware corporation ("WAXS"), STI Merger Co., a Delaware corporation ("Merger Sub"), and STAR Telecommunications, Inc., a Delaware corporation ("STAR"). WITNESSETH: WHEREAS, the parties hereto have previously entered into an Agreement and Plan of Merger, dated as of February 11, 2000, as amended by that certain First Amendment to Agreement and Plan of Merger among such parties, dated as of June 7, 2000 (as so amended, the "Merger Agreement"); and WHEREAS, WAXS, Merger Sub and STAR have agreed to further amend the Merger Agreement, as provided in this Amendment; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: 1. Section 7.1(d) of the Merger Agreement is hereby amended by changing the date "September 30, 2000" therein to "December 31, 2000". 2. Except as expressly set forth in this Amendment, the Merger Agreement shall not be amended, revised or changed in any respect whatsoever and shall remain in full force and effect. 3. This Amendment constitutes the entire understanding of the parties with respect to the subject matter hereof, and any other prior or contemporaneous agreements, whether written or oral, with respect thereto are expressly superseded hereby. 4. This Amendment may be executed in two or more counterparts, each of which shall for all purposes be deemed an original and all of which shall constitute the same instrument. [Signatures appear on the following page] A-41 336 IN WITNESS WHEREOF, each of the parties has caused this Amendment to be duly executed on its behalf as of the date indicated on the first page hereof. WAXS: WORLD ACCESS, INC. By: /s/ W. TOD CHMAR ------------------------------------ Name: W. Tod Chmar Title: Executive Vice President MERGER SUB: STI MERGER CO. By: /s/ W. TOD CHMAR ------------------------------------ Name: W. Tod Chmar Title: President STAR: STAR TELECOMMUNICATIONS, INC. By: /s/ MARY CASEY ------------------------------------ Name: Mary Casey Title: President A-42 337 ANNEX B AGREEMENT AND PLAN OF MERGER AMONG WORLD ACCESS, INC. COMMUNICATION TELESYSTEMS INTERNATIONAL D/B/A WORLDXCHANGE COMMUNICATIONS 338 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of February 11, 2000 (this "Agreement"), by and among World Access, Inc., a Delaware corporation ("WAXS"), CTI Merger Co., a Delaware corporation and wholly-owned subsidiary of WAXS ("Merger Sub"), and Communication TeleSystems International d/b/a WorldxChange Communications, a California corporation ("CTI"). W I T N E S S E T H: WHEREAS, the Boards of Directors of CTI and WAXS deem it advisable and in the best interests of each corporation and its respective stockholders that CTI and WAXS engage in a business combination in order to advance the long-term strategic business interests of CTI and WAXS; WHEREAS, the combination of CTI and WAXS shall be effected by the terms of this Agreement through a merger as outlined below (the "Merger"); WHEREAS, in furtherance thereof, the respective Boards of Directors of CTI, Merger Sub and WAXS have approved the Merger, upon the terms and subject to the conditions set forth in this Agreement, pursuant to which each share of common stock, par value $.01 per share, of CTI ("CTI Common Stock"), each share of preferred stock, Series A, no par value per share, of CTI (the "CTI Series A Preferred Stock") and each share of preferred stock, Series B, no par value per share, of CTI (the "CTI Series B Preferred Stock") (the CTI Series A Preferred Stock and the CTI Series B Preferred Stock are collectively referred to herein as the "CTI Preferred Stock" and the CTI Preferred Stock and the CTI Common Stock are collectively referred to herein as the "CTI Capital Stock") issued and outstanding immediately prior to the Effective Time (as defined in Section 1.3) will be converted into the right to receive the consideration set forth in Section 1.7; WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder; and WHEREAS, simultaneously with the execution and delivery of this Agreement, WAXS is entering into an agreement with each of Roger Abbott and Rosalind Abbott, Atocha, L.P., Gold & Appel Transfer S.A. and Edward Soren (the "Principal Stockholders") pursuant to which each Principal Stockholder will agree to, among other things, vote in favor of the Merger and certain restrictions on the transfer of the consideration received in the Merger. B-1 339 NOW, THEREFORE, in consideration of the mutual representations, warranties and covenants contained herein, and upon and subject to the terms and the conditions hereinafter set forth, the parties do hereby agree as follows: ARTICLE I THE MERGER 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the Delaware General Corporation Law (the "DGCL") and the California General Corporation Law (the "CGCL"), CTI shall be merged with and into Merger Sub at the Effective Time (as defined below). Following the Merger, the separate corporate existence of CTI shall cease and Merger Sub shall continue as the surviving corporation (the "Surviving Corporation"). 1.2 Closing. Subject to the satisfaction or waiver of the conditions set forth in Article VII, the closing of the Merger and the transactions contemplated by this Agreement (the "Closing") will take place on the second business day following the satisfaction or written waiver of such conditions, unless another time or date is agreed to in writing by the parties hereto (the date of the Closing being referred to herein as the "Closing Date"). The Closing shall be held at the offices of Long Aldridge & Norman LLP, 303 Peachtree Street, Suite 5300, Atlanta, Georgia 30303. 1.3 Effective Time. On the Closing Date the parties shall (i) file a certificate of merger in such form as is required by, and executed in accordance with, the relevant provisions of the DGCL (the "Delaware Certificate of Merger") and an agreement of merger in such form as is required by, and executed in accordance with, the relevant provisions of the CGCL (the "California Agreement of Merger") and (ii) make all other filings or recordings required under the DGCL and the CGCL in connection with the Merger. The Merger shall become effective at such time as the Delaware Certificate of Merger and the California Agreement of Merger are duly filed with the Delaware Secretary of State and the California Secretary of State, respectively, or at such subsequent time as WAXS and CTI shall agree and as shall be specified in the Delaware Certificate of Merger and the California Agreement of Merger (the date and time the Merger becomes effective being the "Effective Time"). 1.4 Effects of the Merger. At and after the Effective Time, the Merger will have the effects set forth in the DGCL and the CGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers, licenses, authorizations and franchises of Merger Sub and CTI shall be vested in the Surviving Corporation, and all debts, liabilities and duties of Merger Sub and CTI shall become the debts, liabilities and duties of the Surviving Corporation. 1.5 Articles of Incorporation/Bylaws. The articles of incorporation and bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the articles of incorporation and bylaws of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law. 1.6 New Directors of WAXS. Immediately following the Effective Time, WAXS shall cause one (1) designee of CTI to be elected to the Board of Directors of WAXS. Such CTI designee shall be Walt Anderson, or such other person designated by Gold & Appel Transfer S.A. and reasonably acceptable to WAXS. 1.7 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of WAXS, Merger Sub, CTI or the holders of any of the following securities: (a) [Intentionally Omitted.] (b) Each share of CTI Capital Stock issued and outstanding and directly or indirectly owned or held by CTI or a Subsidiary (as defined in Section 3.1(b)) thereof at the Effective Time shall, by virtue of the Merger, cease to be outstanding and shall be canceled and retired and no capital stock of WAXS or other consideration shall be delivered in exchange therefor. B-2 340 (c) Subject to Sections 2.4, 2.5 and 2.14 hereof, each share of CTI Capital Stock issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive 0.6583 (the "Exchange Ratio") shares of common stock, par value $.01 per share, of WAXS ("WAXS Common Stock"). All shares of CTI Capital Stock, as of the Effective Time, shall no longer be outstanding and shall automatically be canceled and retired and each holder of a certificate representing any such shares (a "Certificate") shall cease to have any rights with respect thereto, except as set forth in this Section 1.7(c), Section 2.4, Section 2.5 and/or Section 2.14 and as provided under applicable law. The shares of WAXS Common Stock issuable pursuant to Section 1.7(c) and, if applicable, the Contingent Shares issuable pursuant to Section 1.7(d), together with any cash in lieu of fractional shares paid pursuant to Section 2.4, shall be referred to herein collectively as the "Merger Consideration." (d) In the event that the average of the closing prices of WAXS Common Stock as reported on the National Market System of the Nasdaq Stock Market (the "Nasdaq") for the ten (10) trading-day period ending at the close of trading on the second (2nd) trading day preceding the Closing (the "Averaging Period") is less than $20.38, then in addition to the shares of WAXS Common Stock issued pursuant to Section 1.7(c), each CTI stockholder who receives shares of WAXS Common Stock pursuant to Section 1.7(c) shall be entitled to receive, subject to Section 2.5, the amount, if any (the "Contingent Amount"), by which the Target Price (as defined below) exceeds the greater of (X) the Current Market Price (as defined below) on the first anniversary of the Effective Time (the "Maturity Date") and (Y) the Floor Price (as defined below), multiplied by the number of shares of WAXS Common Stock issued to such holder pursuant to Section 1.7(c). The maximum number of Contingent Shares that may be issued to CTI stockholders pursuant to this Section 1.7(d) shall in all events be less than fifty percent (50%) of the sum of the shares of WAXS Common Stock issued pursuant to Section 1.7(c) plus the number of Contingent Shares issued pursuant to this Section 1.7(d). The Contingent Amount shall only be paid in shares of WAXS Common Stock (the "Contingent Shares"), which shares shall be valued for purposes hereof at the greater of the Current Market Price as of the Maturity Date and the Floor Price and rounded to the nearest whole share. Notwithstanding anything to the contrary contained in this Agreement, any and all rights in, or to receive, the Contingent Amount shall terminate and be of no further force or effect if, at any time on or prior to the Maturity Date, the Current Market Price is greater than the Target Price. The parties further acknowledge and agree that if any shares of WAXS Common Stock constituting part of the Escrow Fund (as defined in Section 2.5) are released to WAXS in accordance with the Escrow Agreement (as defined in Section 7.1(e)), then the right to receive the Contingent Amount with respect to such shares of WAXS Common Stock shall terminate and be of no further force or effect. Neither the right to receive the Contingent Shares nor any interest therein shall be transferable or assignable by a holder of CTI Capital Stock except by operation of law. The terms and conditions relating to the Contingent Shares have been negotiated by WAXS and CTI so as to satisfy, to the extent possible, the specific requirements of Section 3.03 of the IRS Revenue Procedure 77-37, as it has been amplified and superseded, which established the circumstances under which the Internal Revenue Service (the "IRS") previously issued advance rulings on contingent stock arrangements in mergers intended to qualify as "reorganizations" under Section 368(a) of the Code. Solely for purposes of this Agreement's compliance with such Revenue Procedure, the maximum number of shares of WAXS Common Stock issuable pursuant to Sections 1.7(c) and 2.6(b), and as Contingent Shares pursuant to this Section 1.7(d) is 58,146,739 shares of WAXS Common Stock. For purposes hereof, (a) the "Target Price" means $20.38 per share of WAXS Common Stock; provided, however, that if the Nasdaq Composite Index (the "IXIC") at the close of trading on the Maturity Date is eighty-five percent (85%), or less, of the IXIC at the close of trading on the date of the Effective Time (the difference between one hundred percent (100%) and such percentage being referred to as the "Market Correction Percentage"), then the Target Price shall be reduced by a percentage equal to that portion of the Market Correction Percentage in excess of fifteen percent (15%); (b) the "Current Market Price" means, as of any date specified herein, the average of the daily closing trading prices of WAXS Common Stock, as reported on the Nasdaq, for the B-3 341 twenty (20) consecutive trading days (in which such shares are traded on the Nasdaq) ending at the close of trading on such date; (c) the "Floor Price" means $11.50 per share of WAXS Common Stock; and (d) references to the "close of trading" as of or on a particular date shall mean such date, or if such date is not a trading day or no shares of WAXS Common stock are traded on the Nasdaq on such date, the last trading day preceding such date on which shares of WAXS Common Stock were traded on the Nasdaq. 1.8 CTI Stock Options. (a) At the Effective Time, by virtue of the Merger and without any further action on the part of CTI, WAXS, Merger Sub or the holder of any outstanding CTI Stock Option (as defined in Section 3.2), each CTI Stock Option will be automatically converted into (i) an option to purchase shares of WAXS Common Stock (a "WAXS Stock Option") in an amount equal to the number of shares of CTI Common Stock covered under such CTI Stock Option multiplied by the Exchange Ratio (rounded to the nearest whole number of shares of WAXS Common Stock) at a price per share of WAXS Common Stock equal to the per share option exercise price specified in the CTI Stock Option divided by the Exchange Ratio (rounded to the nearest whole cent) and (ii) if applicable, the right to acquire for no additional consideration such number of Contingent Shares as is equal to the number of Contingent Shares the holder of such CTI Stock Option would be entitled to receive pursuant to Section 1.7(d) if such CTI Stock Option had been exercised immediately prior to the Effective Time. Each WAXS Stock Option shall contain terms and provisions which are substantially similar to those terms, conditions and provisions governing the original CTI Stock Option, except that references to CTI in such CTI Stock Option will be deemed to refer to WAXS and the date of grant of the CTI Stock Option shall be deemed to be the date of grant of such WAXS Stock Option. At the Effective Time, for purposes of interpretation of such new WAXS Stock Option, (i) all references in any stock option plan of CTI (including, without limitation, CTI's 1996 and 1999 Stock Option/Stock Purchase Plans) shall be deemed to refer to WAXS; (ii) any stock option plan of CTI which governs the CTI Stock Option shall continue to govern the WAXS Stock Option substituted therefor; and (iii) WAXS shall, as soon as practicable after the Effective Time, issue to each holder of an outstanding CTI Stock Option such documentation as appropriately evidences the foregoing issued and substituted WAXS Stock Option by WAXS. It is the intention of the parties: (1) that, subject to applicable law, CTI Stock Options assumed by WAXS qualify, following the Effective Time, as incentive stock options, as defined in Section 422 of the Code, to the extent that CTI Stock Options qualified as incentive stock options prior to the Effective Time, (2) that each holder of a CTI Stock Option shall receive a new WAXS Stock Option which preserves (but does not increase) the excess of the fair market value of the shares subject to such CTI Stock Option immediately before the Effective Time over the aggregate option price of such shares immediately before the Effective Time, if any such excess then exists, (3) that the terms, conditions, restrictions and provisions of the WAXS Stock Option be substantially similar to the terms, conditions, restrictions and provisions of the applicable CTI Stock Option, including without limitation, the same vesting schedule (other than to the extent accelerated pursuant to the existing terms of such CTI Stock Option or plan under which such Stock Option was granted), and (4) any terms conditions, restrictions or provisions of a CTI Stock Option applicable to a number of shares rather than a percentage or fraction of shares should be appropriately adjusted based upon the Exchange Ratio. (b) With respect to each CTI Stock Option converted into a WAXS Stock Option pursuant to Section 1.8(a), and with respect to the shares of WAXS Common Stock and Contingent Shares, if any, in respect of such shares of WAXS Common Stock underlying such option, WAXS shall file and keep current all requisite registration statements, on Form S-8 or other appropriate form(s), and comply in all other material respects with applicable state and federal requirements for as long as such options remain outstanding. (c) After the date of this Agreement, CTI agrees that it will not (x) grant any options, warrants or other rights to acquire any shares of CTI Capital Stock (except as set forth on SCHEDULE 5.1(C)), B-4 342 including any restricted stock, stock appreciation rights, limited stock appreciation rights or any other stock rights, (y) permit cash payments to holders of CTI Stock Options in lieu of the substitution therefor of WAXS Stock Options, as described in this Section 1.8 or (z) modify the vesting rules under any CTI Stock Option outstanding on the date hereof or take any other action (other than the transactions contemplated in this Agreement) which in any way would have the effect of accelerating the vesting of the options granted thereunder. (d) A holder of a WAXS Stock Option into which a CTI Stock Option has been converted in accordance with this Section 1.8 may exercise such option in whole or in part in accordance with its terms by delivering a properly executed notice of exercise to WAXS, together with the consideration therefor and the federal withholding tax information, if any, required in accordance with the related stock option plan. 1.9 Certain Adjustments. If between the date hereof and the Effective Time, the outstanding WAXS Common Stock or CTI Capital Stock shall have been changed into a different number of shares or different class by reason of any reclassification, recapitalization, stock split, split-up, combination or exchange of shares or a stock dividend or dividend payable in any other securities shall be declared with a record date within such period, or any similar event shall have occurred, the Exchange Ratio shall be appropriately adjusted to provide to the holders of CTI Capital Stock and CTI Stock Options the same economic effect as contemplated by this Agreement prior to such event. ARTICLE II EXCHANGE OF CERTIFICATES 2.1 Exchange Fund. Prior to the Effective Time, WAXS shall appoint a commercial bank or trust company reasonably acceptable to CTI to act as exchange agent hereunder (the "Exchange Agent") for the purpose of exchanging Certificates for the Merger Consideration. At or prior to the Effective Time, WAXS shall deposit with the Exchange Agent, in trust for the benefit of holders of shares of CTI Capital Stock, certificates representing the WAXS Common Stock issuable pursuant to Section 1.7 in exchange for outstanding shares of CTI Capital Stock. WAXS agrees to make available to the Exchange Agent from time to time as needed, cash sufficient to pay cash in lieu of fractional shares pursuant to Section 2.4 and any dividends and other distributions pursuant to Section 2.3. Any cash, certificates of WAXS Common Stock deposited with the Exchange Agent shall hereinafter be referred to as the "Exchange Fund". 2.2 Exchange Procedures. As soon as reasonably practicable after the Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail to each holder of a Certificate (i) a letter of transmittal which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, and which letter shall be in customary form and have such other provisions as WAXS may reasonably specify and (ii) instructions for effecting the surrender of such Certificates in exchange for the applicable Merger Consideration. Upon surrender of a Certificate to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor (A) one or more shares of WAXS Common Stock (which shall be in uncertificated book entry form unless a physical certificate is requested) representing, in the aggregate, the whole number of shares that such holder has the right to receive pursuant to Section 1.7 (after taking into account all shares of CTI Capital Stock then held by such holder), and (B) a check in the amount equal to the cash that such holder has the right to receive pursuant to this Article II, including cash in lieu of any additional shares of WAXS Common Stock pursuant to Section 2.4 and dividends and other distributions pursuant to Section 2.3. No interest will be paid or will accrue on any cash payable pursuant to Section 2.3 or Section 2.4. In the event of transfer of ownership of CTI Capital Stock which is not registered in the transfer records of CTI, one or more certificates evidencing, in the aggregate, the proper number of shares of WAXS Common Stock, a check in the proper amount of cash in lieu of any additional shares of B-5 343 WAXS Common Stock pursuant to Section 2.4, and any dividends or other distributions to which such holder is entitled pursuant to Section 2.3, may be issued with respect to such CTI Capital Stock to such a transferee if the Certificate representing such shares of CTI Capital Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. 2.3 Distributions with Respect to Unexchanged Shares. No dividends or other distributions declared or made with respect to shares of WAXS Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of WAXS Common Stock that such holder would be entitled to receive upon surrender of such Certificate and no cash payment in lieu of fractional shares of WAXS Common Stock shall be paid to any such holder pursuant to Section 2.4 until such holder shall surrender such Certificate in accordance with Section 2.2. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to such holder of shares of WAXS Common Stock issuable in exchange therefor, without interest, (a) promptly after the time of such surrender, the amount of any cash payable in lieu of fractional shares of WAXS Common Stock to which such holder is entitled pursuant to Section 2.4 and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of WAXS Common Stock, and (b) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to such surrender and a payment date subsequent to such surrender payable with respect to such shares of WAXS Common Stock. 2.4 No Fractional Shares of WAXS Common Stock. (a) No certificates or scrip or shares of WAXS Common Stock representing fractional shares of WAXS Common Stock or book-entry credit of the same shall be issued upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote or to have any rights of a stockholder of WAXS. (b) Except for Contingent Shares, if any, notwithstanding any other provision of this Agreement, each holder of a Certificate exchanged for Merger Consideration who would otherwise have been entitled to receive a fraction of a share of WAXS Common Stock (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to the product of (i) such fractional part of a share of WAXS Common Stock multiplied by (ii) the average closing price of WAXS Common Stock on the Nasdaq over the Averaging Period. As promptly as practicable after the determination of the amount of cash, if any, to be paid to holders of fractional interests, the Exchange Agent shall so notify WAXS, and WAXS shall cause the Surviving Corporation to deposit such amount with the Exchange Agent and shall cause the Exchange Agent to forward payments to such holders of fractional interests subject to and in accordance with the terms hereof. 2.5 Escrow of Shares. (a) At the Closing, 2,453,385 of the shares of WAXS Common Stock to be issued to CTI's stockholders pursuant to Section 1.7(c) (collectively, the "Escrow Fund") shall be delivered to SunTrust Bank, Atlanta (the "Escrow Agent"), which Escrow Fund shall serve as the sole and exclusive source of recovery for any WAXS Protected Party (as defined in Section 8.1) for any indemnification claims hereunder. The Escrow Fund shall be held in escrow and released pursuant to the terms and conditions of the Escrow Agreement (as defined in Section 7.1(e)). The terms and conditions of the Escrow Agreement have been structured by WAXS and CTI so as to satisfy the specific requirements of Section 3.06 of IRS Revenue Procedure 77-37, as it has been amplified and superseded, which established the circumstances under which the IRS previously issued advance rulings on the escrow of stock in mergers intended to qualify as "reorganizations" under Section 368(a) of the Code. (b) If any Contingent Shares are issued at a time that shares of WAXS Common Stock remain in escrow pursuant to the Escrow Agreement (as defined in Section 7.1(d)), then any Contingent B-6 344 Shares that are issued with respect to such shares of WAXS Common Stock shall be delivered to the Escrow Agent and shall be held and released in accordance with the terms and conditions of Section 4 of the Escrow Agreement. 2.6 No Further Ownership Rights in CTI Capital Stock. (a) All shares of WAXS Common Stock issued and cash paid upon conversion of shares of CTI Capital Stock in accordance with the terms of this Article II (including any cash paid pursuant to Section 2.4) shall be deemed to have been issued or paid in full satisfaction of all rights pertaining to the shares of CTI Capital Stock. (b) Any accrued and unpaid dividends owed upon consummation of the Merger to any holder of CTI Preferred Stock in connection with the automatic conversion of such CTI Preferred Stock under the articles of incorporation of CTI shall be paid, at the Closing, solely in shares of WAXS Common Stock (valued at $20.38 per share). Any such shares so issued to any holder of CTI Preferred Stock shall not affect the Exchange Ratio. 2.7 Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of Certificates for six months after the Effective Time shall be delivered to the Surviving Corporation or otherwise on the instruction of the Surviving Corporation, and any holders of the Certificates who have not theretofore complied with this Article II shall thereafter look only to the Surviving Corporation and WAXS for the Merger Consideration with respect to the shares of CTI Capital Stock formerly represented thereby to which such holders are entitled pursuant to Section 1.7 and Section 2.2, any cash in lieu of fractional shares of WAXS Common Stock to which such holders are entitled pursuant to Section 2.4 and any dividends or distributions with respect to shares of WAXS Common Stock to which such holders are entitled pursuant to Section 2.3. Any such portion of the Exchange Fund remaining unclaimed by holders of shares of CTI Capital Stock five years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity (as defined in Section 3.6) shall, to the extent permitted by law, become the property of the Surviving Corporation free and clear of any claims or interest of any person previously entitled thereto. 2.8 No Liability. None of WAXS, Merger Sub, CTI, the Surviving Corporation or the Exchange Agent shall be liable to any person in respect of any Merger Consideration from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 2.9 Investment of the Exchange Fund. The Exchange Agent shall invest any cash included in the Exchange Fund as directed by the Surviving Corporation on a daily basis. Any interest and other income resulting from such investments shall promptly be paid to the Surviving Corporation. 2.10 Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will deliver in exchange for such lost stolen or destroyed Certificate the applicable Merger Consideration with respect to the shares of CTI Capital Stock formerly represented thereby, any cash in lieu of fractional shares of WAXS Common Stock, and unpaid dividends and distributions on shares of WAXS Common Stock deliverable in respect thereof, pursuant to this Agreement. 2.11 Withholding Rights. Each of the Surviving Corporation and WAXS shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of CTI Capital Stock such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code and the rules and regulations promulgated thereunder, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by the Surviving Corporation or WAXS, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as B-7 345 having been paid to the holder of the shares of CTI Capital Stock in respect of which such deduction and withholding was made by the Surviving Corporation or WAXS, as the case may be. 2.12 Further Assurances. At and after the Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of CTI or Merger Sub, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of CTI or Merger Sub, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. 2.13 Stock Transfer Books. The stock transfer books of CTI shall be closed immediately upon the Effective Time and there shall be no further registration of transfers of shares of CTI Capital Stock thereafter on the records of CTI. On or after the Effective Time, any Certificates presented to the Exchange Agent or WAXS for any reason shall be converted into the Merger Consideration with respect to the shares of CTI Capital Stock formerly represented thereby, any cash in lieu of fractional shares of WAXS Common Stock to which the holders thereof are entitled pursuant to Section 2.4 and any dividends or other distributions to which the holders thereof are entitled pursuant to Section 2.3. 2.14 Further Holdback. At the Closing, separately from the shares of WAXS Common Stock comprising the Escrow Fund (which shall be deposited with the Escrow Agent pursuant to the Escrow Agreement), a total of 49,068 of the shares of WAXS Common Stock to be issued to CTI's stockholders pursuant to Section 1.7(c) (the "Expense Fund") shall be deemed delivered to each CTI stockholder and at the deemed direction of each such stockholder delivered to an escrow agent to be designated in writing by CTI not less than five (5) days prior to the Closing Date. Any and all escrow provisions with respect to the Expense Fund shall in all aspects satisfy the specific requirements of Section 3.06 of IRS Revenue Procedure 77-37, as it has been amplified and superseded by the IRS. The CTI stockholders as of immediately prior to the Effective Time shall be the holders of record with full voting rights to all of the shares of WAXS Common Stock held in the Expense Fund. The CTI stockholders as of immediately prior to the Effective Time shall be entitled to exercise such voting rights until such time, if any, as such shares of WAXS Common Stock are sold to pay Representative's Costs pursuant to this Section 2.14. The escrow agent shall deliver to the CTI stockholders as of immediately prior to the Effective Time such proxies or other documents as may be necessary to enable such CTI stockholders to exercise such voting rights. Further, the CTI stockholders as of immediately prior to the Effective Time shall be entitled to promptly receive any dividend distribution with respect to the shares of WAXS Common Stock held in the Expense Fund. Any such dividends paid with respect to such shares shall be distributed by the escrow agent to the CTI stockholders as of immediately prior to the Effective Time as holders of record of such shares. The Expense Fund shall be available in the good faith discretion of the Shareholder Representative to pay the costs and expenses, if any, incurred by the Shareholder Representative in defending (including, without limitation, assuming the defense of any third party claims pursuant to Section 8.5) or otherwise responding to, on behalf of the stockholders of CTI, any claims for indemnification by any WAXS Protected Party pursuant to Article VIII hereof, or otherwise in the performance of its duties hereunder, including, without limitation, the reasonable fees, costs and expenses of attorneys, accountants and other professionals engaged by the Shareholder Representative for such purpose (collectively, the "Representative Costs"). The Shareholder Representative shall have the authority to direct the sale from time to time of such number of shares from the Expense Fund as may be necessary to reimburse the Shareholder Representative for any Representative's Costs, which shall be reimbursed to the Shareholder Representative from the Expense Fund promptly after the escrow agent's receipt of a request therefor. The Shareholder Representative shall also be entitled to have any Representative's Costs advanced to the Shareholder Representative from the Expense Fund upon request therefor, provided that any such advanced amounts not actually expended by the Shareholder Representative to pay Representative's Costs shall be promptly returned to the Expense Fund or returned to the stockholders of CTI as of immediately prior to the Effective Time on a pro rata basis. All shares of WAXS Common Stock or any cash amounts returned to the Expense Fund pursuant to the immediately preceding sentence which are remaining in the B-8 346 Expense Fund at the later to occur of (i) the expiration of the period for asserting claims pursuant to Section 8.2(b) or (ii) the first date on which there are no pending claims from any WAXS Protected Party shall be distributed by the escrow agent to the stockholders of CTI as of immediately prior to the Effective Time on a pro rata basis. CTI shall have authority to negotiate, and the Shareholder Representative shall have authority to enter into an agreement with the escrow agent designated by CTI, which shall effectuate the foregoing. WAXS agrees that, notwithstanding any contrary provision of this Agreement, any voting agreement between WAXS and any Principal Stockholder or any other agreement entered into in connection herewith or therewith, any shares of WAXS Common Stock comprising the Expense Fund may be sold from time to time at the discretion of the Shareholder Representative as contemplated hereby. The provisions of Section 8.7 shall apply to all actions taken by the Shareholder Representative as contemplated hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES OF CTI CTI hereby represents and warrants to WAXS as follows: 3.1 Organization and Authorization. (a) Each of CTI and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as applicable, and has the corporate power and authority to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets, and is duly qualified and in good standing. Each of CTI and its Subsidiaries is duly qualified and in good standing in every state of the United States and in such other jurisdictions (within or outside of the United States) in which the conduct of its business or the ownership of its properties and assets requires it to be so qualified except where the failure to be so qualified would not have a Material Adverse Effect (as defined in Section 3.6) on CTI. (b) SCHEDULE 3.1(B) sets forth (i) every entity in which CTI owns fifty percent (50%) or more of the outstanding equity, directly or indirectly (each a "Subsidiary" and collectively, the "Subsidiaries"), and (ii) the equity interest in such entity that is owned by CTI. Except as noted on SCHEDULE 3.1(B), all outstanding shares of capital stock of the Subsidiaries (the "Subsidiary Shares") are owned by CTI, directly or indirectly, free and clear of all liens, restrictions, claims, equities, charges, options, rights of first refusal or encumbrances. Except as set forth on SCHEDULE 3.1(B), CTI has full power, right and authority to vote all of the shares of capital stock of each Subsidiary which are owned or held by CTI. Except as set forth on SCHEDULE 3.1(B), CTI is not a party to or bound by any agreement prohibiting or restricting its right to transfer or vote the shares of capital stock of any Subsidiary which are owned or held by CTI. (c) Subject to the approval of this Agreement, the Merger and the other transactions contemplated hereby by the stockholders of CTI by the Required CTI Stockholder Vote, CTI has the corporate power to execute, deliver and perform this Agreement and to consummate the transactions and perform its obligations contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary action on the part of CTI, subject to the approval of this Agreement, the Merger and the other transactions contemplated hereby by the stockholders of CTI by the Required CTI Stockholder Vote. This Agreement has been duly and validly executed and delivered by CTI and constitutes CTI's legal, valid and binding obligation, enforceable in accordance with its terms, except to the extent such enforcement may be limited by applicable bankruptcy, reorganization, moratorium or other such laws affecting the enforcement of creditors' rights generally. 3.2 Authorized and Outstanding Stock. The authorized capital stock of CTI, the number of issued and outstanding shares thereof and the record holders of such issued and outstanding shares of CTI's capital stock are set forth on SCHEDULE 3.2. All of such issued and outstanding shares of capital stock of CTI are validly issued, fully paid and nonassessable. There are outstanding options, warrants or other B-9 347 rights, to acquire an aggregate of 4,029,110 shares of capital stock of CTI (each, a "CTI Stock Option"). SCHEDULE 3.2 lists the exercise price and vesting schedule for each CTI Stock Option. 3.3 Absence of Other Claims. Except as set forth on SCHEDULE 3.2, there is not outstanding, nor is CTI bound by, any subscriptions, options, preemptive rights, warrants, calls, commitments or agreements or rights of any character requiring CTI to issue or entitling any person or entity to acquire any additional shares of capital stock or any other equity security of CTI, including any right of conversion or exchange under any outstanding security or other instrument, and CTI is not obligated to issue or transfer any shares of its capital stock for any purpose. There are no outstanding obligations of CTI to repurchase, redeem or otherwise acquire any outstanding shares of capital stock of CTI. 3.4 Financial Statements. SCHEDULE 3.4 contains true, correct and complete copies of (i) the audited consolidated balance sheet of CTI as of September 30, 1998, and the related audited statement of income, retained earnings, and cash flows for the year then ended, and the related notes thereto; (ii) the audited consolidated balance sheet of CTI as of September 30, 1999, and the related audited statement of income, retained earnings, and cash flows for the year then ended, and the related notes thereto; and (iii) the unaudited consolidated balance sheet of CTI for the three (3) month period ending December 31, 1999, and the related unaudited statement of income, retained earnings, and cash flows for the period then ended (the "Interim Financial Statements") (collectively, the "Financial Statements"). The Financial Statements present fairly, in all material respects, the consolidated financial position of CTI, as of the dates thereof, and the related results of its operations for the periods then ended. Except as set forth on SCHEDULE 3.4, the Financial Statements have been prepared in accordance with GAAP on a basis consistent with prior periods subject, in the case of the Interim Financial Statements, to the absence of any notes thereto and to normal and recurring year-end adjustments, which adjustments will not, individually or in the aggregate, be material in amount. 3.5 No Undisclosed Liabilities. Except (i) as and to the extent reflected and adequately reserved against in the Financial Statements, (ii) for liabilities and obligations of a type not required under GAAP to be disclosed in the Financial Statements and which were incurred in the ordinary course of business, consistent with past practice or (iii) as shown on SCHEDULE 3.5, as of September 30, 1999, CTI had no liabilities or obligations whatsoever, whether accrued, absolute, contingent or otherwise. Since September 30, 1999, CTI has not incurred any liability or obligation whatsoever, except for (i) liabilities and obligations incurred in the ordinary course of business consistent with past practice or (ii) as reflected on SCHEDULE 3.5. 3.6 No Violation of Law. Except as set forth on SCHEDULE 3.6, neither CTI nor any of its Subsidiaries is or has been (by virtue of any past or present action, omission to act, contract to which it is a party or any occurrence or state of facts whatsoever) in violation of, or has received any notices of violation with respect to, any applicable local, state, federal or international law, ordinance, regulation, order, injunction or decree, or any other requirement of any supranational, national, state, municipal, local or foreign government, instrumentality, subdivision, court, administrative agency, commission or authority thereof, or any quasi-governmental or private body exercising any supranational, national, state, municipal, local or foreign regulatory, taxing, importing or other governmental or quasi-governmental authority (a "Governmental Entity") binding on it, or relating to its assets or business, except where such violation or loss, liability, penalty or expense by virtue thereof would not have a Material Adverse Effect on CTI. For purposes of this Agreement, "Material Adverse Effect" means, with respect to any specified entity, any change, circumstance or effect or breach of any of the provisions of this Agreement that, individually or in the aggregate with all other changes, circumstances and effects or breaches, is or would reasonably be expected to be materially adverse to (i) the business, financial condition or results of operations of such entity and its Subsidiaries taken as a whole, or (ii) the ability of such entity (or the party owning such entity) to consummate the transactions contemplated by this Agreement. 3.7 Property. Except where it would not have a Material Adverse Effect on CTI: (a) Each of CTI and its Subsidiaries (i) has marketable fee simple title to all of its material real property and has valid title to all personal and mixed, tangible and intangible properties and B-10 348 assets which it purports to own, including all such real and personal properties and assets reflected, but not shown as leased or encumbered, in the Financial Statements (except for inventory and assets sold in the ordinary course of business consistent with past practice and supplies consumed in the ordinary course of business consistent with past practice); and (ii) except for Permitted Liens (as defined hereafter), owns such real and personal property free and clear of objections, liens, restrictions, claims, charges, security interests, easements or other encumbrances of any nature whatsoever, including any mortgages, leases, chattel mortgages, conditional sales contracts, collateral security arrangements and other title or interest retention arrangements. "Permitted Liens" shall mean (x) the security interests, easements or other encumbrances described in SCHEDULE 3.7 and (y) liens for Taxes not yet due and payable. All properties and assets of CTI and its Subsidiaries are in the possession or control of CTI or its Subsidiaries, as applicable. (b) Except as would not have a Material Adverse Effect on CTI, the plants, structures and equipment owned or leased by CTI or any of its Subsidiaries are structurally sound with no known defects, are in good and safe operating condition and repair and are adequate for the uses to which they are being put. (c) Except as would not have a Material Adverse Effect on CTI, the rights, properties and other assets presently owned, leased or licensed by CTI or any of its Subsidiaries include all rights, properties and other assets necessary to permit CTI and its Subsidiaries to conduct their business in the same manner as their business has been conducted in prior periods, without any need for replacement, refurbishment or extraordinary repair. 3.8 [Intentionally Omitted.] 3.9 [Intentionally Omitted.] 3.10 Intellectual Property. (a) Generally. SCHEDULE 3.10(A) sets forth a complete and accurate list of (i) all material patents, trademarks, service marks, trademark and service mark registrations, trademark and service mark registration applications, label filings, copyrights, inventions, patents and patent applications owned by CTI or any of its Subsidiaries and all agreements with respect thereto, (ii) all material trade names owned by CTI or any of its Subsidiaries and (iii) all contracts, agreements or understandings pursuant to which CTI or any of its Subsidiaries has authorized any person to use or any person has the right to use, in any business or commercial activity, any of the items listed in clauses (i) and (ii) above that are owned by CTI or any of its Subsidiaries. Except as would not have a Material Adverse Effect on CTI or as set forth on SCHEDULE 3.10(A), neither CTI nor any of its Subsidiaries has heretofore infringed upon, and is not now infringing upon, any patent, service mark, trade name, trademark, copyright, trade secret, or other intellectual property belonging to any other person. Except as would not have a Material Adverse Effect on CTI or as set forth on SCHEDULE 3.10(A), CTI does not know of any person infringing upon any of CTI's or its Subsidiaries' patents, service marks, trademarks, copyrights, trade secrets, or other intellectual property. CTI has made available to Buyer true, correct and complete copies of each trademark and service mark registration or application therefor, patent or patent application or other item listed in SCHEDULE 3.10(A) and each assignment or license with respect to any thereof. (b) Computer Software and Databases. SCHEDULE 3.10(B) accurately identifies all material proprietary computer software and databases internally developed or acquired by CTI or any of its Subsidiaries (excluding generally available "shrink wrap" software and databases). Except as would not have a Material Adverse Effect on CTI, CTI and its Subsidiaries have all computer software and databases that are necessary to conduct the business of CTI and its Subsidiaries as presently conducted and all documentation relating to all such computer software and databases. Except as would not have a Material Adverse Effect on CTI, all such computer software and databases perform in accordance with the documentation related thereto or used in connection therewith and are free of defects in programming and operation. SCHEDULE 3.10(B) identifies each person to whom CTI or any B-11 349 of its Subsidiaries, in the last two (2) years, has sold, licensed, leased or otherwise transferred or granted any interest or rights to any of the computer software and databases described above and the date of each such sale, license, lease or other transfer or grant. CTI has made available to WAXS true, correct and complete copies of all documents relating to each such sale, license, lease or other transfer or grant. (c) Year 2000 Compliance. Except as would not have a Material Adverse Effect on CTI, all computer hardware and software (including all computer hardware and software contained in imbedded systems) used in the business of CTI and its Subsidiaries or included in products previously or currently manufactured by CTI or any of its Subsidiaries (whether such hardware and software is owned by CTI or any of its Subsidiaries or is licensed from third parties) (collectively, the "Technology Systems") is designed to be used during and after the calendar year 2000 and such hardware and software will continue to operate during each such time period to accurately process date data (including, but not limited to calculating, comparing and sequencing) from, into and between the twentieth and twenty-first centuries, including leap year calculations ("Year 2000 Compliance"). Except as would not have a Material Adverse Effect on CTI, the occurrence of the calendar year 2000 will not adversely affect the Technology Systems of CTI or any of its Subsidiaries or of third parties using products manufactured, or services provided, by CTI or any of its Subsidiaries. No expenditures in excess of currently budgeted items are necessary to cause Technology Systems to operate properly during and after the calendar year 2000. CTI and its Subsidiaries have taken reasonable steps to determine whether the failure of any third parties with which CTI or any of its Subsidiaries has a relationship to achieve Year 2000 Compliance could have a Material Adverse Effect on CTI. Except as would not have a Material Adverse Effect on CTI, all computer hardware and software embedded in products manufactured, or services provided, by CTI or any of its Subsidiaries, when used in combination with, or interfacing with computer hardware and software of any other person, shall accurately accept, release and exchange date data, and shall continue to function in the same manner as it performs today and shall not otherwise impair the accuracy or function ability of such person's computer hardware or software. 3.11 Litigation. SCHEDULE 3.11 sets forth all litigation, claims, suits, actions, investigations, indictments or informations, proceedings or arbitrations, grievances or other procedures (including grand jury investigations, actions or proceedings, and product liability and workers' compensation suits, actions or proceedings) pending, or to the knowledge of CTI, threatened, before any court, commission, arbitration tribunal, or judicial, governmental or administrative department, body, agency, administrator or official, grand jury, or any other forum for the resolution of grievances, against CTI or any of its Subsidiaries or involving any of its or their assets or business, except for such matters as would not have a Material Adverse Effect on CTI. Further, except as set forth in SCHEDULE 3.11 and for matters which would not have a Material Adverse Effect on CTI, there are no material judgments, orders, writs, injunctions, decrees, indictments or informations, grand jury subpoenas or civil investigative demands, plea agreements, stipulations or awards (whether rendered by a court, commission, arbitration tribunal, or judicial, governmental or administrative department, body, agency, administrator or official, grand jury or any other forum for the resolution of grievances) against or relating to CTI or any of its Subsidiaries or involving any of its or their assets or business. CTI has made available to WAXS all information requested by WAXS with respect to each pending litigation, claim, suit, action, investigation, indictment or information, proceeding, arbitration, grievance or other procedure listed in SCHEDULE 3.11, and the judgements and informations, grand jury subpoenas and civil investigative demands, plea agreements, stipulations and awards listed in said Schedule. 3.12 Employment Matters and Benefit Plans. (a) SCHEDULE 3.12(A) sets forth a list of all material agreements, arrangements, commitments, and policies (1) which relate to employee benefits; (2) which pertain to present or former employees, officers, retirees, directors or independent contractors (or their beneficiaries, dependents or spouses) of CTI or any of its Subsidiaries; and (3) which are currently in effect or expected to be adopted, maintained by, sponsored by, or contributed to by CTI or any other employer (a "CTI Affiliate") B-12 350 which, under Section 414 of the Code, would constitute a single employer with CTI (collectively referred to as "CTI Employee Benefit Plans", including, but not limited to, all: (A) employee benefit plans as defined in Section 3(3) of ERISA; and (B) all other deferred compensation, incentive, profit-sharing, thrift, stock ownership, stock appreciation rights, bonus, stock option, stock purchase, vacation, or other benefit plans or arrangements. (b) CTI and all CTI Affiliates have complied with their respective substantive obligations with respect to all CTI Employee Benefit Plans (including, but not limited to, (1) filing or distributing all reports or notices required by ERISA or the Code and (2) complying with all requirements of Part 6 of Title I of ERISA and Code Section 4980B) and have maintained the CTI Employee Benefit Plans in compliance with all applicable laws and regulations (including, but not limited to, ERISA and the Code), except where the failure to comply with such obligations would not result in a Material Adverse Effect on CTI. Each CTI Employee Benefit Plan that is intended to qualify under Code Section 401(a) has received a favorable determination letter (or other ruling indicating its tax-qualified status) from the IRS which is current with respect to all plan provisions required under applicable law for which such a letter can be obtained under IRS procedures, and the IRS has not threatened or taken any action to revoke any favorable determination letter issued with respect to any such CTI Employee Benefit Plan. No statement, either oral or written, has been made or administrative action has been taken by CTI or any CTI Affiliate (or any agent of either) to any Person regarding any CTI Employee Benefit Plans that is not in accordance with the terms of that plan that would have a Material Adverse Effect on CTI. (c) CTI has made available to WAXS true, correct and complete copies of all of the current documents relating to the CTI Employee Benefit Plans, including, but not limited to (1) all plan texts (including any subsequent amendments), trust instruments and other funding arrangements adopted or entered into in connection with each of the CTI Employee Benefit Plans; (2) the notices and election forms used to notify employees and their dependents of their continuation coverage rights under group health plans (under Code Section 4980B(f) and ERISA Section 606), if applicable; and (3) the most recent Form 5500 annual reports (including all schedules thereto), summary plan descriptions and favorable determination letters, if applicable, for Employee Benefit Plans. Since the date such documents were supplied to WAXS, no plan amendments have been adopted and no such amendments or changes shall be adopted or made prior to the Closing Date without WAXS's approval, except as required by applicable law after the date hereof. (d) Except as listed in SCHEDULE 3.12(D), neither CTI nor any CTI Affiliate has any material agreement, arrangement, commitment or understanding to create any additional CTI Employee Benefit Plans or to continue, modify, change or terminate any existing CTI Employee Benefit Plans. (e) None of the CTI Employee Benefit Plans (1) is currently under investigation, audit or review by the U.S. Department of Labor, the IRS, the Pension Benefit Guaranty Corporation or any other federal or state agency or (2) is liable for any federal, state, local or foreign taxes that would have a Material Adverse Effect on CTI. Except for such liabilities that would not have a Material Adverse Effect on CTI, there is no transaction in connection with which CTI or any CTI Affiliate could be subject to either a civil penalty assessed pursuant to ERISA Section 502, a tax imposed by Code Section 4975 or liability for a breach of fiduciary responsibility under ERISA. (f) Other than routine claims for benefits payable to participants or beneficiaries in accordance with the terms of the CTI Employee Benefit Plans, or relating to qualified domestic relations orders (as defined in Section 414(p) of the Code), there are no claims, pending or threatened, by any participant or beneficiary against any of the CTI Employee Benefit Plans or any fiduciary of any of the CTI Employee Benefit Plans that would have a Material Adverse Effect on CTI. (g) Neither CTI nor any CTI Affiliate has at any time maintained, sponsored or contributed to any "pension plan", as defined in ERISA Section 3(2), which is subject to Title IV of ERISA or contributed to any pension plan which is a "multiemployer plan" as defined in ERISA Section 3(37)(A). B-13 351 (h) SCHEDULE 3.12(H) sets forth a list of all agreements, arrangements, commitments and CTI Employee Benefit Plans, under which (1) any benefits will be increased, (2) the vesting or exercisability of benefits will be accelerated, (3) amounts will become immediately payable, and/or (4) the immediate funding for any benefits is required, upon the occurrence of the transactions contemplated by this Agreement. Except with respect to CTI Stock Options, SCHEDULE 3.12(H) also sets forth a good faith estimate of the total value and/or cost of any such change in control benefits and/or funding and a statement of the time periods in which such payments must be made and/or funding obligations must be met, including but not limited to the value and/or costs of any gross up payments for tax purposes. (i) To the knowledge of CTI, no key employee, or group of employees of CTI has any plans to terminate employment with CTI or any of its Subsidiaries other than employees with plans to retire. CTI and its Subsidiaries have complied with all laws relating to the employment of labor, including provisions thereof relating to wages, hours and equal opportunity, and it does not have any labor relations problems (including threatened or actual strikes or work stoppages or grievances), except for such failures or problems that would not have a Material Adverse Effect on CTI. 3.13 Collective Bargaining. Except as set forth on SCHEDULE 3.13, there are no labor contracts, collective bargaining agreements, letters of understanding or other arrangements, formal or informal, with any union or labor organization covering any of CTI's or its Subsidiaries' employees and none of said employees are represented by any union or labor organization. CTI has made available to Buyer a true, correct, and complete copy of each agreement listed on SCHEDULE 3.13. 3.14 Labor Disputes. CTI and its Subsidiaries are in compliance with all federal and state laws respecting employment and employment practices, terms and conditions of employment, wages and hours, except where the failure to be in compliance would not have a Material Adverse Effect on CTI. No unfair labor practice complaint against CTI or any of its Subsidiaries is pending before the National Labor Relations Board. CTI does not know of any labor strike or other labor trouble actually pending, being threatened against, or affecting CTI or any of its Subsidiaries. Relations between management and labor are amicable and there have not been, nor are there presently, any attempts to organize non-union employees, nor are there plans for any such attempts. 3.15 Investments. Except for the Subsidiary Shares and as disclosed on SCHEDULE 3.15, neither CTI nor any of its Subsidiaries owns any capital stock or other securities or have any other material investment in any person or other entity. 3.16 Tax Matters. Except as set forth on SCHEDULE 3.16: (a) (i) All material Tax Returns required to be filed under applicable law by CTI and each of its Subsidiaries have been filed, or requests for extensions have been timely filed and have not expired; (ii) all such Tax Returns filed by CTI and its Subsidiaries are complete and accurate in all material respects; (iii) all Taxes shown to be due on such Tax Returns or on subsequent assessments with respect thereto have been paid or the Financial Statements reflect that adequate reserves have been established for the payment of such Taxes, and no other material Taxes are payable by CTI and its Subsidiaries with respect to items or periods covered by such Tax Returns (whether or not shown on or reportable on such Tax Returns) or with respect to any period prior to the date of this Agreement; (iv) CTI and each of its Subsidiaries has disclosed on their federal income Tax Return all positions taken therein that could give rise to a substantial understatement of income Tax within the meaning of Section 6662 of the Code; (v) there are no material liens on any of the assets of CTI or any of its Subsidiaries with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that CTI or any of its Subsidiaries is contesting in good faith through appropriate proceedings and for which the Financial Statements reflect that appropriate reserves have been established; (vi) no power of attorney to deal with Tax matters or waiver or extension of any statute of limitations with respect to Taxes has been granted by CTI or any of its Subsidiaries; and (vii) there is no (X) audit, examination, deficiency or refund litigation or matter in controversy with respect to any Taxes of CTI and its Subsidiaries nor (Y) has the IRS nor any other Tax authority asserted any claim for Taxes in B-14 352 writing, or to the knowledge of CTI, is threatening to assert any claim for Taxes, that might reasonably be expected to result in a Tax determination which would have a Material Adverse Effect on CTI. (b) SCHEDULE 3.16 sets forth the names of the Subsidiaries of CTI which are or have been a member of an affiliated group of corporations filing a consolidated federal income Tax Return (or a group of corporations filing a consolidated, combined or unitary income Tax Return under comparable provisions of state, local or foreign Tax law) other than a group the common parent of which was CTI; (c) There are no contracts, agreements, plans or arrangements, including but not limited to the provisions of this Agreement, covering any employee or former employee of CTI or any of its Subsidiaries that, individually or collectively, could give rise to the payment of any amount (or portion thereof) that would not be deductible pursuant to Section 280G of the Code. (d) Neither CTI nor any of its Subsidiaries is a party to (i) a Tax Sharing Agreement, (ii) transactions which have produced deferred intercompany gains, losses or other intercompany items or excess loss accounts (within the meaning of Treas. Reg. sec. 1.1502-13 or 1.1502-19, respectively, or any predecessor regulations or any comparable items for state, local or non-United States Tax purposes), or (iii) any joint venture, partnership, limited liability company or other arrangement or contract that should be treated as a partnership for federal income Tax purposes or as to which, an election has been made under Treas. Reg. sec. 301.7701-3 to have the entity disregarded for federal income Tax purposes as an entity separate from its owner. (e) None of CTI and its Subsidiaries (i) has or has had operations or assets outside the United States taxable as a "branch" by the United States or as a "permanent establishment" by any foreign country, (ii) has received written notice of any claim made by a Tax authority in a jurisdiction where CTI or any of its Subsidiaries does not file Tax Returns that it is or may be subject to Taxes in such jurisdiction, (iii) is a "passive foreign investment company" within the meaning of the Code, (iv) has participated in or cooperated with an international boycott or has been requested to do so in connection with any prior transaction or the transactions contemplated by this Agreement, and (v) has availed itself of any Tax amnesty, Tax holiday or similar relief in any jurisdiction. (f) CTI has made available to WAXS true copies of (i) all material Tax Returns that CTI or its Subsidiaries have filed since its fiscal year ended September 30, 1995, and (ii) all material correspondence, including without limitation, closing agreements, private letter rulings, advance pricing agreements and gain recognition agreements and other written submissions to or communications with any Tax authorities. (g) (i) There is no plan or intention on the part of holders of CTI Capital Stock who own five percent (5%) or more of the CTI Capital Stock by vote or value (the "5% CTI stockholders"), nor have any of such 5% CTI stockholders entered any agreement, and to the knowledge of CTI, there is no plan or intention on the part of the remaining holders of CTI Capital Stock to sell, exchange or otherwise dispose of a number of shares of WAXS Common Stock received in the Merger (excluding the Contingent Shares, if any) to any person related to WAXS within the meaning of Treas. Reg. sec. 1.368-1(e)(3) that would reduce the CTI stockholders' aggregate ownership of such WAXS Common Stock to a number of shares of WAXS Common Stock having a value, as of the Effective Time of the Merger, of less than fifty percent (50%) of the value of all of the formerly outstanding CTI Capital Stock as of the Effective Time. For purposes of this representation, shares of WAXS Common Stock exchanged for cash or other property, surrendered by dissenters or exchanged for cash in lieu of fractional shares of WAXS Common Stock will be treated as outstanding CTI Capital Stock as of the Effective Time. Any third party who may acquire WAXS Common Stock from Roger Abbott and Rosalind Abbott as former CTI stockholders after the Merger as contemplated in the Voting and Stock Transfer Restriction Agreement dated as of the date hereof between WAXS and Roger Abbott and Rosalind Abbott (the "Abbott Voting and Stock Transfer Restriction Agreement"), will not be a person related to WAXS within the meaning of B-15 353 Treas. Reg. sec. 1.368-1(e)(3), and there are no facts and circumstances indicating that the cash to be used by each such third party to purchase the WAXS Common Stock from such former CTI stockholders receiving WAXS Common Stock in the Merger will in substance be exchanged by WAXS or any of its Subsidiaries for CTI Capital Stock. (ii) The fair market value of the WAXS Common Stock (inclusive of Contingent Shares, if any) and cash in lieu of fractional shares of Parent Common Stock, if any, together with any cash paid or shares of WAXS Common Stock issued, as the case may be, in satisfaction of accrued unpaid dividends on CTI Preferred Stock, received by each holder of CTI Capital Stock in the Merger will be approximately equal to the fair market value of the shares of CTI Capital Stock surrendered in the Merger by each CTI stockholder. (iii) CTI is not a regulated investment company, a real estate investment trust, or a corporation fifty percent (50%) or more of the value of whose total assets (excluding cash, cash items, receivables and U.S. government securities) are stock or securities and eighty percent (80%) or more of the value of whose total assets are assets held for investment. For purposes of the fifty percent (50%) and eighty percent (80%) determinations under the preceding sentence, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary's assets. A corporation shall be considered a subsidiary for purposes of this paragraph if the parent owns fifty percent (50%) or more of the combined voting power of all classes of stock entitled to vote, or fifty percent (50%) or more of the total value of shares of all classes of stock outstanding. (iv) In the Merger, CTI will transfer to Merger Sub at least ninety percent (90%) of the fair market value of its net assets, and at least seventy percent (70%) of the fair market value of its gross assets held immediately prior to the Merger. For purposes of this representation, amounts paid by CTI to dissenters or to CTI stockholders who receive cash or other property, CTI assets used by CTI to pay reorganization expenses, and CTI assets used for redemptions and distributions (excluding regular, normal dividends) made by CTI prior to the Effective Time will be included as assets of CTI held immediately prior to the Merger. (v) None of the compensation received by any stockholder-employee of CTI will be separate consideration for, or allocable to, any of the shares of CTI Capital Stock held by such stockholder-employee; none of the shares of WAXS Common Stock issued in the Merger and received by any stockholder-employee of CTI will be separate consideration for, or allocable to, any employment agreement, agreement not to compete or any other compensation owed or owing to such stockholder-employee; and the compensation paid to any stockholder-employee of CTI will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. (vi) CTI and each of its stockholders will pay their respective expenses, if any, incurred in connection with the Merger. (vii) There is no intercorporate indebtedness existing between WAXS and CTI or between CTI and the Merger Sub that was issued, acquired, or will be settled at a discount. (viii) At the Effective Time of the Merger, the fair market value of the assets of CTI transferred to Merger Sub will equal or exceed the sum of its liabilities assumed by Merger Sub, plus (without duplication) the amount of liabilities, if any, to which the transferred assets of CTI are subject. (ix) The liabilities of CTI assumed by Merger Sub and the liabilities of CTI to which the transferred assets of CTI are subject were incurred by CTI in the ordinary course of its business. (x) CTI is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. B-16 354 (xi) The business carried on by CTI at the Effective Time is its "historic business" within the meaning of Treas. Reg. sec. 1.368-1(d). (xii) Prior to the Effective Time, CTI has not distributed the stock of any corporation in a distribution qualifying for Tax-free treatment under Section 355 of the Code. (xiii) During the five (5) year period ending as of the Effective Time, neither CTI nor any persons related to CTI within the meaning of Treas. Reg. sec. 1.368-1(e)(3) (but without regard to Treas. Reg. sec. 1.368-1(e)(3)(i)(A)) will have directly or through any transaction, agreement, or arrangement with any other person, (A) acquired CTI Capital Stock with consideration other than shares of WAXS capital stock or CTI Capital Stock or (B) made any "extraordinary distributions" with respect to CTI Capital Stock within the meaning of Treas. Reg. sec. 1.368-1T(e)(1)(ii)(A). (xiv) The principal purposes of CTI for participating in the Merger are bona fide purposes unrelated to Taxes, and the terms of this Agreement are the product of arm's-length negotiations. (xv) CTI and each of its Subsidiaries are not currently, have not been within the last five (5) years, and do not anticipate becoming a "United States real property holding corporation" within the meaning of Section 897(c) of the Code. (xvi) There is a valid business reason underlying the Section 1.7(d) provisions concerning the possible issuance of Contingent Shares and the provisions of this Agreement relating to Contingent Shares satisfy the specific requirements of Section 3.03 of IRS Revenue Procedure 77-37, as it has been amplified and superseded by the IRS. (xvii) There is a valid business reason for the escrow of shares of WAXS Common Stock, including Contingent Shares, if any, pursuant to Section 2.5 of this Agreement and the Escrow Agreement described in Section 7.1(d), and the escrow provisions of this Agreement and the Escrow Agreement satisfy the specific requirements of Section 3.06 of IRS Revenue Procedure 77-37, as it has been amplified and superseded by the IRS. (xviii) There is a valid business reason for the escrow of shares of WAXS Common Stock comprising the Expense Fund pursuant to Section 2.14 of this Agreement, and the escrow provisions of Section 2.14 satisfy the specific requirements of Section 3.06 of IRS Revenue Procedure 77-37, as it has been amplified and superseded by the IRS. (h) For purposes of this Agreement: (i) "Tax" (and, with correlative meaning, "Taxes" shall mean: (i) all taxes, charges, fees, levies or other assessments, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including, but not limited to, federal income taxes and state income taxes), payroll and employee withholding taxes, unemployment insurance, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, employer tax, estimated, severance, telecommunications, occupation, goods and services, capital, profits, value added taxes, franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which the Person is required to pay, withhold or collect; and (ii) any liability for the payment of any amounts described in clause (i) as a result of being a successor to or transferee of any individual or entity or a member of an affiliated, consolidated or unitary group for any period (including pursuant to Treas. Reg. sec. 1.1502-6 or comparable provisions of state, local or foreign tax law); and (iii) any liability for the payment of amounts B-17 355 described in clause (i) or clause (ii) as a result of any express or implied obligation to indemnify any Person or as a result of any obligations under agreements or arrangements with any Person; (ii) "Tax Asset" means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction or any other credit or tax attribute which could reduce Taxes (including, without limitation, credits related to alternative minimum Taxes); (iii) "Tax Return" shall mean all reports, estimates, declarations of estimated tax, information statements and returns (including any attached schedules) or similar statement relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties; and (iv) "Tax Sharing Agreement" shall mean any and all existing written Tax sharing agreements, or arrangements binding two or more persons with respect to the payment of Taxes, including any written agreements or arrangements which afford any other person the right to receive any payment from one or more other persons in respect to any Taxes or the benefit of any Tax Asset of one or more other persons or require or permit the transfer or assignment of any income, revenue, receipts or gains. 3.17 Required Licenses and Permits. Except as would not have a Material Adverse Effect on CTI, CTI and its Subsidiaries have all licenses, tariffs, permits, variances, exemptions, orders, approvals and other authorizations of all Governmental Entities necessary for the operation of the business of CTI and its Subsidiaries (the "CTI Permits"). CTI and its Subsidiaries are in compliance with the terms of the CTI Permits, except where the failure to so be in compliance would have a Material Adverse Effect on CTI. The businesses of CTI and its Subsidiaries are not being conducted in violation of, and neither CTI nor any of its Subsidiaries have received any notices of violations with respect to, any law, ordinance or regulation of any Governmental Entity, except for possible violations which would not have a Material Adverse Effect on CTI. CTI has made available to WAXS true, correct, and complete copies of all CTI Permits. 3.18 Contracts and Commitments. Except as set forth or described in SCHEDULES 3.12, 3.13 or 3.18: (a) Neither CTI nor any of its Subsidiaries is a party to any agreement or contract, the absence of which would have a Material Adverse Effect on CTI; (b) No contracts or commitments of CTI or any of its Subsidiaries have unexpired terms of more than twelve (12) months from the date hereof or require payments or the provision of services having a value individually in excess of $1,000,000 (or, as to any series of related contracts or commitments, $1,000,000 in the aggregate); (c) Neither CTI not any of its Subsidiaries have any contract, written or oral, relating to the employment of any person by CTI or any Subsidiary thereof, or any consulting or similar kind of contract, that is not cancelable by CTI as a Subsidiary thereof, on notice of not longer than one hundred twenty (120) days and without liability of any kind, except liabilities which arise as a matter of law upon termination of employment, or any agreement or arrangement providing for the payment of any bonus or commission based on sales or earnings; (d) Except for negotiable instruments in the process of collection, neither CTI nor any of its Subsidiaries has any unexpired power of attorney outstanding or any contract, commitment or liability (whether absolute, accrued, contingent or otherwise), as guarantor, surety, co-signer, endorser, co-maker, indemnitor in respect of the contract or commitment of any other person, corporation, partnership, joint venture, association, organization or other entity (other than a Subsidiary of CTI) with respect to an amount exceeding $2,000,000; (e) There are no contracts or agreements with any director, officer or shareholder of CTI or a Subsidiary thereof, or with any person related to any such person or with any company or other organization in which any director, officer, or shareholder of CTI or a Subsidiary thereof, or anyone related to any such person, has a material direct or indirect financial interest; B-18 356 (f) Neither CTI nor any of its Subsidiaries is subject to any contract or agreement containing covenants limiting the freedom of CTI or any of its Subsidiaries to compete in any line of business in any geographic area or requiring CTI or any of its Subsidiaries to share any profits; (g) Neither CTI nor any of its Subsidiaries has any outstanding contract or agreement for variable cost service (excluding point-to-point service obtained pursuant to a lease or IRU arrangement) which is of a "take-or-pay" or similar variety and which requires payments or the provision of services having a value in excess of $50,000 per year or $1,000,000 over the term of the contract or agreement; and (h) CTI has made available to WAXS true, correct and complete copies of each of the agreements listed on SCHEDULE 3.18 (such agreements, together with any agreements set forth or described in or required to be set forth or described in any of SCHEDULES 3.12 or 3.13 being referred to as the "Material Contracts"); 3.19 No Conflict. Subject to obtaining any required consents or approvals set forth on SCHEDULE 3.21, the execution and delivery of this Agreement by CTI, the consummation of the transactions contemplated herein by CTI, and the performance of the covenants and agreements hereunder of CTI will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of any charter document or bylaw of CTI or a Subsidiary thereof, (ii) except as set forth in SCHEDULE 3.19, violate, conflict with or result in a breach or default under or give rise to a right of termination, amendment, cancellation or acceleration of any term, condition or obligation under any material mortgage, indenture, contract, license, permit, instrument, trust document, will, or other agreement, document or instrument to which CTI or a Subsidiary thereof is a party or by which CTI, any Subsidiary thereof or its or their assets may be bound, (iii) violate any provision of law, statute, regulation, court order or ruling of any governmental authority to which CTI or a Subsidiary thereof is a party or by which its or their assets may be bound or (iv) result in the creation or imposition of any lien, claim, charge, restriction, security interest or encumbrance of any kind whatsoever upon any asset, except, with respect to the foregoing clauses (ii), (iii) or (iv), where there would arise no Material Adverse Effect on CTI therefrom. 3.20 Agreements in Full Force and Effect. Except as expressly set forth in SCHEDULE 3.20, all Material Contracts are valid and binding and in full force and effect and are enforceable in accordance with their terms, except to the extent that such enforceability may be limited due to laws relating to bankruptcy, reorganization, moratorium or other such laws. CTI does not have knowledge of any pending or threatened bankruptcy, insolvency or similar proceeding with respect to any party to such agreements. No event has occurred with respect to any agreement or contract to which CTI or a Subsidiary thereof is a party which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a default thereunder by CTI or a Subsidiary thereof, or to the knowledge of CTI, any other party thereto, except where such default would not have a Material Adverse Effect on CTI. 3.21 Required Consents and Approvals. Except as set forth on SCHEDULE 3.21, no consent or approval is required by virtue of the execution hereof by CTI or the consummation of any of the transactions contemplated herein by CTI to avoid the violation or breach of, or the default under, or the creation of a lien on any asset of CTI or a Subsidiary thereof pursuant to the terms of, any regulation, order, decree or award of any Governmental Entity or any lease, agreement, contract, mortgage, note, license, permit, tariff, authorization or any other instrument to which CTI or a Subsidiary thereof is a party or to which it or any of its property or any of its capital stock is subject, except where the failure to obtain such consent or approval would not have a Material Adverse Effect on CTI. 3.22 Absence of Certain Changes and Events. Except as set forth on SCHEDULE 3.22, since September 30, 1999, each of CTI and its Subsidiaries has conducted its business only in the ordinary course, and has not: (a) made any declaration, setting aside or payment of any dividend or other distribution of assets (whether in cash, stock or property) with respect to the capital stock of CTI or a Subsidiary thereof, B-19 357 or any direct or indirect redemption, purchase or other acquisition of such stock, or otherwise made any payment of cash or any transfer of other assets, to any shareholder or affiliate thereof (including, without limitation, the repayment of or on any indebtedness or other obligation); or transferred any assets from a Subsidiary to CTI; (b) suffered any Material Adverse Effect; (c) except for customary increases based on term of service or regular promotion of non-officer employees, increased (or announced any increase in) the compensation payable or to become payable to any employee or increased (or announced any increase in) any bonus, insurance, pension or other employee benefit plan, payment or arrangement for such employees, or entered into or amended any material employment, consulting, severance or similar agreement; (d) incurred, assumed or guaranteed any liability or obligation (absolute, accrued, contingent or otherwise) other than in the ordinary course of business consistent with past practice; (e) paid, discharged, satisfied or renewed any material claim, liability or obligation other than in the ordinary course of business and consistent with past practice; (f) permitted any asset to be subjected to any mortgage, lien, security interest, restriction, charge or other encumbrance of any kind except for Permitted Liens; (g) waived any material claims or rights; (h) sold, transferred or otherwise disposed of any material asset, except in the ordinary course of business consistent with past practice; (i) made any single capital expenditure or investment in excess of $1,000,000; (j) made any change in any method, practice or principle of financial or tax accounting; (k) paid, loaned, advanced, sold, transferred or leased any asset to any employee, except for normal compensation involving salary and benefits or expenses reimbursed in the ordinary course of business, consistent with past practice; (l) issued or sold any of its capital stock or issued any warrant, option or other right to purchase shares of its capital stock, or any security convertible into its capital stock; (m) entered into any material commitment or transaction, other than in the ordinary course of business consistent with past practice, affecting the business of CTI or its Subsidiaries; or (n) agreed in writing, or otherwise, to take any action described in this Section 3.22. 3.23 Brokers and Advisers. Except for Gerard Klauer Mattison & Co., Inc., no broker, agent or finder has rendered financial services to CTI in connection with the transactions contemplated by this Agreement. 3.24 Information Supplied. None of the information supplied or to be supplied by CTI for inclusion or incorporation by reference in the Proxy Statement/Prospectus and the Registration Statement (each as defined herein) will, on the date it is first mailed to WAXS's stockholders or at the time of the WAXS Stockholders Meeting (in the case of the Proxy Statement/Prospectus) or on the date it is filed or declared effective by the SEC (in the case of the Registration Statement) contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the information supplied or to be supplied by CTI to its stockholders in connection with such stockholders' adoption of this Agreement and approval of the Merger and the other transactions contemplated hereby will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. B-20 358 3.25 CTI Board Approval. The Board of Directors of CTI, by resolutions duly adopted by unanimous vote at a meeting duly called and held and not subsequently rescinded or modified in any way (the "CTI Board Approval"), has duly (i) determined that this Agreement, the Merger and the other transactions contemplated hereby are fair to and in the best interests of CTI and its stockholders, (ii) approved this Agreement, the Merger and the other transactions contemplated hereby and (iii) declared the advisability of this Agreement, the Merger and the other transactions contemplated hereby, and, further, (iv) recommended that the stockholders of CTI approve and adopt this Agreement, the Merger and the other transactions contemplated hereby and directed that this Agreement and the transactions contemplated hereby be submitted for consideration by CTI's stockholders. 3.26 Required CTI Stockholder Vote. The affirmative vote of holders of shares of CTI Common Stock, CTI Series A Preferred Stock and CTI Series B Preferred Stock voting as three (3) separate classes, representing a majority of the outstanding shares of each such class (the "Required CTI Stockholder Vote"), are the only votes of the holders of any class or series of CTI capital stock necessary to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. 3.27 Disclosure. No representations or warranties by CTI in this Agreement (as qualified by the corresponding Schedules delivered by CTI pursuant hereto) contain any untrue statement of material fact, or omit to state any fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF WAXS AND MERGER SUB WAXS and Merger Sub hereby represent and warrant to CTI as follows: 4.1 Organization. WAXS and Merger Sub are corporations duly organized, validly existing and in good standing under the laws of the state of their incorporation and have all requisite corporate power and authority to effect the transactions and perform their obligations as contemplated hereunder. Except as set forth on SCHEDULE 4.1, Exhibit 21.1 to WAXS's Annual Report on Form 10-K for the year ended December 31, 1998 includes all the Subsidiaries of WAXS which as of the date of this Agreement are Significant Subsidiaries (as defined in Rule 1-02 of Regulation S-X of the Securities and Exchange Commission (the "SEC")). Except as disclosed on SCHEDULE 4.1 or in the WAXS SEC Reports (as defined herein), all the outstanding shares of capital stock of, or other equity interest in, each such Significant Subsidiary owned or held by WAXS have been validly issued and are fully paid and nonassessable and are owned directly or indirectly by WAXS, free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever and free of any other restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests), except for such matters as would not have a Material Adverse Effect on WAXS. Neither WAXS nor any of its Subsidiaries directly or indirectly owns any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity (other than the Subsidiaries of WAXS) that is or would reasonably be expected to be material to WAXS and its Subsidiaries taken as a whole. 4.2 Authorization. Subject to the approval of this Agreement, the Merger and the other transactions contemplated hereby by the stockholders of WAXS by the Required WAXS Vote, WAXS has the right, power and authority to execute, deliver and perform this Agreement and the Escrow Agreement and to consummate the transactions contemplated hereby and thereby, including the issuance of the WAXS Common Stock as contemplated hereunder. The execution, delivery and performance of this Agreement and the Escrow Agreement, and the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of WAXS, subject to the approval of this Agreement, the Merger and the other transactions contemplated hereby by the stockholders of WAXS by the Required WAXS Vote. This Agreement and the Escrow Agreement have B-21 359 been duly and validly executed and delivered by WAXS and constitute a legal, valid and binding obligation of WAXS, enforceable in accordance with their terms, except to the extent such enforceability may be limited by applicable bankruptcy, reorganization, moratorium or other such laws affecting the rights of creditors generally. Merger Sub has the right, power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereunder. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Merger Sub. This Agreement has been duly and validly executed and delivered by Merger Sub and constitutes a legal, valid and binding obligation of Merger Sub, enforceable in accordance with its terms, except to the extent such enforceability may be limited by applicable bankruptcy, reorganization, moratorium or other such laws affecting the rights of creditors generally. 4.3 No Conflict. The execution and delivery of this Agreement and the Escrow Agreement by WAXS, the execution and delivery of this Agreement by Merger Sub, the consummation of the transactions contemplated herein and therein by WAXS and Merger Sub, as applicable, and the performance of the covenants and agreements of WAXS and Merger Sub will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any of the provisions of any charter document or bylaw of WAXS or Merger Sub, (ii) except as set forth in SCHEDULE 4.3, violate, conflict with or result in a breach or default under or give rise to a right of termination, amendment, cancellation or acceleration of any term, condition or obligation under any material mortgage, indenture, contract, license, permit, instrument, trust document, or other agreement, document or instrument to which WAXS or Merger Sub is a party or by which WAXS or Merger Sub or any of its or their properties may be bound, (iii) violate any provision of law, statute, rule, regulation, court order, judgment or decree, or ruling of any Governmental Entity, to which WAXS or Merger Sub is a party or by which WAXS or Merger Sub or any of its or their properties may be bound or (iv) result in the creation or imposition of any lien, claim, charge, restriction, security interest or encumbrance of any kind whatsoever upon any asset of WAXS or Merger Sub, except, with respect to the foregoing clauses (ii), (iii) or (iv), where there would arise no Material Adverse Effect on WAXS or Merger Sub therefrom. 4.4 Validity of Issuance. The shares of WAXS Common Stock, when issued in accordance with Section 1.7 hereof, will be duly authorized, validly issued, fully paid and nonassessable. 4.5 Capital Structure. As of February 11, 2000: (a) The authorized capital stock of WAXS consists of (A) 150,000,000 shares of WAXS Common Stock, of which 53,787,805 shares are outstanding and no shares are held in treasury of WAXS and (B) 10,000,000 shares of Preferred Stock, par value $.01 per share, of which 50,000 shares designated as 4.25% Cumulative Senior Perpetual Convertible Preferred Stock, Series A, par value $.01 per share (the "Series A Preferred Stock"), and 350,259.875 shares designated as Convertible Preferred Stock, Series C (the "Series C Preferred Stock"), are outstanding. WAXS has reserved or has available 4,347,827 shares of WAXS Common Stock for issuance upon conversion of the Series A Preferred Stock and 18,027,478 shares of WAXS Common Stock for issuance upon conversion of the Series C Preferred Stock. All issued and outstanding shares of the capital stock of WAXS are duly authorized, validly issued, fully paid and nonassessable, and no class of capital stock is entitled to preemptive rights. In addition to the option described in Item 1 of SCHEDULE 4.5, there are outstanding options, warrants or other rights (a "WAXS Stock Option") to acquire 13,133,837 shares of capital stock from WAXS. (b) No bonds, debentures, notes or other indebtedness of WAXS having the right to vote on any matters on which holders of capital stock of WAXS may vote are issued or outstanding. (c) Except as otherwise set forth in this Section 4.5, the WAXS SEC Reports (as defined below) or SCHEDULE 4.5 and as contemplated by Section 1.5 and Section 1.6, there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which WAXS or any of its Subsidiaries is a party or by which any of them is bound obligating WAXS or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, B-22 360 additional shares of capital stock or other voting securities of WAXS or any of its Subsidiaries or obligating WAXS or any of its Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call right, commitment, agreement, arrangement or undertaking. Except as set forth on SCHEDULE 4.5 or the WAXS SEC Reports, there are no outstanding obligations of WAXS or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock of WAXS or any of its Subsidiaries. 4.6 Reports and Financial Statements. (a) WAXS has filed all required registration statements, prospectuses, reports, schedules, forms, statements and other documents required to be filed by it under the federal securities laws with the SEC since January 1, 1998 (collectively, including all exhibits thereto, the "WAXS SEC Reports"). No Subsidiary of WAXS is required to file any form, report, registration statement, prospectus or other document with the SEC not otherwise filed with a WAXS SEC Report. None of the WAXS SEC Reports, as of their respective dates (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), contained or will contain any untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The WAXS SEC Reports, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances existing as of the time of filing of such reports, not misleading. Each of the financial statements (including the related notes) included in the WAXS SEC Reports (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) presents fairly, in all material respects, the consolidated financial position and consolidated results of operations and cash flows of WAXS and its Subsidiaries as of the respective dates or for the respective periods set forth therein all in conformity with GAAP consistently applied during the periods involved except as otherwise noted therein, and subject, in the case of the unaudited interim financial statements, to normal and recurring year-end adjustments that have not been and will not be material in amount. All of such WAXS SEC Reports, as of their respective dates (or as of the date of any amendment to the respective WAXS SEC Report filed prior to the date of this Agreement), complied as to form in all material respects with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. (b) Except as disclosed on SCHEDULE 4.6 or in the WAXS SEC Reports, since December 31, 1999, WAXS and its Subsidiaries have not incurred any liabilities that are of a nature that would be required to be disclosed on a balance sheet of WAXS and its Subsidiaries or the footnotes thereto prepared in conformity with GAAP, other than (A) liabilities incurred in the ordinary course of business or (B) liabilities that would not have a Material Adverse Effect on WAXS. 4.7 Brokers and Advisers. Except for Donaldson, Lufkin & Jenrette Securities Corporation, no broker, agent or finder has rendered financial services to WAXS in connection with the transactions contemplated by this Agreement. 4.8 Information Supplied. None of the information supplied or to be supplied by WAXS for inclusion or incorporation by reference in the Proxy Statement/Prospectus (as defined herein) will, on the date it is first mailed to WAXS's stockholders, or at the time of the WAXS Stockholders Meeting contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Proxy Statement/Prospectus will, on the date it is first mailed to WAXS's stockholders and at the time of the WAXS Stockholders Meeting, comply as to form in all material respects with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. 4.9 WAXS Board Approval. The Board of Directors of WAXS, by resolutions duly adopted by unanimous vote at a meeting duly called and held and not subsequently rescinded or modified in any way (the "WAXS Board Approval"), has duly (i) determined that this Agreement, the Merger and the other B-23 361 transactions contemplated hereby are fair to and in the best interests of WAXS and its stockholders, (ii) approved this Agreement, the Merger and the other transactions contemplated hereby and (iii) declared the advisability of this Agreement, the Merger and the other transactions contemplated hereby, and, further, (iv) recommended that the stockholders of WAXS approve and adopt this Agreement, the Merger and the other transactions contemplated hereby and directed that this Agreement and the transactions contemplated hereby by submitted for consideration by WAXS's stockholders at the WAXS Stockholders Meeting. 4.10 Required WAXS Stockholder Vote. Except as set forth on SCHEDULE 4.10, the affirmative vote of holders of shares of WAXS Common Stock, Series A Preferred Stock and Series C Preferred Stock, voting together as a single class, representing a majority of the outstanding shares of WAXS Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (the "Required WAXS Vote"), is the only vote of the holders of any class or series of WAXS capital stock necessary to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. 4.11 Required Merger Sub Board Approval. The Board of Directors of Merger Sub, by resolutions duly adopted by a unanimous written consent and not subsequently rescinded or modified in any way, has duly (i) determined that this Agreement, the Merger and the other transactions contemplated hereby are fair to and in the best interests of Merger Sub and its sole stockholder, WAXS, (ii) approved this Agreement, the Merger and the other transactions contemplated hereby and (iii) declared the advisability of this Agreement, the Merger and the other transactions contemplated hereby, and, further, (iv) recommended that WAXS adopt this Agreement and approve the Merger and the other transactions contemplated hereby. 4.12 Required Merger Sub Stockholder Vote. The affirmative vote of WAXS, as sole stockholder of Merger Sub, is the only vote of the holders of any class or series of Merger Sub capital stock necessary to adopt this Agreement and approve the Merger and the other transactions contemplated hereby. WAXS, in its capacity as sole stockholder of Merger Sub, has, by resolutions duly adopted by written consent (the "Merger Sub Stockholder Resolutions") adopted this Agreement and approved the Merger and the other transactions contemplated hereby. 4.13 Litigation; Compliance with Laws. (a) Except as disclosed on SCHEDULE 4.13 or in the WAXS SEC Report, there is no suit, investigation, action or proceeding pending or, to the knowledge of WAXS, threatened, against or affecting WAXS or any Subsidiary of WAXS having, or which would have a Material Adverse Effect on WAXS, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against WAXS or any Subsidiary of WAXS having, or which would have a Material Adverse Effect on WAXS. (b) Except as would not have a Material Adverse Effect on WAXS, WAXS and its Subsidiaries hold all permits, licenses, variances, authorizations, exemptions, orders and approvals of all Governmental Entities which are necessary for the operation of the businesses of WAXS and its Subsidiaries (the "WAXS Permits"). WAXS and its Subsidiaries are in compliance with the terms of the WAXS Permits, except as disclosed in the WAXS SEC Reports or where the failure to be valid and in full force and effect or to so comply would not have a Material Adverse Effect on WAXS. The businesses of WAXS and its Subsidiaries are not being conducted in violation of, and WAXS has not received any notices of violations with respect to, any law, ordinance or regulation of any Governmental Entity, except as disclosed in the WAXS SEC Reports or for violations which would not have a Material Adverse Effect on WAXS. 4.14 Absence of Certain Changes or Events. Except as disclosed on SCHEDULE 4.14 or in the WAXS SEC Reports and except for liabilities incurred in connection with this Agreement or the transactions contemplated hereby, since December 31, 1998 through and including the date hereof, (i) WAXS and its Subsidiaries have conducted, in all material respects, their business only in the ordinary course and (ii) there has not been any change, circumstance or event which has had, or would reasonably be expected B-24 362 to have, a Material Adverse Effect on WAXS, other than any change, circumstance or effect relating (A) to the economy or financial markets in general, or (B) in general to the industries in which WAXS and its Subsidiaries operate and not specifically relating to WAXS and its Subsidiaries. 4.15 Tax Matters. Except as set forth on SCHEDULE 4.15: (a) (i) All material Tax Returns required to be filed under applicable law by WAXS and each of its Subsidiaries have been filed, or requests for extensions have been timely filed and have not expired; (ii) all such Tax Returns filed by WAXS and its Subsidiaries are complete and accurate in all material respects; (iii) all Taxes shown to be due on such Tax Returns or on subsequent assessments with respect thereto have been paid or the WAXS SEC Reports reflect that adequate reserves have been established for the payment of such Taxes, and no other material Taxes are payable by WAXS or any of its Subsidiaries with respect to items or periods covered by such Tax Returns (whether or not shown on or reportable on such Tax Returns) or with respect to any period prior to the date of this Agreement; (iv) there are no material liens on any of the assets of WAXS or any of its Subsidiaries with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that WAXS and its Subsidiaries is contesting in good faith through appropriate proceedings and for which the WAXS SEC Reports reflect that appropriate reserves have been established; and (v) there is no audit, examination, deficiency or refund litigation or matter in controversy with respect to any Taxes of WAXS and its Subsidiaries that might reasonably be expected to result in a Tax determination which would have a Material Adverse Effect on WAXS. (b) There are no contracts, agreements, plans or arrangements, including but not limited to the provisions of this Agreement, covering any employee or former employee of WAXS or any of its Subsidiaries that, individually or collectively, could give rise to the payment of any amount (or portion thereof) that would not be deductible pursuant to Section 280G of the Code. (c) Neither WAXS nor any of its Subsidiaries is a party to a Tax Sharing Agreement. (d) (i) During the five (5) year period beginning as of the Effective Time, neither WAXS nor any person "related" to WAXS within the meaning of Treas. Reg. sec. 1.368-1(e)(3) will (A) be under any obligation and will have entered into any agreement to redeem or repurchase any of the WAXS Common Stock issued in the Merger or to make any "extraordinary distributions" within the meaning of Treas. Reg. sec. 1.368-1T(e)(1)(ii)(A) in respect of the WAXS Common Stock and (B) have a plan or intention to reacquire any of the WAXS Common Stock issued in the Merger either directly or through any transaction, agreement or arrangement with any other person, except (X) for escrowed shares of WAXS Common Stock, if any, which may be returned to WAXS pursuant to the Escrow Agreement and (Y) that WAXS may repurchase shares of WAXS Common Stock on the open market through a broker for the prevailing market price pursuant to an open-market repurchase program as described in Rev. Rul. 99-58, 1999-52 I.R.B. 701. To the knowledge of WAXS, any third party who may acquire WAXS Common Stock from Roger Abbott and Rosalind Abbott as former CTI stockholders after the Merger as contemplated by the Abbott Voting and Stock Transfer Restriction Agreement will not be a person related to WAXS within the meaning of Treas. Reg. sec. 1.368-1(e)(3) and to the knowledge of WAXS, there are no facts and circumstances indicating that the cash to be used by any such third party to purchase the WAXS Common Stock from such former CTI stockholders receiving such WAXS Common Stock in the Merger will in substance be exchanged by WAXS or any of its Subsidiaries for CTI Capital Stock. (ii) As of the Effective Time, neither WAXS nor any person related to WAXS within the meaning of Treas. Reg. sec. 1.368-1(e)(3) will own beneficially or of record, nor will have owned during the past five (5) years, any CTI Capital Stock or securities of CTI or options or instruments giving the holder thereof the right to acquire CTI Capital Stock or securities of CTI. (iii) Prior to or in the Merger, neither WAXS nor any person related to WAXS within the meaning of Treas. Reg. sec. 1.368-1(e)(3) will have acquired directly or through any transaction, B-25 363 agreement or arrangement with any other person, any capital stock of CTI with consideration other than shares of WAXS Common Stock. (iv) The fair market value of the WAXS Common Stock (inclusive of Contingent Shares, if any) and cash in lieu of fractional shares of WAXS Common Stock, if any, together with any cash paid or shares of WAXS Common Stock issued, as the case may be, in satisfaction of accrued unpaid dividends on CTI Preferred Stock, received by each holder of CTI Capital Stock in the Merger will be approximately equal to the fair market value of the shares of CTI Capital Stock surrendered in the Merger by each CTI stockholder. (v) Following the Merger, WAXS will cause Merger Sub to continue CTI's "historic business" within the meaning of Treas. Reg. sec. 1.368-1(d) or use a significant portion of CTI's historic business assets in a business. For purposes of this representation, Merger Sub will be treated as conducting CTI's historic business or using a significant portion of CTI's historic business assets in a business if (a) the members of the WAXS "qualified group" (as defined below in this Section 4.15(d)(viii)), in the aggregate, continue the historic business of CTI or use a significant portion of CTI's historic business assets in a business, or (b) the foregoing activities are undertaken by a partnership in which (1) the members of the WAXS qualified group, in the aggregate, own at least a thirty-three and one third percent (33 1/3%) interest in the partnership, or (ii) one or more members of the qualified group has active and substantial management functions as a partner with respect to the partnership business and the members of the qualified group, in the aggregate, own at least a twenty percent (20%) interest in the partnership. (vi) On and prior to the Effective Time, WAXS will be in "control" of Merger Sub within the meaning of Section 368(c) of the Code, which is a newly-formed corporation that was organized for the sole purpose of facilitating the Merger. (vii) WAXS has no plan or intention, and WAXS has no plan or intention to cause the Merger Sub, to issue additional shares of its capital stock following the Merger, or take any other action, that would result in WAXS losing "control" of the Merger Sub within the meaning of Section 368(c) of the Code. (viii) WAXS has no plan or intention following the Merger to liquidate the Merger Sub; to merge the Merger Sub with and into another corporation; to sell or otherwise dispose of the stock of the Merger Sub; or to cause the Merger Sub to sell or otherwise dispose of any of the assets acquired from CTI, except for dispositions made in the ordinary course of business or for transfers or successive transfers of all or part of the assets acquired from CTI to a member(s) of the WAXS qualified group or to a partnership that has a member(s) of the qualified group as a partner who own, in the aggregate, at least a thirty-three and one third percent (33 1/3%) interest in the partnership, or (ii) one or more members of the qualified group has active and substantial management functions as a partner with respect to the partnership business and the members of the qualified group, in the aggregate, own at least a twenty percent (20%) interest in the partnership. For purposes of this Section 4.15(d) and as set forth under Treas. Reg. sec. 1.368-1(d)(4)(ii), the term "qualified group" shall mean one or more chains of corporations connected through stock ownership with WAXS, but only if WAXS owns directly stock meeting the requirements of Section 368(c) of the Code in at least one other corporation, and stock meeting the requirements of Section 368(c) of the Code in each of the corporations (except WAXS) is owned directly by one of the other corporations. (ix) WAXS and Merger Sub will pay their respective expenses, if any, incurred in connection with the Merger. (x) There is no intercorporate indebtedness existing between WAXS and CTI or between the Merger Sub and CTI that was issued, acquired, or will be settled at a discount. B-26 364 (xi) Neither WAXS nor Merger Sub is a regulated investment company, a real estate investment trust, or a corporation fifty percent (50%) or more of the value of whose total assets (excluding cash, cash items, receivables and U.S. government securities) are stock or securities and eighty percent (80%) or more of the value of whose total assets are assets held for investment. For purposes of the fifty percent (50%) and eighty percent (80%) determinations under the preceding sentence, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary's assets. A corporation shall be considered a subsidiary for purposes of this paragraph if the parent owns fifty percent (50%) or more of the combined voting power of all classes of stock entitled to vote, or fifty percent (50%) or more of the total value of shares of all classes of stock outstanding. (xii) No stock of the Merger Sub will be issued in the Merger. (xiii) Neither WAXS nor the Merger Sub is under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. (xiv) In the Merger, to the knowledge of WAXS, the Merger Sub will acquire at least ninety percent (90%) of the fair market value of CTI's net assets, and at least seventy percent (70%) of the fair market value of CTI's gross assets held immediately prior to the Merger. For purposes of this representation, amounts paid by CTI to dissenters or to CTI stockholders who receive cash or other property, CTI assets used by CTI to pay reorganization expenses, and CTI assets used for redemptions and distributions (excluding regular, normal dividends) made by CTI prior to the Effective Time will be included as assets of CTI held immediately prior to the Merger. (xv) None of the compensation received by any stockholder-employee of CTI will be separate consideration for, or allocable to, any of the shares of CTI Capital Stock held by such stockholder-employee; none of the shares of WAXS Common Stock issued in the Merger and received by any stockholder-employee of CTI will be separate consideration for, or allocable to, any employment agreement, agreement not to compete or any other compensation owed or owing to such stockholder-employee; and the compensation paid to any stockholder-employee of CTI will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. (xvi) The payment of cash in lieu of fractional shares of WAXS Common Stock is solely for the purpose of avoiding the expense and inconvenience to WAXS of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to CTI stockholders instead of issuing fractional shares of WAXS Common Stock will not exceed one percent (1%) of the total Merger Consideration that will be issued in the Merger. (xvii) Prior to the Effective Time, neither WAXS nor any Subsidiary of WAXS has distributed the stock of any corporation in a distribution of stock qualifying for Tax-free treatment under Section 355 of the Code. (xviii) The principal purposes of WAXS for participating in the Merger are bona fide purposes unrelated to Taxes, and the terms of this Agreement are the product of arm's-length negotiations. (xix) To the extent of the shares of WAXS Common Stock, including Contingent Shares, if any, that are placed in escrow under the Escrow Agreement for possible return to WAXS under the conditions specified in such Escrow Agreement and this Agreement: (1) there is a valid business reason for establishing the escrow arrangement; (2) the shares of WAXS Common Stock subject to the Escrow Agreement at the Effective Date, including the Contingent Shares, if any, which are issued pursuant to Section 1.7(d) hereunder and subsequently become subject to the Escrow Agreement, will each appear as issued and outstanding on the balance sheet of B-27 365 WAXS and such shares will be legally outstanding under applicable state law; (3) all dividends paid on such stock by WAXS will be distributed to the former CTI stockholders; (4) all voting rights of such stock held under the Escrow Agreement will be exercisable by the former CTI stockholders or on their behalf by the Shareholder Representative; (5) such stock will not be subject to restrictions requiring its return to WAXS because of the death, failure to continue employment or similar restrictions; (6) all such stock will be released from the Escrow Agreement within five (5) years after the Effective Time (except where there is a bona fide dispute as to whom such stock should be released); (7) the return of such stock to WAXS will not be triggered by an event the occurrence or nonoccurrence of which is within the control of the CTI stockholders; (8) the return of such stock to WAXS will not be triggered by the payment of additional Tax or reduction in Taxes paid as a result of an IRS audit of the CTI stockholders, Merger Sub or WAXS either (x) with respect to the Merger or (y) when the Merger involves a related person within the meaning of Section 267(c)(4) of the Code; (9) the mechanism for the calculation of the number of shares of WAXS Common Stock to be returned to WAXS from the Escrow Fund is objective and readily ascertainable; and (10) at least fifty percent (50%) of the number of shares of WAXS Common Stock issued as of Effective Time to the CTI stockholders will not be subject to the Escrow Agreement or the Expense Fund. (xx) As to the Contingent Shares, if any, which may be issued by WAXS pursuant to Section 1.7(d) hereunder: (1) all the Contingent Shares will be issued by WAXS pursuant to Section 1.7(d) of this Agreement within five (5) years from the Effective Time and as to any Contingent Shares which are placed in escrow under the Escrow Agreement, such Contingent Shares will be released from the Escrow Agreement within five (5) years after the Effective Time (except where there is a bona fide dispute as to whom such stock should be released); (2) there is a valid business reason for the provisions in Section 1.7(d) concerning the possible issuance of Contingent Shares; (3) the maximum number of Contingent Shares that may be issued is stated hereunder; (4) at least fifty percent (50%) of the maximum number of shares of WAXS Common Stock (inclusive of the Contingent Shares) will be issued as of the Effective Time pursuant to Section 1.7(c) hereunder; (5) the Section 1.7(d) provisions concerning the possible right to receive Contingent Shares after the Effective Time prohibit assignment of such rights except by operation of law; (6) the Section 1.7(d) provisions can give rise only to the receipt of additional WAXS Common Stock; (7) such stock issuance will not be triggered by an event the occurrence or nonoccurrence of which is within the control of the CTI stockholders; (8) such stock issuance will not be triggered by the payment of additional Tax or reduction in Taxes paid as a result of an IRS audit of the CTI shareholders or WAXS either (x) with respect to the Merger or (y) when the Merger involves related persons within the meaning of Section 267(c)(4) of the Code; and (9) the mechanism in Section 1.7(d) hereunder for the calculation of Contingent Shares to be issued is objective and readily ascertainable. (xxi) To the knowledge of WAXS, there is a valid business reason for the escrow of shares of WAXS Common Stock comprising the Expense Fund pursuant to Section 2.14 of this Agreement, and to the knowledge of WAXS, the escrow provisions of Section 2.14 satisfy the specific requirements of Section 3.06 of IRS Revenue Procedure 77-37, as it has been amplified and superseded by the IRS. ARTICLE V COVENANTS RELATED TO CONDUCT OF BUSINESS 5.1 Covenants of CTI. During the period from the date of this Agreement and continuing until the Effective Time, CTI agrees as to itself and its Subsidiaries that: (a) Ordinary Course. Except with respect to any of the matters described on any of the Schedules to Sections 5(b), (c), (e), (f), (g), (h) or (j), CTI and its Subsidiaries shall carry on B-28 366 their respective businesses in the usual, regular and ordinary course, substantially in accordance with past practice, in all material respects. (b) Dividends; Changes in Share Capital. Except as set forth on SCHEDULE 5.1(B), CTI shall not, and shall not permit any of its Subsidiaries to, and shall not propose to, (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, except for dividends by wholly-owned Subsidiaries of CTI (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its capital stock, except for any such action by a wholly-owned Subsidiary of CTI which remains a wholly-owned Subsidiary after consummation of such transaction, or (iii) repurchase, redeem or otherwise acquire any shares of capital stock of CTI or any of its Subsidiaries or any securities convertible into or exercisable for any shares of such capital stock except for the purchase from time to time by CTI of CTI Common Stock in the ordinary course of business consistent with past practice in connection with the CTI Employee Benefit Plans. (c) Issuance of Securities. Except as set forth on SCHEDULE 5.1(C), CTI shall not, and shall not permit any of its Subsidiaries to, issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock of any class, or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any such shares, or enter into any agreement with respect to any of the foregoing, other than (i) the issuance of CTI Common Stock upon the exercise of CTI Stock Options or in connection with other stock-based benefits plans outstanding on the date hereof, in each case in accordance with their present terms or (ii) issuances by a wholly-owned Subsidiary of CTI of capital stock to such Subsidiary's parent or another wholly-owned subsidiary of CTI. (d) Governing Documents. Neither CTI nor any of its Subsidiaries shall amend or propose to amend their respective certificates of incorporation, bylaws or other governing documents. (e) Acquisitions. Except as set forth on SCHEDULE 5.1(E), CTI shall not, and shall not permit any of its Subsidiaries to acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets (other than the acquisition of assets used in the operations of the business of CTI and its Subsidiaries in the ordinary course). (f) Sales. Except as set forth on SCHEDULE 5.1(F), CTI shall not, and shall not permit any of its Subsidiaries to, sell or agree to sell by merging or consolidating with, or by selling a substantial equity interest in or a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise sell or agree to sell any assets (other than the sale of assets used in the operations of the business of CTI and its Subsidiaries in the ordinary course). (g) Investments; Indebtedness. Except as set forth on Schedule 5.1(g), CTI shall not, and shall not permit any of its Subsidiaries to make any capital expenditures or capital investments or make any loans, advances or capital commitments to, or investments in, any other person, in excess of $5,000,000 in the aggregate other than (x) by CTI or a Subsidiary of CTI to or in CTI or in any Subsidiary of CTI or (y) pursuant to any contract or other legal obligation of CTI or any of its Subsidiaries existing at the date hereof. Except as set forth on SCHEDULE 5.1(G), CTI shall not, and shall not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any indebtedness, issuances of debt guarantees, loans or advances not in existence as of the date hereof except pursuant to credit facilities, indentures and other arrangements in existence on the date hereof (as such credit facilities, indentures and other arrangements may be amended, extended, modified, refunded, renewed or refinanced after the date hereof) or in the ordinary course of business consistent with past practice. (h) Compensation. Other than as contemplated by SCHEDULE 5.1(H) or SCHEDULE 5.1(C), CTI shall not (i) increase the amount of compensation of any director or executive officer except in the B-29 367 ordinary course of business consistent with past practice or as required by an existing agreement, (ii) make any increase in or commitment to increase any employee benefits, except in the ordinary course of business, consistent with past practice or as required by an agreement existing on the date hereof, (iii) issue any options, warrants or other rights to acquire any shares of CTI Capital Stock or adopt or make any commitment to adopt any agreement, arrangement, commitment or policy which, if in affect as of the date hereof, would constitute a CTI Employee Benefit Plan under Section 3.12(a) hereof or (iv) make any contribution, other than regularly scheduled contributions, to any CTI Employee Benefit Plan. (i) Accounting Methods; Income Tax Matters. CTI shall not change its methods of accounting in effect on December 31, 1999, except as required by changes in GAAP as concurred in by CTI's independent auditors. CTI shall not (i) change its fiscal year, (ii) make any material tax election, (iii) adopt or change any Tax accounting method, (iv) enter into any closing agreement, settle or compromise a Tax liability with a Tax authority, (v) surrender any right to claim a refund of Taxes, or (vi) take (or permit any Subsidiary of CTI to take) any other action which would have the effect of materially increasing the Tax liability or materially decreasing any Tax asset of CTI or any of its Subsidiaries, other than in the ordinary course of business consistent with past practice. (j) Certain Agreements. Except as set forth on SCHEDULE 5.1(J) and except for extensions or renewals of agreements in existence on the date hereof, CTI shall not, and shall not permit any of its Subsidiaries to, without the prior consent of WAXS (which consent shall not be unreasonably withheld or delayed), enter into any agreement or arrangement which, if it had been entered into prior to the execution of this Agreement, would have been a Material Contract. (k) Litigation. CTI shall not and shall not permit any of its Subsidiaries to settle or, compromise any litigation, except where the amount paid or payable, in each case, does not exceed $1,000,000. 5.2 Control of CTI's Business. Nothing contained in this Agreement shall give WAXS, directly or indirectly, the right to control CTI's operations prior to the Effective Time. Prior to the Effective Time, CTI shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its operations. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Preparation of Proxy Statement: Stockholders Meetings. (a) As promptly as reasonably practicable following the date hereof, WAXS shall prepare and file with the Securities and Exchange Commission (the "SEC") materials which shall constitute its proxy statement and prospectus in connection with the WAXS Stockholders Meeting (such proxy statement and prospectus, and any amendments or supplements thereto, the "Proxy Statement/Prospectus") and WAXS shall prepare and file a registration statement on Form S-4 with respect to the issuance of all WAXS Common Stock in the Merger, including, without limitation, the Contingent Shares and the shares of WAXS Common Stock issuable to the holders of CTI Preferred Stock as contemplated by Section 2.6(b) (the "Registration Statement"). The Proxy Statement/Prospectus will be included in and will constitute a part of the Registration Statement as WAXS's prospectus. The Registration Statement and the Proxy Statement/Prospectus shall comply as to form in all material respects with the applicable provisions of the Securities Act and the Exchange Act and the rules and regulations thereunder. WAXS shall use reasonable efforts to have the Registration Statement declared effective by the SEC as promptly as reasonably practicable after filing with the SEC and to keep the Registration Statement effective as long as is necessary to consummate the Merger and the actions contemplated thereby. CTI shall use its reasonable best efforts to cooperate with and assist WAXS in connection with the preparation and amendment of the Proxy Statement/Prospectus and the Registration Statement. WAXS will provide CTI with a B-30 368 reasonable opportunity to review and comment on any amendment or supplement to the Registration Statement prior to filing such with the SEC, and will provide CTI with a copy of all such filings made with the SEC. WAXS will use reasonable efforts to cause the Joint Proxy Statements/Prospectus to be mailed to WAXS's stockholders as promptly as practicable after the Registration Statement is declared effective under the Securities Act. WAXS shall also take any action (other than qualifying to do business in any jurisdiction in which it is not now so qualified or to file a general consent to service of process) required to be taken under any applicable state securities laws in connection with the issuance of WAXS Common Stock and CTI shall furnish all information concerning CTI and the holders of CTI Capital Stock as may be reasonably requested in connection with any such action. WAXS will advise CTI promptly after it receives notice thereof, of the time when the Registration Statement has become effective, the issuance of any stop order or the suspension of the qualification of the WAXS Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction or any request by the SEC for amendment of the Registration Statement. If at any time prior to the Effective Time any information relating to WAXS or CTI, or any of their respective affiliates, officers or directors, should be discovered by WAXS or CTI which should be set forth in an amendment or supplement to the Registration Statement or the Proxy Statement/Prospectus so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party which discovers such information shall promptly notify the other party hereto and, to the extent required by law, rules or regulations, an appropriate amendment or supplement describing such information shall be promptly filed with the SEC and disseminated to the stockholders of WAXS and CTI. (b) CTI shall, as promptly as reasonably practicable following the execution of this Agreement, (i) duly take all lawful action to call, give notice of, convene and hold a meeting of its stockholders (which meeting the parties intend to be held no later than 30 days following the date on which the Registration Statement has been declared effective by the SEC) for the purpose of obtaining or (ii) duly take all lawful action to obtain by written consent pursuant to the CGCL, the required vote of its stockholders with respect to the actions contemplated by this Agreement and shall take all lawful action to solicit the adoption of this Agreement by the stockholders of CTI by written consent or otherwise. The Board of Directors of CTI shall recommend adoption of this Agreement by the stockholders of CTI and shall not withdraw, modify or materially qualify in any manner adverse to WAXS such recommendation or take any action or make any statement materially inconsistent with such recommendation (collectively, an "Adverse Change in the CTI Recommendation"); provided, however, that the foregoing shall not prohibit accurate disclosure of factual information regarding the business, financial condition or results of operations of WAXS or CTI or the fact that an Acquisition Proposal (as defined in Section 6.4) has been made, the identity of the party making such proposal or the material terms of such proposal (provided, that the Board of Directors of CTI does not withdraw, modify or materially qualify in any manner adverse to WAXS its recommendation) in the Registration Statement or the Proxy Statement/Prospectus, to the extent such information, facts, identity or terms is required to be disclosed therein under applicable law. (c) WAXS shall, as promptly as reasonably practicable following the execution of this Agreement, duly take all lawful action to call, give notice of, convene and hold a meeting of its stockholders (the "WAXS Stockholders Meeting") (which meeting the parties intend to be held no later than 30 days following the date on which the Registration Statement has been declared effective by the SEC) for the purpose of obtaining the required vote of its stockholders with respect to the transactions contemplated by this Agreement and shall take all lawful action to solicit the approval of the transactions contemplated hereby by the stockholders of WAXS. The Board of Directors of WAXS shall recommend approval of the transactions contemplated hereby by the stockholders of WAXS and shall not withdraw, modify or materially qualify in any manner adverse to CTI such recommendation or take any action or make any statement in connection with the WAXS Stockholders Meeting materially inconsistent with such recommendation; provided, however, that the B-31 369 foregoing shall not prohibit accurate disclosure of factual information regarding the business, financial condition or operations of WAXS or CTI. 6.2 Access to Information. Upon reasonable notice, each of CTI and WAXS shall (and shall cause its Subsidiaries to) afford to the officers, employees, accountants, counsel, financial advisors and other representatives of the other parties hereto reasonable access during normal business hours, during the period prior to the Effective Time, to all its properties, books, contracts, commitments, records, officers and employees and, during such period, each of CTI and WAXS shall (and shall cause its Subsidiaries to) furnish promptly to the other parties hereto (a) a copy of each report, schedule, registration statement and other document filed, published, announced or received by it during such period pursuant to the requirements of federal or state securities laws, as applicable (other than documents which such party is not permitted to disclose under applicable law), and (b) consistent with its legal obligations, all other information concerning it and its business, properties and personnel as such other party may reasonably request; provided, however, that either CTI or WAXS may restrict the foregoing access to the extent that any law, treaty, rule or regulation of any governmental entity applicable to such party requires such party or its Subsidiaries to restrict access to any properties or information. The parties will hold any such information which is non-public in confidence to the extent required by, and in accordance with, the provisions of the Confidentiality Agreement, dated January 6, 2000, between CTI and WAXS (the "Confidentiality Agreement"). Any investigation by WAXS or CTI shall not affect the representations and warranties made herein of CTI or WAXS, as the case may be. 6.3 Reasonable Efforts. (a) Subject to the terms and conditions of this Agreement, each party will use reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the Merger and the other transactions contemplated by this Agreement as soon as practicable after the date hereof, including (i) preparing and filing as promptly as practicable all documentation to effect all necessary applications, notices, petitions, filings, and other documents and to obtain as promptly as practicable all consents, waivers, licenses, orders, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any third party and/or any governmental entity in order to consummate the Merger or any of the other transactions contemplated by this Agreement and (ii) taking all reasonable steps as may be necessary to obtain all such material consents, waivers, licenses, registrations, permits, authorizations, tax rulings, orders and approvals. The parties each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by it or any of its Subsidiaries or affiliates from any governmental entity or third party with respect to the Merger or any of the other transactions contemplated by this Agreement, in each case, to the extent permitted by law or regulation or any applicable confidentiality agreements existing on the date hereof. (b) The parties shall promptly prepare and file any required notifications with the United States Department of Justice (the "DOJ") and the Federal Trade Commission (the "FTC") as required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). The parties shall cooperate with each other in connection with the preparation of such notifications and related matters, including sharing information concerning sales and ownership and such other information as may be needed to complete such notification, and providing a copy of such notifications to the other prior to filing; provided, that WAXS and CTI shall have the right to redact any dollar revenue information from the copies of such notifications provided to the other parties. The parties shall keep all information about the other obtained in connection with the preparation of such notification confidential pursuant to the terms of the Confidentiality Agreement. Each party shall pay the filing fee required under the regulations promulgated pursuant to the HSR Act with respect for the notification for which such party is the "Acquiring Person" (as defined in the regulations promulgated to the HSR Act). B-32 370 6.4 Acquisition Proposals. Without the prior written consent of WAXS, pending the Closing, CTI agrees that neither it nor any of its Subsidiaries shall, and that it shall cause its employees, officers, directors, affiliates, agents and representatives (including any investment banker, financial advisor, attorney or accountant retained by any of them) not to, directly or indirectly, initiate, solicit, encourage or knowingly facilitate (including by way of furnishing information or engaging in discussions or negotiations) any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar action involving CTI, or any purchase or sale of a material portion of the assets of (including stock of Subsidiaries) of CTI, taken as a whole, or any purchase or sale of, or tender or exchange offer for, a material portion of the equity securities of CTI (any such proposal or offer being referred to herein as an "Acquisition Proposal"). CTI further agrees that neither it nor any of its Subsidiaries shall, and that it shall cause it and its Subsidiaries' officers, directors, affiliates, employees, agents and representatives (including any investment banker, financial advisor, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, have any discussion with or provide any confidential information or data to any Person relating to an Acquisition Proposal, or engage in any negotiations concerning an Acquisition Proposal, or knowingly facilitate any effort or attempt to make or implement an Acquisition Proposal or accept an Acquisition Proposal. CTI agrees that it and its Subsidiaries will, and will cause its officers, directors, affiliates, employees, agents and representatives to, immediately cease and cause to be terminated any activities, discussions or negotiations existing as of the date of this Agreement with any parties conducted heretofore with respect to any Acquisition Proposal. CTI agrees that it will promptly inform its directors, officers, affiliates, key employees, agents and representatives of the obligations undertaken in this Section 6.4. 6.5 Fees and Expenses. All Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such Expenses. As used in this Agreement, "Expenses" includes all out-of-pocket expenses (including all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a parry hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement and the transactions contemplated hereby. 6.6 Public Announcements. Neither WAXS nor CTI shall, without the prior consent of the other party, issue a press release or any other public statement with respect to this Agreement or the transactions contemplated hereby except pursuant to a joint communications plan, unless otherwise required by applicable law or by obligations pursuant to any listing agreement with or rules of any securities exchange, in which case the parties shall use reasonable efforts to consult with each other before issuing any press release or otherwise making any public statement with respect to this Agreement or the transactions contemplated hereby. 6.7 Listing. So long as WAXS Common Stock is quoted on the Nasdaq or listed on any national securities exchange, WAXS, if permitted by the rules of such system or exchange, will quote or list and keep quoted or listed on such system or exchange, all WAXS Common Stock issuable pursuant to Article I hereof. WAXS shall not voluntarily cause or take any steps to voluntarily cause WAXS Common Stock to fail to be quoted on the Nasdaq or a national securities exchange. 6.8 Termination of Tax Sharing Agreements. As of the Effective Time, CTI shall cause all Tax Sharing Agreements to which CTI or any of its Subsidiaries is a party to be terminated and of no further force and effect after the Effective Time, thereby extinguishing any rights or obligations of any party thereunder. 6.9 Bridge Financing. WAXS agrees to make funds available to Borrower (as defined in that certain Participation Agreement, of even date herewith, between Foothill Capital Corporation and WAXS (the "Participation Agreement")) on and subject to the terms and conditions set forth in the Participation Agreement. 6.10 Tax Treatment; Plan of Reorganization. This Agreement is intended to constitute a "plan of reorganization" within the meaning of Treas. Reg. sec.1.368-2(g). During the period from the date of this B-33 371 Agreement through the Effective Time, unless the parties shall otherwise agree in writing, none of WAXS, CTI or any of their respective Subsidiaries shall knowingly take or fail to take any action which action or failure to act which could reasonably be expected to cause the Merger to fail to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. After the Merger and pursuant to the plan of reorganization set forth in this Agreement, WAXS expects to transfer some or all of the assets of the Surviving Corporation in a manner permitted under Section 368(a)(2)(C) of the Code and Treas. Reg. sec.1.368-2(k). WAXS and CTI agree to treat the Merger as a reorganization within the meaning of Section 368(a) of the Code. To this end, none of WAXS, CTI nor Merger Sub, nor, after the Merger, the Surviving Corporation will take any position on any federal, state or local income or franchise Tax Return, or take any other Tax reporting position that is inconsistent with the treatment of the Merger as a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code, unless otherwise required by a "determination" (as defined in Section 1313(a)(1) of the Code) or by applicable state or local income or franchise Tax law. 6.11 Directors' and Officers' Indemnification and Insurance. (a) From the Effective Time through the sixth (6th) anniversary of the date on which the Effective Time occurs, WAXS shall indemnify and hold harmless each present (as of the Effective Time) or former officer or director of CTI and its Subsidiaries (the "Indemnified Parties"), against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys' fees and disbursements (collectively, "Costs"), incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to (i) the fact that the Indemnified Party is or was an officer or director of CTI or any of its Subsidiaries or (ii) matters existing or occurring at or prior to the Effective Time (including those related to this Agreement and the transactions and actions contemplated hereby), whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under applicable law; provided that no Indemnified Party may settle any such claim without the prior approval of WAXS (which approval shall not be unreasonably withheld or delayed). Each Indemnified Party will be entitled to advancement of expenses incurred in the defense of any claim, action, suit, proceeding or investigation from WAXS within ten (10) business days of receipt by WAXS from the Indemnified Party of a request therefor; provided that any person to whom expenses are advanced provides an undertaking, to the extent required by the CGCL, to repay such advances if it is ultimately determined that such person is not entitled to indemnification. (b) WAXS shall maintain, at no expense to the beneficiaries, in effect for six years from the Effective Time the current policies of the directors' and officers' liability insurance maintained by CTI with respect to matters existing or occurring at or prior to the Effective Time (including the transactions contemplated by this Agreement); provided that WAXS may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less advantageous to any beneficiary thereof; and provided, further, that in no event shall WAXS be required to pay annual premiums for such insurance in excess of 125% of the annual premiums currently paid by CTI for such insurance. Notwithstanding the foregoing, if the insurance policies that WAXS would be required to maintain pursuant to this Section 6.11(b) would require the payment of aggregate annual premiums in excess of 125% of the aggregate annual premiums in effect under such policies of CTI as of the date hereof (the "CTI Policies"), then WAXS shall be obligated to use commercially reasonable efforts to obtain and maintain such substitute policies of insurance as are the best available as to amount and other coverage terms and conditions for annual premiums equal to 125% of the aggregate annual premiums in respect of the CTI Policies. (c) Notwithstanding anything herein to the contrary, if any claim, action, suit, proceeding or investigation (whether arising before, at or after the Effective Time) is made against any Indemnified Party, on or prior to the sixth (6th) anniversary of the Effective Time, the provisions of this Section 6.11 shall continue in effect until the final disposition of such claim, action, suit, proceeding or investigation. B-34 372 (d) The covenants contained in this Section 6.11 are intended to be for the benefit of, and shall be enforceable by, each of the Indemnified Parties and their respective heirs and legal representatives and shall not be deemed exclusive of any other rights to which an Indemnified Party is entitled, whether pursuant to law, contract or otherwise. (e) In the event that WAXS or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, proper provision shall be made so that the successors or assigns of WAXS or the purchaser of such properties and assets shall succeed to the obligations set forth in this Section 6.11. 6.12 Merger Sub Stockholder Resolutions. Pending the Closing, WAXS shall not rescind or modify in any material respect the Merger Sub Stockholder Resolutions. 6.13 Compliance with Dissenters' Rights Statute. CTI shall comply with all procedures and requirements applicable to CTI under Chapter 13 of the CGCL. 6.14 Good Faith. The parties shall perform and exercise their respective obligations and rights provided for hereunder in good faith. ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of CTI, Merger Sub and WAXS to effect the Merger are subject to the satisfaction or waiver on or prior to the Closing Date of the following conditions: (a) HSR Act. The waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired. (b) Stockholder Approval. The stockholders of WAXS shall have approved this Agreement and the Merger by the Required WAXS Vote and the stockholders of CTI shall have approved this Agreement and the Merger by the Required CTI Vote. (c) Registration Statement. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated or, to the knowledge of WAXS or CTI, threatened by the SEC. (d) Escrow Agreement. WAXS, CTI and the Escrow Agent shall have executed and delivered an escrow agreement in the form attached hereto as Exhibit A (the "Escrow Agreement"). 7.2 Additional Conditions to Obligations of WAXS. The obligations of WAXS to effect the Merger are subject to the satisfaction of, or waiver by WAXS, on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. Each of the representations and warranties of CTI set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent that such representations and warranties speak as of another date, in which case any such representations and warranties shall be true and correct as of such date), except where any failures to be true and correct would not have a Material Adverse Effect on WAXS or the Surviving Corporation, and WAXS shall have received a certificate of the chief executive officer and the chief financial officer of CTI to such effect. (b) Performance of Obligations of CTI. CTI shall have performed or complied in all material respects with all material agreements and covenants required to be performed by it under this B-35 373 Agreement at or prior to the Closing Date, and WAXS shall have received a certificate of the chief executive officer and the chief financial officer of CTI to such effect. (c) Consents and Approvals. All consents, approvals and actions of, filings with and notices to any governmental entity required to consummate the Merger and the other transactions contemplated hereby, or of any other third party required of CTI or any of its Subsidiaries to consummate the Merger and the other transactions contemplated hereby shall have been obtained, except where the failure to obtain any such consent or approval would not have a Material Adverse Effect on WAXS or the Surviving Corporation; provided, however, that the provisions of this Section 7.2(c) shall not be available to WAXS if WAXS's failure to fulfill its obligations pursuant to Section 6.3 shall have been the cause of, or shall have resulted in, the failure to obtain any such consent or approval. (d) No Material Change. CTI and its Subsidiaries, taken as a whole, shall not have suffered, since the date hereof, a Material Adverse Effect, other than any change, circumstance or effect relating (i) to the economy or financial markets in general, or (ii) in general to the industries in which CTI operates and not specifically relating to CTI. (e) Opinion of Counsel to CTI. WAXS shall have received from O'Melveny & Myers LLP an opinion, dated the Closing Date, in the form attached hereto as Exhibit B. (f) No Injunctions or Restraints; Illegality. No laws shall have been adopted or promulgated, and no temporary restraining order, preliminary or permanent injunction or other order issued by a court or other governmental entity of competent jurisdiction shall be in effect (i) having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger or (ii) which otherwise would have a Material Adverse Effect on WAXS or the Surviving Corporation; provided, however, that the provisions of this Section 7.2(f) shall not be available to WAXS if its failure to fulfill its obligations pursuant to Section 6.3 shall have been the cause of, or shall have resulted in any such order or injunction. (g) Trading Price. The average of the closing prices of WAXS Common Stock as reported on the Nasdaq for the ten (10) consecutive trading days ending at the close of trading on the second (2nd) trading day preceding the Closing shall not be below $15.00. (h) Dissenters' Rights. CTI shall have complied with all procedures and requirements applicable to it under Chapter 13 of the CGCL, the period for exercising dissenters' rights pursuant to the CGCL in connection with the Merger shall have expired and holders of less than one percent (1%) of the shares of CTI Capital Stock issued and outstanding immediately prior to the Closing shall have exercised such dissenters' rights, and WAXS shall have received a certificate from an officer of CTI to all such effects. (i) Approval of CTI Preferred Stock. All of the shares of outstanding CTI Preferred Stock shall have been voted in favor of this Agreement, the Merger and the other transactions contemplated hereby (which vote shall not have been rescinded or modified in any way) and such shares have been converted into not more than 8,282,829 shares of CTI Common Stock pursuant to the terms and conditions of the Certificate of Determination of Preferences of the CTI Series A Preferred Stock and the CTI Series B Preferred Stock, as applicable. 7.3 Additional Conditions to Obligations of CTI. The obligations of CTI to effect the Merger are subject to the satisfaction of, or waiver by CTI, on or prior to the Closing Date of the following additional conditions: (a) Representations and Warranties. Each of the representations and warranties of WAXS set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent that such representations and warranties speak as of another date, in which case any such representations and warranties shall be true and correct as of such date), except where any failures to be true and correct B-36 374 would not have a Material Adverse Effect on WAXS, and CTI shall have received a certificate of the chief executive officer and the chief financial officer of WAXS to such effect. (b) Performance of Obligations of WAXS. WAXS shall have performed or complied in all material respects with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date, and CTI shall have received a certificate of the chief executive officer and the chief financial officer of WAXS to such effect. (c) Consents and Approvals. All consents, approvals and actions of, filings with and notices to any governmental entity required to consummate the Merger and the other transactions contemplated hereby, or of any other third party required of WAXS or any of its Subsidiaries to consummate the Merger and the transactions contemplated hereby shall have been obtained, except where the failure to obtain any such consent or approval would not have a Material Adverse Effect on WAXS or the Surviving Corporation; provided, however, that the provisions of this Section 7.3(c) shall not be available to CTI if its failure to fulfill any of its obligations pursuant to Section 6.3 shall have been the cause of, or shall have resulted in, the failure to obtain any such consent or approval. (d) Opinion of Counsel to WAXS. CTI shall have received from Long Aldridge & Norman LLP an opinion, dated the Closing Date, in the form attached hereto as Exhibit C. (e) [Intentionally omitted.] (f) No Injunctions or Restraints; Illegality. No laws shall have been adopted or promulgated, and no temporary restraining order, preliminary or permanent injunction or other order issued by a court or other governmental entity of competent jurisdiction shall be in effect (i) having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger or (ii) which otherwise would have a material adverse effect on the business, financial condition or operations of WAXS and its Subsidiaries taken as a whole; provided, however, that the provisions of this Section 7.3(g) shall not be available to CTI if its failure to fulfill its obligations pursuant to Section 6.3 shall have been the cause of, or shall have resulted in any such order or injunction. ARTICLE VIII POST-CLOSING INDEMNIFICATION; SHAREHOLDER REPRESENTATIVE 8.1 Remedies. Subject to the terms of this Article VIII, from and after the Effective Time, WAXS shall be indemnified and held harmless from and against any and all claims, losses, liabilities, damages, costs (including court costs) and expenses (including reasonable attorneys' and accountants' fees) suffered or incurred by WAXS, its successors or assigns, and their respective officers, employees, consultants and agents (the "WAXS Protected Parties") (hereinafter "Loss" or "Losses"), as a result of, or with respect to, (i) except as otherwise provided in Section 8.2, any breach or inaccuracy of any representation or warranty of CTI set forth in this Agreement (without regard to any Material Adverse Effect qualification contained in any such representation or warranty, except such qualification contained in the representation and warranty in Section 3.18(a)), whether such breach or inaccuracy exists or is made on the date of this Agreement or as of the Closing Date; (ii) any breach or inaccuracy of any representation or warranty of CTI set forth in the certificates to be provided to WAXS pursuant to Sections 7.2(a) and (b), without regard to the Material Adverse Effect qualification contained in such certificate or the underlying representations or warranties referenced therein (except such qualification contained in the representation and warranty in Section 3.18(a)); (iii) any breach of or noncompliance by CTI prior to the Effective Time with any covenant or agreement of CTI contained in this Agreement; and (iv) any imposition of the suspended $17.6 million fine, or other monetary penalty, imposed in connection with or related to the matter described in item 1 of SCHEDULE 3.6, but only to the extent that such imposition arises out of wrongful acts or omissions of CTI which occur after the effective date of the order referred to in item 1 of SCHEDULE 3.6 and prior to the Closing Date. B-37 375 8.2 Indemnity Claims. (a) Survival. The representations and warranties of CTI contained herein or in any certificate or other document delivered pursuant hereto or in connection herewith shall not be extinguished by the Closing but shall survive the Closing, subject to the limitations set forth in Section 8.2(b) hereof with respect to the time periods within which claims for indemnity must be asserted, and the covenants and agreements of the parties contained herein shall survive without limitation as to time except as may be otherwise specified herein. Notwithstanding the foregoing, none of the representations and warranties of CTI contained in Section 3.16(g) hereof or in the CTI certificate required pursuant to Section 7.2(a) with respect to Section 3.16(g) hereof shall survive the Closing and no WAXS Protected Party shall be entitled to indemnification pursuant to this Article VIII for any breach or alleged breach by CTI of such representations and warranties. No investigation or other examination of CTI by WAXS shall affect the term of survival of any representation or warranty contained herein or in any certificate or other document delivered pursuant hereto or in connection herewith. (b) Time to Assert Claims. All claims for indemnification hereunder shall be asserted no later than one (1) year after the Effective Time provided; however, that if a notice of claim which conforms, in all material respects, as to form and substance with the requirements set forth in Section 8.4 is given pursuant to Section 8.4 prior to such one-year anniversary of the Effective Time, such representation or warranty shall continue indefinitely with respect to the claims in such notice until such claims are resolved pursuant to this Article VIII. Nothing herein shall be deemed to prevent a WAXS Protected Party from making a claim for a Loss hereunder for potential or contingent claims or demands provided the notice of Loss sets forth the specific basis for any such potential or contingent claim or demand to the extent then feasible and the party making the claim has reasonable grounds to believe that such a claim or demand may become actual. 8.3 Deductible. Notwithstanding any other provision hereof, the WAXS Protected Parties shall make no claim against CTI for indemnification hereunder (except pursuant to Section 8.1(a)(iv)) unless and until the amount of each individual Loss in excess of $150,000 (the "Subdeductible Amount") exceeds $3,000,000 in the aggregate (the "Deductible Amount"), in which event the WAXS Protected Parties may claim indemnification for the amount of such Losses (in each case net of the Subdeductible Amount) in excess of the Deductible Amount. 8.4 Notice of Claim. A WAXS Protected Party shall notify the Shareholder Representative (as defined in Section 8.7), in writing, of any claim for indemnification, specifying in reasonable detail the nature of the Loss, and, if known, the amount, or an estimate of the amount, of the liability arising therefrom. The WAXS Protected Party shall provide to the Shareholder Representative as promptly as practicable thereafter such information and documentation as may be reasonably requested to support and verify the claim asserted, so long as such disclosure would not violate the attorney-client privilege of the WAXS Protected Party. 8.5 Defense. If the facts pertaining to a Loss arise out of the claim of any third party, or if there is any claim against a third party available by virtue of the circumstances of the Loss, the Shareholder Representative may assume the defense or the prosecution thereof by prompt written notice to the WAXS Protected Party, including the employment of counsel or accountants, at its cost and expense. The WAXS Protected Party shall have the right to employ counsel separate from counsel employed by the Shareholder Representative in any such action and to participate therein, but the fees and expenses of such counsel employed by the WAXS Protected Party shall be at its expense. The Shareholder Representative shall not be liable for any settlement of any such claim effected without its prior written consent, which shall not be unreasonably withheld or delayed. The Shareholder Representative shall not agree to a settlement of any claim which provides for any relief, other than the payment of monetary damages, which would have a material precedential impact or effect on the business or financial condition of any WAXS Protected Party without the WAXS Protected Party's prior written consent. Whether or not the Shareholder Representative chooses to so defend or prosecute such claim, the parties hereto shall reasonably cooperate B-38 376 in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. The Shareholder Representative shall be subrogated to all rights and remedies of any WAXS Protected Party. 8.6 Satisfaction of Obligations. Notwithstanding anything else herein or otherwise to the contrary (except as set forth in Section 10.1), (i) the sole remedy of any WAXS Protected Party for any breach by CTI of a representation or warranty of CTI hereunder shall be the right to receive indemnification from CTI pursuant to this Article VIII and (ii) the Escrow Fund shall constitute the WAXS Protected Parties' sole source of recovery for claims for indemnification arising under this Article VIII, and none of CTI, its Subsidiaries or any of their respective officers, directors, employees or shareholders shall have any personal liability whatsoever with respect thereto. 8.7 Shareholder Representative. (a) Upon approval by the stockholders of CTI of the Merger, this Agreement and the other transactions contemplated hereby, the stockholders of CTI will be deemed to have appointed, as of the Effective Time, Edward S. Soren (the "Shareholder Representative") as their representative under this Agreement and the Escrow Agreement, including for purposes of the indemnification obligations set forth in this Article VIII, and as attorney-in-fact and agent for and on behalf of such CTI stockholders with authority to take any and all actions and make any and all decisions required or permitted to be taken or made by them under this Agreement and the Escrow Agreement (including the settling of claims for indemnity). The Shareholder Representative shall have full power and authority as agent of the CTI stockholders to represent the CTI stockholders, and their successors, heirs, representatives, and assigns with respect to all matters arising under this Agreement and the Escrow Agreement and any other matters concerning the transactions contemplated by this Agreement and the Escrow Agreement after the Closing, and all action taken by the Shareholder Representative shall be binding upon the CTI stockholders and their successors, heirs, representatives and assigns as if expressly confirmed and ratified by each of them. (b) The Shareholder Representative shall act in good faith in undertaking his duties set forth herein. The Shareholder Representative, acting in such capacity, shall not incur any liability with respect to any action or inaction taken by him except those involving his own willful misconduct or gross negligence. The Shareholder Representative may, in all questions arising under this Agreement, rely on the advice of counsel and for anything done, omitted or suffered in good faith by the Shareholder Representative based on such advice, the Shareholder Representative shall not be liable to anyone, except to the extent such action or inaction involves the Shareholder Representative's own willful misconduct or gross negligence. Nothing set forth in this Section 8.7(b) shall in any way relieve the Shareholder Representative in his capacity as a CTI Stockholder of his obligations under this Article VIII. (c) In the event of the death or permanent disability of the Shareholder Representative or his resignation as the Shareholder Representative, a successor Shareholder Representative shall be appointed by Roger Abbott. Prompt notice of such appointment shall be delivered in writing by Roger Abbott to WAXS and the Escrow Agent. ARTICLE IX TERMINATION PRIOR TO CLOSING 9.1 Termination of Agreement. This Agreement may be terminated at any time prior to the Closing: (a) By mutual written consent of WAXS and CTI; (b) By either WAXS or CTI, if the other party shall have failed to comply in any material respect with any of its material covenants or agreements contained in this Agreement, which failure to so comply has not been cured within thirty (30) days following receipt by such other party of written B-39 377 notice of such failure to comply; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's reasonable efforts and for so long as the breaching party shall be so using its reasonable efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; and provided, further, that no party shall have the right to terminate this Agreement pursuant to this Section 9.1(b) if such party is then failing to comply in any material respect with any of its covenants or agreements contained in this Agreement; (c) By either WAXS or CTI, if there has been a breach by the other party of any representations or warranties, which breach has not been cured within thirty (30) days following receipt by such other party of written notice of such failure to comply; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's reasonable efforts and for so long as the breaching party shall be so using reasonable efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; and provided further, that this provision shall only apply to such breaches which would have a Material Adverse Effect on (i) WAXS (after giving effect to the Merger), (ii) the Surviving Corporation or (iii) WAXS (after giving effect to the Merger) and the Surviving Corporation; (d) By either CTI or WAXS, if the Effective Time shall not have occurred on or before October 31, 2000 (the "Termination Date"); provided, however, that the right to terminate this Agreement under this Section 9.1(d) shall not be available to any party whose action or failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before the Termination Date and any such action or failure constitutes a breach of this Agreement; (e) By either CTI or WAXS if any governmental entity (i) shall have issued an order, decree or ruling or taken any other action (which the parties shall have used their reasonable efforts to resist, resolve or lift, as applicable, in accordance with Section 6.3) permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling, or other action shall have become final and nonappealable or (ii) shall have failed to issue an order, decree or ruling or to take any other action (which order, decree, ruling or other action the parties shall have used their reasonable efforts to obtain, in accordance with Section 6.3), which, in the case of each of (i) and (ii) is necessary to fulfill the conditions set forth in Section 7.2(f) with respect to WAXS or Section 7.3(g) with respect to CTI, and such denial of a request to issue such order, decree, ruling or take such other action shall have become final and nonappealable; provided, however, that the right to terminate this Agreement under this Section 9.1(e) shall not be available to any party whose action or failure to fulfill any obligation under this Agreement has been the cause of such action or inaction and any such action or failure constitutes a breach of this Agreement; or (f) By WAXS or CTI if the adoption of this Agreement by the stockholders of WAXS or the stockholders of CTI shall not have been obtained by reason of the failure to obtain the required vote of the WAXS or CTI stockholders, in each case, upon the taking of such vote. 9.2 Effect of Termination. In the event of any termination of this Agreement by either CTI or WAXS, as provided in Section 9.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of WAXS or CTI or their respective officers or directors except with respect to Sections 6.2, 6.5, 6.6, this Section 9.2 and Section 10.7, which provisions shall survive such termination and except that, notwithstanding anything to the contrary contained in this Agreement, neither WAXS nor CTI shall be relieved or released from any liabilities or damages arising out of its breach of this Agreement. 9.3 Amendment. This Agreement may be amended by CTI and WAXS, by action taken or authorized by their respective Boards of Directors or representatives or authorized officers, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of CTI and WAXS, but, after any such approval, no amendment shall be made which by law or in accordance with the rules of any relevant stock exchange or automatic quotations system requires further B-40 378 approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of CTI and WAXS. 9.4 Extension, Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, representatives or authorized officers, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE X MISCELLANEOUS 10.1 Survival of Representations and Warranties and Covenants; Fraud/Misrepresentation. Except as otherwise provided herein, no representation or warranty of any party made in this Agreement or in any certificate delivered by such party pursuant hereto shall survive the Closing. Except as otherwise provided in Section 9.2, all covenants and agreements of the parties hereto shall survive the Closing. Notwithstanding anything in this Agreement to the contrary, nothing contained in Article VIII or in any other provision hereof shall limit, modify or otherwise affect the rights or remedies of WAXS or CTI, at law or in equity, arising prior to the Effective Time or against any person or entity for fraud or intentional misrepresentation. 10.2 Entire Agreement. This Agreement (including the Schedules and Exhibits), the Escrow Agreement and the Confidentiality Agreement constitute the sole understanding of the parties with respect to the subject matter hereof; provided, however, that this provision is not intended to abrogate any other written agreement between the parties executed with or after this Agreement. 10.3 Parties Bound by Agreement; Successors and Assigns. The terms, conditions and obligations of this Agreement shall inure to the benefit of and be binding upon the parties hereto and the respective successors and assigns thereof. Without the prior written consent of WAXS, CTI may not assign its rights, duties or obligations hereunder or any part thereof to any other person or entity. WAXS may assign its rights and duties hereunder in whole or in part (before or after the Effective Time) to one or more affiliates but if it does so, it shall remain liable for all WAXS' obligations hereunder. 10.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. 10.5 Headings. The headings of the Sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 10.6 Modification and Waiver. Any of the terms or conditions of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). B-41 379 10.7 Notices. Any notice, request, instruction or other document to be given hereunder by any party hereto to any other party hereto shall be in writing and delivered personally (including by overnight courier or express mail service) or sent by registered or certified mail, postage or fees prepaid, if to CTI to: WorldxChange Communications 9999 Willow Creek Road San Diego, California 92131 Attention: Eric Lipoff, Esq. with a copy to: O'Melveny & Myers LLP 610 Newport Center Drive 17th Floor Newport Beach, California 92660 Attention: David A. Krinsky, Esq. if to WAXS to: World Access, Inc. 945 E. Paces Ferry Road, Suite 2200 Atlanta, Georgia 30326 Attention: W. Tod Chmar with a copy to: Long Aldridge & Norman LLP Suite 5300 303 Peachtree Street Atlanta, Georgia 30308 Attention: H. Franklin Layson, Esq. or at such other address for a party as shall be specified by like notice. Any notice which is delivered personally in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party or the office of such party. Any notice which is addressed and mailed in the manner herein provided shall be conclusively presumed to have been duly given to the party to which it is addressed at the close of business, local time of the recipient, on the fourth business day after the day it is so placed in the mail or, if earlier, the time of actual receipt. 10.8 Governing Law. This Agreement is executed by Buyer in, and shall be construed in accordance with and governed by the laws of the State of Delaware without giving effect to the principles of conflicts of law thereof. 10.9 No Third-Party Beneficiaries. With the exception of the parties to this Agreement and the WAXS Protected Parties and the Seller Protected Parties, there shall exist no right of any person to claim a beneficial interest in this Agreement or any rights occurring by virtue of this Agreement. 10.10 "Including." Words of inclusion shall not be construed as terms of limitation herein, so that references to "included" matters shall be regarded as non-exclusive, non-characterizing illustrations. 10.11 Schedules and Exhibits. Each of the Schedules and Exhibits referred to in this Agreement are and shall be incorporated herein and made a part hereof. [SIGNATURES APPEAR ON FOLLOWING PAGE] B-42 380 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date indicated on the first page hereof. WAXS: World Access, Inc. By: /s/ W. Tod Chmar ------------------------------------ Name: W. Tod Chmar Title: Executive Vice President MERGER SUB: CTI Merger Co. By: /s/ W. Tod Chmar ------------------------------------ Name: W. Tod Chmar Title: President CTI: Communication TeleSystems International d/b/a WORLDXCHANGE Communications By: /s/ Edward S. Soren ------------------------------------ Name: Edward S. Soren Title: Executive Vice President B-43 381 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER THIS AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Amendment"), dated as of May 23, 2000, by and among World Access, Inc., a Delaware corporation ("WAXS"), WorldxChange Communications, Inc., a Delaware corporation f/k/a CTI Merger Co. ("Merger Sub"), and Communication TeleSystems International d/b/a WorldxChange Communications, a California corporation ("CTI"). W I T N E S S E T H : WHEREAS, WAXS, Merger Sub and CTI are parties to that ceratin Agreement and Plan of Merger, dated as of February 11, 2000 (the "Merger Agreement"), pursuant to which CTI will merger with and into Merger Sub; WHEREAS, the parties have agreed to make certain amendments to the Merger Agreement; and WHEREAS, capitalized terms used, but not otherwise defined herein, shall have the meanings given to such terms in the Merger Agreement; NOW THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby mutually agree as follows: 1. Notwithstanding anything in the Merger Agreement to the contrary, no CTI stockholder and no holder of any CTI Stock Option shall have the right to receive, or have any other interest in or to, the Contingent Amount or any Contingent Shares. 2. The last sentence of Section 1.7(c) of the Merger Agreement is hereby amended by deleting the phrase "and, if applicable, the Contingent Shares issuable pursuant to Section 1.7(d)" contained therein. 3. Section 1.7(d) of the Merger Agreement is hereby deleted in its entirety and replaced with "[INTENTIONALLY OMITTED.]". 4. The first sentence of Section 1.8(a) is hereby deleted in its entirety and replaced with the following: "At the Effective Time by virtue of the Merger and without any further action on the part of CTI, WAXS, Merger Sub or the holder of any outstanding CTI Stock Option (as defined in Section 3.2), each CTI Stock Option will be automatically converted into an option to purchase shares of WAXS Common Stock (a "WAXS Stock Option") in an amount equal to the number of shares of CTI Common Stock covered under such CTI Stock Option multiplied by the Exchange Ratio (rounded to the nearest whole number of shares of WAXS Common Stock) at a price per share of WAXS Common Stock equal to the per share option exercise price specified in the CTI Stock Option divided by the Exchange Ratio (rounded to the nearest whole cent)." 5. Section 1.8(b) is hereby amended by deleting the phrase "and Contingent Shares, if any," contained therein. 6. Section 2.4(b) of the Merger Agreement is hereby amended by deleting the phrase "Except for Contingent Shares, if any, notwithstanding" and substituting therefor the word "Notwithstanding". 7. Section 2.5(b) of the Merger Agreement is hereby deleted in its entirety and replaced with "[INTENTIONALLY OMITTED.]". 8. Section 3.16(g)(i) of the Merger Agreement is hereby amended by deleting the phrase "(excluding the Contingent Shares, if any)" in the first sentence of such section. 9. Section 3.16(g)(ii) of the Merger Agreement is hereby amended by deleting the phrase "(inclusive of Contingent Shares, if any)" contained therein. B-44 382 10. Section 3.16(g)(xvi) of the Merger Agreement is hereby deleted in its entirety and replaced with "[INTENTIONALLY OMITTED.]". 11. Section 3.16(g)(xvii) of the Merger Agreement is hereby amended by deleting the phrase ", including Contingent Shares, if any," contained therein. 12. Section 4.15(d)(iv) of the Merger Agreement is hereby amended by deleting the phrase "(inclusive of Contingent Shares, if any)" contained therein. 13. Section 4.15(d)(xix) of the Merger Agreement is hereby amended by deleting the phrases ", including Contingent Shares, if any," and ", including the Contingent Shares, if any, which are issued pursuant to Section 1.7(d) hereunder and subsequently become subject to the Escrow Agreement, will each" and replacing the second such phrase with the word "will". 14. Section 4.15(d)(xx) of the Merger Agreement is hereby deleted in its entirety and replaced with "[INTENTIONALLY OMITTED.]". 15. Section 6.1(a) of the Merger Agreement is hereby amended by deleting the phrase "the Contingent Shares and" contained in the first sentence thereof. 16. Except as expressly set forth in this Amendment, the Merger Agreement shall remain in full force and effect and shall not be deemed to have been modified or amended by this Amendment. 17. This Amendment constitutes the entire understanding of the parties with respect to the subject matter hereof, and any other prior or contemporaneous agreements, whether written or oral, with respect thereto are expressly superseded hereby. 18. This Amendment may be executed in two or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. (SIGNATURES APPEAR ON FOLLOWING PAGE) B-45 383 IN WITNESS WHEREOF, the parties hereto have executed this Amendment to Agreement and Plan of Merger as of the date first above written. WORLD ACCESS, INC. By: /s/ W. Tod Chmar ------------------------------------ Name: W. Tod Chmar Title: Executive Vice President WORLDXCHANGE COMMUNICATIONS, INC. By: /s/ W. Tod Chmar ------------------------------------ Name: W. Tod Chmar Title: President COMMUNICATION TELESYSTEMS INTERNATIONAL D/B/A WORLDXCHANGE COMMUNICATIONS By: /s/ Eric Lipoff ------------------------------------ Name: Eric Lipoff Title: Senior Vice President B-46 384 SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER This Second Amendment to Agreement and Plan of Merger (this "Amendment") is entered into this 1(st) day of August, 2000 by and among World Access, Inc., a Delaware corporation ("WAXS"), WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., a Delaware corporation ("Merger Sub"), and Communication TeleSystems International d/b/a WorldxChange Communications, a California corporation ("CTI"). WITNESSETH: WHEREAS, the parties hereto have previously entered into an Agreement and Plan of Merger dated as of February 11, 2000, as amended by that certain First Amendment to Agreement and Plan of Merger among such parties dated May 23, 2000 (as so amended, the "Merger Agreement"); WHEREAS, CTI and WAXS have agreed, subject to their concurrent entering into of this Amendment, to enter into a certain Executive Management Services Agreement (the "Management Agreement"), pursuant to which WAXS has agreed to manage the operations and business affairs of CTI on the terms specified therein; WHEREAS, in connection with the Management Agreement, CTI, Merger Sub and WAXS have agreed to further amend the Merger Agreement, as provided in this Amendment; and WHEREAS, the Boards of Directors of each of CTI, Merger Sub and WAXS have determined that it is in the best interest of each such corporation and its shareholders, or shareholder, to enter into this Amendment. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: 1. Amendments to the Merger Agreement. The Merger Agreement is hereby amended as follows: (a) Section 5.2. Section 5.2 of the Merger Agreement is hereby deleted in its entirety and replaced with the following text: "5.2 Management Agreement. WAXS and CTI have entered into that certain Executive Management Services Agreement, dated August 1, 2000 (the "Management Agreement"). Pursuant to the Management Agreement, WAXS has agreed to manage the operations and business affairs of CTI on the terms specified therein. In light of the foregoing and notwithstanding any other term or provision of this Agreement, WAXS hereby agrees that CTI shall have no liability whatsoever for any breach by CTI of any one or more of its covenants stated in this Agreement (including, without limitation, any covenant or agreement of CTI set forth in Section 5.1 (Covenants of CTI) or any Section or Article VI) to the extent such breach is caused by any action or omission of WAXS pursuant to the Management Agreement." (b) Section 7.2(a). Section 7.2(a) of the Merger Agreement is hereby deleted in its entirety and replaced with the following text: "(a) Representations and Warranties. Each of the representations and warranties of CTI set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent that such representations and warranties speak as of another date, in which case any such representations and warranties shall be true and correct as of such date), except (i) where any failures to be true and correct as of the Closing Date have been caused by or result from any act or omission of WAXS pursuant to the Management Agreement occurring from and after the date of the Management Agreement through and including the Closing Date or (ii) where any such failures to be true and correct would not have a Material Adverse Effect on WAXS or the Surviving Corporation, and WAXS shall have received a certificate of the chief executive officer and the chief financial officer of CTI to such effect." B-47 385 (c) Section 7.2(b). Section 7.2(b) of the Merger Agreement is hereby amended to delete the period at the end of such Section and in place thereof insert the following text: "; provided, that the foregoing condition shall be deemed satisfied notwithstanding any failure by CTI to have performed or complied in any material respect with any of its material agreements or covenants required to be performed by it hereunder to the extent such failure is caused by any act or omission of WAXS pursuant to the Management Agreement occurring from and after the date of the Management Agreement through and including the Closing Date." (d) Section 7.2(c). Section 7.2(c) of the Merger Agreement is hereby deleted in its entirety and replaced with the following text: "(c) Consents and Approvals. All consents, approvals and actions of, filings with and notices to any governmental entity required to consummate the Merger and the other transactions contemplated hereby, or of any other third party required of CTI or any of its Subsidiaries to consummate the Merger and the other transactions contemplated hereby shall have been obtained, except where the failure to obtain any such consent or approval would not have a Material Adverse Effect on WAXS or the Surviving Corporation; provided, however, that the provisions of this Section 7.2(c) shall not be available to WAXS if the failure to obtain any consent or approval shall have been caused by or as a result of any act or omission of WAXS pursuant to the Management Agreement occurring from and after the date of the Management Agreement through and including the Closing Date." (e) Section 7.2(d). Section 7.2(d) of the Merger Agreement is hereby deleted in its entirety and replaced with the following text: "(d) [Reserved]". (f) Section 7.2(g). Section 7.2(g) of the Merger Agreement is hereby deleted in its entirety and replaced with the following text: "(g) [Reserved]". (g) Section 8.1. Section 8.1 of the Merger Agreement is hereby amended by adding the following text after the end of such Section: "Notwithstanding the foregoing, CTI shall not have any liability for, and shall not be required to indemnify any WAXS Protected Party with respect to any of the matters set forth in the foregoing clauses (i), (ii), (iii) or (iv), in each case to the extent that such breach, inaccuracy or noncompliance, or imposition of any part or all of the suspended fine, is caused by or results from any act or omission of WAXS pursuant to the Management Agreement occurring from and after the date of the Management Agreement through and including the Closing Date." (h) Section 9.1(b). Section 9.1(b) of the Merger Agreement is hereby deleted in its entirety and replaced with the following text: "(b) By either WAXS or CTI, if the other party shall have failed to comply in any material respect with any of its material covenants or agreements contained in this Agreement, which failure to so comply has not been cured within thirty (30) days following receipt by such other party of written notice of such failure to comply; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's reasonable efforts and for so long as the breaching party shall be so using its reasonable efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; and provided, further, that (i) no party shall have the right to terminate this Agreement pursuant to this Section 9.1(b) if such party is then failing to comply in any material respect with any of its covenants or agreements contained in this Agreement and (ii) WAXS shall not have the right to terminate this Agreement pursuant to this Section 9.1(b) if CTI's failure to comply in any material respect with any of its material covenants or agreements contained in this Agreement is caused by or results from any act or omission of WAXS pursuant to the Management Agreement occurring from and after the date of the Management Agreement through and including the Closing Date;" B-48 386 (i) Section 9.1(c). Section 9.1(c) of the Merger Agreement is hereby deleted in its entirety and replaced with the following text: "(c) By either WAXS or CTI, if there has been a breach by the other party of any representations or warranties, which breach has not been cured within thirty (30) days following receipt by such other party of written notice of such failure to comply; provided, however, that if any such breach is curable by the breaching party through the exercise of the breaching party's efforts to cure such breach, the non-breaching party may not terminate this Agreement pursuant to this paragraph; and provided further, that (i) this provision shall only apply to such breaches which would have a Material Adverse Effect on (A) WAXS (after giving effect to the Merger), (B) the Surviving Corporation or (C) WAXS (after giving effect to the Merger) and the Surviving Corporation and (ii) WAXS shall not have the right to terminate this Agreement pursuant to this Section 9.1(c) if CTI's breach of any of its representations and warranties stated herein is caused by or results from any act or omission of WAXS pursuant to the Management Agreement occurring from and after the date of the Management Agreement through and including the Closing Date;" (j) Section 9.1(d). Section 9.1(d) of the Merger Agreement is hereby amended by changing the date "October 31, 2000" therein to "December 31, 2000". 2. No Other Changes. Except as expressly set forth herein, the Merger Agreement shall not be amended, revised or changed in any respect whatsoever and shall remain in full force and effect. 3. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall for all purposes be deemed an original and all of which shall constitute the same instrument. [Signatures appear on the following page] B-49 387 IN WITNESS WHEREOF, each of the parties has caused this Amendment to be duly executed on its behalf as of the date indicated on the first page hereof. WAXS: WORLD ACCESS, INC. By: ------------------------------------ Name: Title: MERGER SUB: CTI MERGER CO. By: ------------------------------------ Name: Title: CTI: Communication TeleSystems International d/b/a WORLDxCHANGE Communications By: ------------------------------------ Name: Title: B-50 388 ANNEX C February 11, 2000 Board of Directors World Access, Inc. 945 East Paces Ferry Road Suite 2200 Atlanta, GA 30326 Dear Sirs: You have requested our opinion as to the fairness from a financial point of view to World Access, Inc. (the "Company") of the consideration to be paid by the Company pursuant to the terms of the Agreement and Plan of Merger, dated as of February 11, 2000 (the "Agreement"), by and among the Company, STI Merger Co., a wholly-owned subsidiary of the Company ("Merger Sub"), and STAR Telecommunications, Inc. ("STAR"), pursuant to which STAR will be merged (the "Merger") with and into Merger Sub. Pursuant to the Agreement, each share of common stock, par value $0.001 per share, of STAR ("STAR Common Stock") issued and outstanding will be converted into, at the election of the Company by written notice to STAR prior to the Closing, the following consideration (the "Merger Consideration"): (i) the right to receive the number of shares of common stock, par value $.01 per share, of the Company ("WAXS Common Stock") obtained by solving for "X" in the following formula (the "Exchange Ratio"): X = (7.81 + Z) / 20.00, or (ii) the right to receive, at the option of the holder, either (x) the number of shares of WAXS Common Stock equal to the Exchange Ratio or (y) such number of shares of WAXS Common Stock as shall equal sixty percent (60%) of the Exchange Ratio and an amount in cash equal to forty percent (40%) of the sum of ($7.81 + Z) (the "Cash and Stock Election"); provided, however, that in no event shall more than forty-five percent (45%) of the outstanding shares of STAR Common Stock receive the Cash and Stock Election. For the purposes of the Agreement and this opinion, (a) in determining the Exchange Ratio, "Z" shall equal the PT-1 Excess Proceeds (as defined below) divided by the number of issued and outstanding STAR shares/options and (b) "PT-1 Excess Proceeds" means the cash proceeds received by STAR at the consummation of the sale of PT-1, net of all taxes, fees and expenses in connection with the sale of PT-1 ("Net PT-1 Proceeds") in excess of $150.0 million. In arriving at our opinion, we have reviewed the draft dated February 6, 2000 of the Agreement. We also have reviewed financial and other information that was publicly available or furnished to us by the Company and STAR, including information provided during discussions with their respective managements. Included in the information provided during discussions with the respective managements were certain financial projections of STAR for the period beginning January 1, 2000 and ending December 31, 2004 prepared by the management of the Company and certain financial projections of the Company for the period beginning January 1, 2000 and ending December 31, 2004 prepared by the management of the Company. In addition, we have compared certain financial and securities data of the Company and STAR with various other companies whose securities are traded in public markets, reviewed the historical stock prices and trading volumes of the common stock of the Company and STAR, reviewed prices paid in certain other business combinations and conducted such other financial studies, analyses and investigations as we deemed appropriate for purposes of this opinion. In rendering our opinion, we have relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to us from public sources, that was provided to us by the Company and STAR or their respective representatives, or that was otherwise reviewed by us. In particular, we have relied upon the estimates of the management of the Company of the operating synergies achievable as a result of the Merger. With respect to the financial projections supplied to us, we have relied on representations that they have been reasonably prepared on the basis reflecting the best 389 currently available estimates and judgments of the management of the Company as to the future operating and financial performance of the Company and STAR. In addition, we have relied upon and assumed Net PT-1 Proceeds of $150.0 million from the sale of PT-1. We have not assumed any responsibility for making any independent evaluation of any assets of liabilities or for making any independent verification of any of the information reviewed by us. We have assumed that the Merger will be accounted for as a purchase under generally accepted accounting principles and that it will qualify as a tax-free reorganization for U.S. federal income tax purposes. Our opinion is necessarily based on economic, market, financial and other conditions as they exist on, and on the information made available to us as of, the date of this letter. It should be understood that, although subsequent developments may affect this opinion, we do not have nay obligation to update, revise or reaffirm this opinion. We are expressing no opinion as to the prices at which the WAXS Common Stock will actually trade at any time. Our opinion does not address the relative merits of the Merger and the other business strategies being considered by the Company's Board of Directors, nor does it address the Board's decision to proceed with the Merger. Our opinion does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed transaction. Donaldson, Lufkin & Jenrette Securities Corporation ("Donaldson, Lufkin & Jenrette"), as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Donaldson, Lufkin & Jenrette has performed investment banking and other services for the Company in the past and has been compensated for such services. Donaldson, Lufkin & Jenrette acted as financial advisor to the Company in connection with its acquisition of FaciliCom International, Inc. ("FaciliCom"), and acted as solicitation agent in connection with the consent solicitation for FaciliCom's outstanding senior notes. Donaldson, Lufkin & Jenrette is currently acting as financial advisor to the Company in connection with its proposed acquisition of Communication TeleSystems International d/b/a WorldxChange Communications. Further, Donaldson, Lufkin & Jenrette is currently providing advisory services in connection with the exploration of a possible sale of the Company's NACT Telecommunications Inc. and Telco Systems Inc. subsidiaries and the Company's Wireless Local Loop Division. Based upon the foregoing and such other factors as we deem relevant, we are of the opinion that the Merger Consideration to be paid by the Company pursuant to the Agreement is fair to the Company and its stockholders from a financial point of view. Very truly yours, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ MICHAEL CONNOLLY ------------------------------------ Michael Connolly Vice President C-2 390 ANNEX D February 11, 2000 Board of Directors World Access, Inc. 945 East Paces Ferry Road Suite 2200 Atlanta, GA 30326 Dear Sirs: You have requested our opinion as to the fairness from a financial point of view to World Access, Inc. (the "Company") of the consideration to be paid by the Company pursuant to the terms of the Agreement and Plan of Merger, dated as of February 11, 2000 (the "Agreement"), by and among the Company, CTI Merger Co., a wholly-owned subsidiary of the Company ("Merger Sub"), and Communication TeleSystems International d/b/a WorldxChange Communications, ("CTI"), pursuant to which CTI will be merged (the "Merger") with and into Merger Sub. Pursuant to the Agreement, each share of common stock, par value $.01 per share, of CTI, each share of preferred stock, Series A, no par value per share, of CTI and each share of preferred stock, Series B, no par value per share, of CTI, issued and outstanding, will be converted into the right to receive 0.6583 shares of common stock, par value $.01 per share, of the Company ("WAXS Common Stock") (such shares and the Contingent Shares referred to below are referred to as the "Merger Consideration"). In the event that the average of the closing prices of WAXS Common Stock for the ten (10) trading-day period ending at the close of trading on the second trading day preceding the Closing is less than $20.38, then, in addition to the shares of WAXS Common Stock issued pursuant to the above, each CTI stockholder who receives shares of WAXS Common Stock shall be entitled to receive the amount, if any (the "Contingent Amount"), by which the Target Price (as defined below) exceeds the greater of (i) the Current Market Price (as defined below) on the first anniversary of the Effective Time (the "Maturity Date") and (ii) $11.50, multiplied by the number of shares of WAXS Common Stock issued to such holder pursuant to the prior sentence. The Contingent Amount shall only be paid in shares of WAXS Common Stock (the "Contingent Shares"), which shares shall be valued for purposes hereof at the greater of the Current Market Price as of the Maturity Date and $11.50 and rounded to the nearest whole share. Any and all rights in, or to receive, the Contingent Amount shall terminate and be of no further force or effect if, at any time on or prior to the Maturity Date, the Current Market Price is greater than the Target Price. For purposes hereof, (a) the Target Price means $20.38 per share of WAXS Common Stock; provided, however, that if the Nasdaq Composite Index (the "IXIC") at the close of trading on the Maturity Date is eighty-five percent (85%) or less than the "IXIC" at the close of trading on the date of the Effective Time (the difference between one hundred percent (100%) and such percentage being referred to as the "Market Correction Percentage"), then the Target Price shall be reduced by a percentage equal to that portion of the Market Correction Percentage in excess of fifteen percent (15%); and (b) the Current Market Price means, as of any date specified herein, the average of the daily closing trading prices of WAXS Common Stock for the twenty (20) consecutive trading days ending at the close of trading on such date. In arriving at our opinion, we have reviewed the draft dated February 10, 2000 of the Agreement. We also have reviewed financial and other information that was publicly available or furnished to us by the Company and CTI including information provided during discussions with their respective managements. Included in the information provided during discussions with the respective managements were certain financial projections of CTI for the period beginning January 1, 2000 and ending December 31, 2004 prepared by the management of the Company, and certain financial projections of the Company for the 391 period beginning January 1, 2000 and ending December 31, 2004 prepared by the management of the Company. In addition, we have compared certain financial and securities data of the Company and CTI with various other companies whose securities are traded in public markets, reviewed prices paid in certain other business combinations and conducted such other financial studies, analyses and investigations as we deemed appropriate for purposes of this opinion. In rendering our opinion, we have relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to us from public sources, that was provided to us by the Company and CTI or their respective representatives, or that was otherwise reviewed by us. In particular, we have relied upon the estimates of the management of the Company of the operating synergies achievable as a result of the Merger. With respect to the financial projections supplied to us, we have relied on representations that they have been reasonably prepared on the basis reflecting the best currently available estimates and judgments of the management of the Company and CTI as to the future operating and financial performance of the Company and CTI. We have not assumed any responsibility for making any independent evaluation of any assets or liabilities or for making any independent verification of any of the information reviewed by us. We have assumed that the Merger will be accounted for as a purchase under generally accepted accounting principles and that it will qualify as a tax-free reorganization for U.S. federal income tax purposes. Our opinion is necessarily based on economic, market, financial and other conditions as they exist on, and on the information made available to us as of, the date of this letter. It should be understood that, although subsequent developments may affect this opinion, we do not have any obligation to update, revise or reaffirm this opinion. We are expressing no opinion as to the prices at which the WAXS Common Stock will actually trade at any time. Our opinion does not address the relative merits of the Merger and the other business strategies being considered by the Company's Board of Directors, not does it address the Board's decision to proceed with the Merger. Our opinion does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed transaction. Donaldson, Lufkin & Jenrette Securities Corporation ("Donaldson, Lufkin & Jenrette"), as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Donaldson, Lufkin & Jenrette has performed investment banking and other services for the Company in the past and has been compensated for such services. Donaldson, Lufkin & Jenrette acted as financial advisor to the Company in connection with its acquisition of FaciliCom International, Inc. ("FaciliCom"), and acted as solicitation agent in connection with the consent solicitation for FaciliCom's outstanding senior notes. Donaldson, Lufkin & Jenrette is currently acting as financial advisor to the Company in connection with its proposed acquisition of STAR Telecommunications, Inc. Further, Donaldson, Lufkin & Jenrette is currently providing advisory services in connection with the exploration of a possible sale of the Company's NACT Telecommunications Inc. and Telco Systems Inc. subsidiaries and the Company's Wireless Local Loop Division. Based upon the foregoing and such other factors as we deem relevant, we are of the opinion that the Merger Consideration to be paid by the Company pursuant to the Agreement is fair to the Company and its stockholders from a financial point of view. Very truly yours, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: /s/ MICHAEL CONNOLLY ------------------------------------ Michael Connolly Vice President D-2 392 ANNEX E February 7, 2000 Board of Directors Star Telecommunications, Inc. 223 East De La Guerra Santa Barbara, CA 93101 Ladies and Gentlemen: Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial advisor to Star Telecommunications, Inc. ("STAR") in connection with the proposed merger of STAR and World Access, Inc. ("World Access") pursuant to the Agreement and Plan of Merger (the "Merger Agreement") to be entered into among World Access, STAR and STI Merger Co., a wholly owned subsidiary of World Access ("Acquiror Sub"), which provides, among other things, for the merger of STAR with and into Acquiror Sub (the "Transaction"), as a result of which STAR will become a wholly owned subsidiary of World Access. As set forth more fully in the Merger Agreement, as a result of the Transaction, each share of the Common Stock, par value $0.001 per share, of STAR ("STAR Common Stock") not owned directly or indirectly by World Access or STAR will be converted into the right to receive the "Merger Consideration" described below. The "Merger Consideration" is (A) a number of shares of Common Stock, par value $0.01 per share, of World Access ("World Access Common Stock") equal to a fraction (the "Exchange Ratio") (1) the numerator of which is the sum of (a) $7.81 and (b) an amount equal to the "PT-1 Excess Proceeds" (as defined in the Merger Agreement) divided by the total number of issued and outstanding shares of STAR Common Stock and shares of STAR common stock underlying issued and outstanding options with exercise prices of $7.81 or less (the "PT-1 Excess Proceeds Per Share") and (2) the denominator of which is $20.00; or, at the election of World Access by written notice to STAR, (B) (1) a number of shares of World Access Common Stock equal to 60 percent of the Exchange Ratio and (2) an amount in cash equal to 40 percent of the sum of (a) $7.81 and (b) the PT-1 Excess Proceeds Per Share. The terms and conditions of the Transaction are more fully set forth in the Merger Agreement. You have requested Deutsche Bank's opinion, as investment bankers, as to the fairness, from a financial point of view, to the holders of STAR Common Stock of the Merger Consideration to be received by such stockholders pursuant to the Merger Agreement. In connection with Deutsche Bank's role as financial advisor to, and in arriving at its opinion, Deutsche Bank has reviewed certain publicly available financial and other information concerning STAR and World Access and certain internal analyses and other information furnished to it by STAR and World Access. Deutsche Bank has also held discussions with members of the senior managements of STAR and World Access regarding the businesses and prospects of their respective companies and the joint prospects of a combined company. In addition, Deutsche Bank has (i) reviewed the reported prices and trading activity for STAR Common Stock and World Access Common Stock, (ii) compared certain financial and stock market information for STAR and World Access with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which it deemed comparable in whole or in part, (iv) reviewed the terms of the February 6, 2000 draft of the Merger Agreement, and (v) performed such other studies and analyses and considered such factors as it deemed appropriate. Deutsche Bank has not assumed responsibility for independent verification of, and has not independently verified, any information, whether publicly available or furnished to it, concerning STAR or World Access, including, without limitation, any financial information, forecasts or projections considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, Deutsche Bank has assumed and relied upon the accuracy and completeness of all such information and Deutsche Bank has not conducted a physical inspection of any of the properties or assets, and has not prepared or obtained any independent evaluation or appraisal of any of the assets or liabilities, of STAR or World Access. With respect to the financial forecasts and projections, including the analyses and forecasts of certain cost E-1 393 savings, operating efficiencies, revenue effects and financial synergies expected by STAR and World Access to be achieved as a result of the Transaction (collectively, the "Synergies"), made available to Deutsche Bank and used in its analyses, Deutsche Bank has assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of STAR or World Access, as the case may be, as to the matters covered thereby. In rendering its opinion, Deutsche Bank expresses no view as to the reasonableness of such forecasts and projections, including the Synergies, or the assumptions on which they are based. Deutsche Bank's opinion is necessarily based upon economic, market and other conditions as in effect on, and the information made available to it as of, the date hereof. We undertake no obligation to update this opinion to reflect any developments occurring after the date hereof. We express no opinion as to the price or range of prices at which World Access Common Stock may trade subsequent to the announcement or consummation of the Transaction. For purposes of rendering its opinion, Deutsche Bank has assumed that the final terms of the Merger Agreement would not vary from the February 6, 2000 draft that Deutsche Bank reviewed in any respect that would be material to Deutsche Bank's analysis. Further, Deutsche Bank has assumed that, in all respects material to its analysis, the representations and warranties of STAR, World Access and Acquiror Sub contained in the Merger Agreement are true and correct, STAR, World Access and Acquiror Sub will each perform all of the covenants and agreements to be performed by it under the Merger Agreement and all conditions to the obligations of each of STAR, World Access and Acquiror Sub to consummate the Transaction will be satisfied without any waiver thereof. Deutsche Bank has also assumed that all material governmental, regulatory or other approvals and consents required in connection with the consummation of the Transaction will be obtained and that in connection with obtaining any necessary governmental, regulatory or other approvals and consents, or any amendments, modifications or waivers to any agreements, instruments or orders to which either STAR or World Access is a party or is subject or by which it is bound, no limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have a material adverse effect on STAR or World Access or materially reduce the contemplated benefits of the Transaction to STAR or its stockholders. In addition, you have informed Deutsche Bank, and accordingly for purposes of rendering its opinion Deutsche Bank has assumed, that the Transaction will be tax-free to each of the STAR, World Access, World Access's stockholders and, to the extent they receive World Access Common Stock, STAR's stockholders. In connection with our engagement, we have not been authorized by STAR or its Board of Directors to solicit, nor have we solicited, any alternative transactions to the Transaction. This opinion is addressed to the Board of Directors of STAR and is not a recommendation to the stockholders of STAR to approve the Transaction. This opinion is limited to the fairness, from a financial point of view, to the stockholders of STAR of the consideration to be received by such stockholders pursuant to the Merger Agreement in the Transaction, and Deutsche Bank expresses no opinion as to the merits of the underlying decision by STAR to engage in the Transaction. Deutsche Bank will be paid a fee for its services as financial advisor to STAR in connection with the Transaction, a substantial portion of which is contingent upon consummation of the Transaction. We are an affiliate of Deutsche Bank AG (together with its affiliates, the "DB Group"). One or more members of the DB Group have, from time to time, provided investment banking, commercial banking (including extension of credit) and other financial services to STAR and World Access or their respective affiliates for which it has received compensation. A portion of the proceeds of a bridge loan to be provided by World Access to STAR pursuant to the Merger Agreement may be used to repay indebtedness of STAR which has been extended by one or more members of the DB Group. In the ordinary course of business, members of the DB Group may actively trade in the securities and other instruments and obligations of STAR and World Access for their own accounts and for the accounts of their customers. Accordingly, the DB Group may at any time hold a long or short position in such securities, instruments and obligations. E-2 394 Based upon and subject to the foregoing, it is Deutsche Bank's opinion as investment bankers that, as of the date hereof, the Merger Consideration to be received pursuant to the Merger Agreement by holders of STAR Common Stock in the Transaction is fair, from a financial point of view, to such stockholders. Very truly yours, DEUTSCHE BANK SECURITIES INC. /s/ Deutsche Bank Securities Inc. E-3 395 ANNEX F SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW sec. 262. Appraisal rights. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to sec. 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to sec. 251 (other than a merger effected pursuant to sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec. 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of sec. 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. F-1 396 (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under sec. 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder's shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder's shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to sec. 228 or sec. 253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section; provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated F-2 397 therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has F-3 398 submitted such stockholder's certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder's demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. F-4 399 ANNEX G SECTIONS 1300 THROUGH 1312 OF THE CALIFORNIA GENERAL CORPORATION LAW Section 1300. Shareholder in short-form merger; Purchase at fair market value; "Dissenting shares"; "Dissenting shareholder" (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split, or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the National Market System of the NASDAQ Stock Market, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. Section 1301. Notice to holder of dissenting shares of reorganization approval; Demand for purchase of shares; Contents of demand (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of the price determined by the corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's G-1 400 right under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in clause (i) or (ii) of paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. Section 1302. Stamping or endorsing dissenting shares Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. Section 1303. Dissenting shareholder entitled to agreed price with interest thereon; When price to be paid (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the holders thereof shall be filed with the secretary of the corporation. (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. Section 1304. Action by dissenters to determine whether shares are dissenting shares or fair market value of dissenting shares or both; Joinder of shareholders; Consolidation of actions; Determination of issues; Appointment of appraisers (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision G-2 401 (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. Section 1305. Duty and report of appraisers; Court's confirmation of report; Determination of fair market value by court; Judgment, and payment; Appeal; Costs of action (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. (b) If a majority of the appraisers appointed fail to make and file a report within 10 days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). Section 1306. Prevention of payment to holders of dissenting shares of fair market value; Effect To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5. Section 1307. Disposition of dividends upon dissenting shares Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor. G-3 402 Section 1308. Rights and privileges of dissenting shares; Withdrawal of demand for payment Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. Section 1309. When dissenting shares lose their status Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys' fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. Section 1310. Suspension of proceedings for compensation or valuation pending litigation If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. Section 1311. Shares to which chapter inapplicable This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. Section 1312. Attack on validity of reorganization or short-form merger; Rights of shareholders; Burden of proof (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such G-4 403 shareholder's shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon 10 days' prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled. G-5 404 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102 of the General Corporation Law of the State of Delaware ("DGCL") allows a corporation to eliminate or limit the personal liability of directors of a corporation to the corporation or to any of its security holders for monetary damages for a breach of fiduciary duty as a director, except (i) for breach of the director's duty or loyalty, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for certain unlawful dividends and stock repurchases, or (iv) for any transaction from which the director derived an improper personal benefit. Section 145 of the DGCL provides that, in the case of any action other than one by or in the right of the corporation, a corporation may indemnify any person who was or is a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation in such capacity on behalf of another corporation or enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Articles X and XI of the World Access, Inc. amended certificate of incorporation provide for indemnification of directors, officers and employees to the fullest extent permissible under the DGCL. Officers and directors of World Access are presently covered by insurance which (with certain exceptions and with certain limitations) indemnifies them against any losses or liabilities arising from any alleged "wrongful act" including any alleged breach of duty, neglect, error, misstatement, misleading statement, omissions or other act done or wrongfully attempted. The cost of such insurance is borne by World Access as permitted by the DGCL. World Access has entered into separate indemnification agreements with its directors and non-director officers at the level of Vice President and above. These indemnification agreements provide as follows: - there is a rebuttable presumption that the director or officer has met the applicable standard of conduct required for indemnification; - World Access will advance litigation expenses to a director or officer at his request provided that he undertakes to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses; - World Access will indemnify a director or officer for amounts paid in settlement of a derivative suit; - in the event of a determination by the disinterested members of the board of directors or independent counsel that a director or officer did not meet the standard of conduct required for indemnification, the director or officer may contest this determination by petitioning a court or commencing any arbitration proceeding conducted by a single arbitrator pursuant to the rules of the American Arbitration Association to make an independent determination of whether such director or officer is entitled to indemnification under his indemnification agreement; and - World Access will reimburse a director or officer for expenses incurred enforcing his rights under his indemnification agreement. II-1 405 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) Exhibits. The following exhibits are filed as part of this registration statement.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 2.1 -- Agreement and Plan of Merger, dated as of February 11, 2000 among World Access, Inc., STI Merger Co. and STAR Telecommunications, Inc. (incorporated by reference to Exhibit 2.1 to World Access' Form 10-Q for the quarter ended March 31, 2000, filed May 22, 2000). 2.2 -- Agreement and Plan of Merger, dated as of February 11, 2000 among World Access, Inc., WorldxChange Communications, Inc. f/k/a CTI Merger Co. and Communication TeleSystems International d/b/a WorldxChange Communications (incorporated by reference to Exhibit 2.2 to World Access' Form 10-Q for the quarter ended March 31, 2000, filed May 22, 2000). 2.3 -- First Amendment to Agreement and Plan of Merger dated May 23, 2000 by and among World Access, Inc., WorldxChange Communications, Inc. and Communication TeleSystems International d/b/a WorldxChange Communications (incorporated by reference to Annex B to World Access' joint proxy statement/prospectus contained in this Registration Statement). 2.4 -- Second Amendment to Agreement and Plan of Merger dated August 1, 2000 by and among World Access, Inc., WorldxChange Communications, Inc. and Communication TeleSystems International d/b/a (incorporated by reference to Annex B to World Access' joint proxy statement/prospectus contained in this Registration Statement). 2.5 -- First Amendment to Agreement and Plan of Merger dated June 7, 2000 by and among World Access, Inc., STI Merger Co. and STAR Telecommunications, Inc. (incorporated by reference to Annex A to World Access' joint proxy statement/prospectus contained in this Registration Statement). 2.6 -- Purchase and Transfer Agreement, dated as of June 14, 2000 between Dr. Henning F. Klose, Apax Germany II L.P., Apax Funds Nominees Ltd. fur "B" Account, Apax Funds Nominees Ltd. fur "D" Account, AP Vermogensverwaltung Gesellshaft burgerlichen Rechts, A + M GmbH & Co. Vermogensverwaltung KG, and, World Access, Inc. and TelDaFax Aktiengesellschaft Marburg/Lahn (incorporated by reference to Exhibit 2.3 to World Access' Form 10-Q for the quarter ended June 30, 2000, filed August 14, 2000). 2.7 -- Second Amendment to Agreement and Plan of Merger dated October 6, 2000 by and among World Access, Inc., STI Merger Co. and STAR Telecommunications, Inc. (incorporated by reference to Annex A to World Access' joint proxy statement/prospectus contained in this Registration Statement). 3.1 -- Certificate of Incorporation of World Access and Amendments to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to World Access' Form S-4 filed to October 6, 1998, Registration No. 333-65389, Amendment to Certificate of Incorporation incorporated by reference to Exhibit 3.2 of WA Telcom Products Co., Inc.'s Form 8-K filed October 28, 1998). 3.2 -- Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 3.3 -- Certificate of Designation of 4.25% Cumulative Senior Perpetual Convertible Preferred Stock, Series A (incorporated by reference to Exhibit 4 to World Access' Form 8-K, filed May 3, 1999). 3.4 -- Certificate of Designation of 4.25% Cumulative Junior Convertible Preferred Stock, Series B (incorporated by reference to Exhibit 4.1 to World Access' Form 8-K, filed July 14, 1999). 3.5 -- Certificate of Designation of Convertible Preferred Stock, Series C (incorporated by reference to Exhibit 1.7(b) to Appendix A to World Access' Proxy Statement dated November 5, 1999 relating to the Special Meeting of Stockholders held on December 7, 1999). 3.6 -- Certificate of Designation of Convertible Preferred Stock, Series D (incorporated by reference to Exhibit 4 to World Access' Form 8-K, filed February 28, 2000).
II-2 406
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 3.7 -- Certificate of Designation of Convertible Preferred Stock, Series E (incorporated by reference to Exhibit 3.7 to World Access' Form 10-Q for the quarter ended June 30, 2000, filed August 14, 2000). 3.8 -- Bylaws of World Access (incorporated by reference to Exhibit 3.2 to World Access' Form S-4 filed October 6, 1998, No. 333-65389). 4.1 -- Indenture dated as of October 1, 1997 by and between World Access, Inc. and First Union Bank, as trustee (incorporated by reference to Exhibit 4.1 to WA Telcom Products Co., Inc.'s Form 8-K, filed October 8, 1997). 4.2 -- First Supplemental Indenture dated October 28, 1998 between World Access, Inc., WA Telcom Products Co., Inc. and First Union Bank, as Trustee (incorporated by reference to Exhibit 4.1 to World Access' Form 8-K filed October 28, 1998). 4.3 -- Indenture dated as of December 7, 1999 by and between World Access, Inc. and First Union Bank, as Trustee. 4.4** -- Voting and Stock Transfer Restriction Agreement dated as of February 11, 2000 between World Access, Inc. and Samer Tawfik. 4.5** -- Voting and Stock Transfer Restriction Agreement dated as of February 11, 2000 between World Access, Inc. and Christopher E. Edgecomb. 4.6** -- Voting and Stock Transfer Restriction Agreement dated as of February 11, 2000 between World Access, Inc. and Roger B. Abbott and Rosalind Abbott. 4.7** -- Voting and Stock Transfer Restriction Agreement dated as of February 11, 2000 between World Access, Inc. and Atocha, L.P. 4.8** -- Voting and Stock Transfer Restriction Agreement dated as of February 11, 2000 between World Access, Inc. and Gold & Appel Transfer S.A. 4.9** -- Voting and Stock Transfer Restriction Agreement dated as of February 11, 2000 between World Access, Inc. and Edward S. Soren. 4.10** -- Voting and Stock Transfer Restriction Agreement dated as of February 11, 2000 between Communication TeleSystems International d/b/a WorldxChange Communications and WorldCom Network Services, Inc., The 1818 Fund III, L.P., John D. Phillips, W. Tod Chmar, Resurgens Partners, LLC and Armstrong International Telecommunications, Inc. 4.11** -- Form of Escrow Agreement between World Access, Inc., Edward S. Soren and SunTrust Bank, Atlanta. 4.12** -- Form of Voting and Stock Transfer Restriction Agreement among Communication TeleSystems International d/b/a WORLDxCHANGE Communications and Geocapital V, L.P, Geocapital Advisors, L.P., Geocapital Investors V, L.P., Clay C. Long, Gregory A. Somers, Kelli J. Somers, Water J. Burmeister, Gilbert Global Equity Partners, L.P., Gilbert Global Equity Partners (Bermuda), L.P., Morgan Stanley & Co. Incorporated, SSCM, LLC, R2 Investments, Ltd, Erie Indemnity Company, Erie Insurance Exchange, John P. Imlay, Comm/Net Holding Liquidating Trust, Michael Billingsley, Teleplus Telecommunications, Inc., Carl E. Sanders and Zilkha Capital Partners. 5.1 -- Opinion of Long Aldridge & Norman LLP regarding legality of common stock. 8.1* -- Opinion of Long Aldridge & Norman LLP regarding certain tax matters in connection with the merger of STAR Telecommunications, Inc. with and into STI Merger Co., a wholly-owned subsidiary of World Access. 8.2* -- Opinion of Long Aldridge & Norman LLP regarding certain tax matters in connection with the merger of Communication Telesystems International d/b/a WorldxChange Communications with and into WorldxChange Communications, Inc. f/k/a CTI Merger Co., a wholly-owned subsidiary of World Access. 8.3* -- Opinion of O'Melveny & Myers LLP regarding certain tax matters in connection with the merger of Communication Telesystems International d/b/a WorldxChange Communications with and into WorldxChange Communications, Inc. f/k/a CTI Merger Co., a wholly-owned subsidiary of World Access.
II-3 407
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.1 -- World Access, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to WA Telco Systems' Registration Statement on Form S-8, filed on July 25, 1991, No. 33-41255-A). 10.2 -- Amendment to World Access, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.2 to WA Telco Systems' Form 10-K for the year ended December 31, 1993, filed March 31, 1994). 10.3 -- Second Amendment to 1991 Stock Option Plan (incorporated by reference to Exhibit 10.3 to WA Telco Systems' Form 10-K for the year ended December 31, 1993, filed March 31, 1994). 10.4 -- Third Amendment to 1991 Stock Option Plan (incorporated by reference to Exhibit 10.26 to WA Telco Systems' Form S-2, Amendment No. 2, filed on February 14, 1995, No. 33-87026). 10.5 -- World Access, Inc., Outside Directors' Warrant Plan (incorporated by reference to Exhibit 10.40 to WA Telco Systems' Form 10-K for the year ended December 31, 1995, filed April 10, 1996). 10.6 -- Directors' Warrant Incentive Plan (incorporated by reference to Exhibit 10.41 to WA Telco Systems' Form 10-K for the year ended December 31, 1995, filed April 10, 1996). 10.7 -- Fourth Amendment to 1991 Stock Option Plan (incorporated by reference to Exhibit 10.32 to WA Telco Systems' Form 10-K for the year ended December 31, 1996, filed April 11, 1997). 10.8 -- Fifth Amendment to 1991 Stock Option Plan (incorporated by reference to Exhibit 10.33 to WA Telco Systems' Form 10-K for the year ended December 31, 1996, filed April 11, 1997). 10.9 -- Amendment One to Outside Directors' Warrant Plan (incorporated by reference to Exhibit 10.33 to WA Telco Systems' Form 10-K for the year ended December 31, 1996, filed April 11, 1997). 10.10 -- Amendment One to Directors' Warrant Incentive Plan (incorporated by reference to Exhibit 10.31 to WA Telco Systems' Form 10-K for the year ended December 31, 1996, filed April 11, 1997). 10.11 -- Amendment Two to Outside Directors' Warrant Plan (incorporated by reference to Exhibit 10.21 to WA Telco Systems' Form 10-K for the year ended December 31, 1997, filed April 15, 1998). 10.12 -- Amendment Two to Directors' Warrant Incentive Plan (incorporated by reference to Exhibit 10.22 to WA Telco Systems' Form 10-K for the year ended December 31, 1997, filed April 15, 1998). 10.13 -- Sixth Amendment to 1991 Stock Option Plan (incorporated by reference to Exhibit 10.22 to WA Telco Systems' Form 10-K for the year ended December 31, 1997, filed April 15, 1998). 10.14 -- Severance Protection Agreement dated November 1, 1997 by and between World Access, Inc. and Mark A. Gergel (incorporated by reference to Exhibit 10.33 to WA Telco Systems' Form 10-K for the year ended December 31, 1997, filed April 15, 1998). 10.15 -- Amendment Three to Outside Directors' Warrant Plan (incorporated by reference to Exhibit 10.21 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.16 -- Executive Employment Agreement between World Access, Inc. and Mark A. Gergel dated as of December 14, 1998 (incorporated by reference to Exhibit 10.23 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.17 -- World Access, Inc. 1998 Incentive Equity Plan, as amended (incorporated by reference to Exhibit 10.25 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.18 -- Assignment and Assumption Agreement dated October 29, 1998 between World Access, Inc. and WA Telcom Products Co., Inc. (incorporated by reference to Exhibit 10.1 to World Access' Form 8-K filed October 28, 1998). 10.19 -- Form of Indemnification Agreement with directors and officers (incorporated by reference to Appendix H to World Access' Joint Proxy Statement/Prospectus dated November 10, 1998 relating to the Special Meeting of Stockholders held on November 30, 1998).
II-4 408
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.20 -- Schedule of all officers and directors who have signed an Indemnification Agreement referred to in Exhibit 10.19 (incorporated by reference to Exhibit 10.28 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.21 -- First Amended and Restated Credit Agreement dated as of December 7, 1999 between Telco Systems, Inc., World Access Holdings, Inc. and Bank of America, N.A. as Administrative Agent and Fleet National Bank as Syndication Agent and Bank Austria Creditanstalt Corporate Finance, Inc. as Documentation Agent and Banc of America Securities LLC as Lead Arranger and Book Running Manager (incorporated by reference to Exhibit 10.20 to World Access' Form 10-K for the year ended December 31, 1999, filed March 30, 2000). 10.22 -- Guaranty dated as of December 30, 1998 between World Access, Telco Systems, World Access Holdings, Inc., NationsBank, N.A. as Administrative Agent and the lenders party to the Credit Agreement referred to in Exhibit 10.21 (incorporated by reference to Exhibit 10.30 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.23 -- Pledge Agreement dated as of December 31, 1998 by World Access in favor of NationsBank, N.A. as Administrative Agent and the lenders party to the Credit Agreement referred to in Exhibit 10.21 (incorporated by reference to Exhibit 10.31 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.24 -- Security Agreement dated as of December 31, 1998 by World Access in favor of NationsBank, N.A. as Administrative Agent and the lenders party to the Credit Agreement referred to in Exhibit 10.21 (incorporated by reference to Exhibit 10.32 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.25 -- Disbursement Agreement dated as of December 14, 1998 by and among World Access, Inc., Cherry Communications Incorporated (d/b/a Resurgens Communications Group) and William H. Cauthen, Esq. (incorporated by reference to Exhibit 10.33 to World Access' Form 10-K for the year ended December 31, 1998, filed April 9, 1999). 10.26 -- Agreement and Plan of Merger and Reorganization by and among World Access, Inc., WAXS INC., WA Merger Corp. and Cherry Communications Incorporated (d/b/a/ Resurgens Communications Group) dated as of May 12, 1998, as amended (incorporated by reference to Appendix A to World Access, Inc.'s Proxy Statement dated November 12, 1998 relating to the Special Meeting of Stockholders held on December 14, 1998). 10.27 -- Share Exchange Agreement by and among World Access, Inc., WAXS INC., Cherry Communications U.K. Limited and Renaissance Partners II, dated as of May 12, 1998 (incorporated by reference to Appendix B to World Access, Inc.'s Proxy Statement dated November 12, 1998 relating to the Special Meeting of Stockholders held on December 14, 1998). 10.28 -- Confirmation Agreement dated as of December 7, 1999 by Telco Systems, Inc., World Access Holdings, Inc., World Access, Inc., WA Telco Systems Products Co., Inc., NACT Telecommunications, Inc., Restor-AIT, Inc., Sunrise Sierra, Inc., Westec Communications, Inc., Telco Systems Security Corporation, World Access Capital Corp., World Access Telecommunications Group, Inc., Cellular Infrastructure Supply, Inc. and Galaxy Personal Services, Inc. for the benefit of the lenders party to the Credit Agreement referred to in Exhibit 10.20 (incorporated by reference to Exhibit 10.24 to World Access' Form 10-K for the year ended December 31, 1999, filed March 30, 2000). 10.29 -- Pledge Agreement dated as of December 7, 1999 by World Access, Inc. in favor of Bank of America, N.A., in its capacity as Administrative Agent, and each lender a party to the Credit Agreement referred to in Exhibit 10.20 (incorporated by reference to Exhibit 10.28 to World Access' Form 10-K for the year ended December 31, 1999, filed March 30, 2000). 10.30 -- FaciliCom International, Inc. 1998 Stock Option Plan (incorporated by reference to Exhibit 10.19 to FaciliCom International, Inc.'s Form 10-K for the year ended September 30, 1998, filed December 28, 1998).
II-5 409
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 10.31 -- First Amendment to the World Access, Inc. 1998 Incentive Equity Plan (incorporated by reference to Exhibit 10.32 to World Access' Form 10-K for the year ended December 31, 1999, filed March 30, 2000). 10.32 -- FaciliCom International, Inc. 1999 Special Stock Option Plan (incorporated by reference to Exhibit 10.33 to World Access' Form 10-K for the year ended December 31, 1999, filed March 30, 2000). 10.33 -- Credit Agreement dated as of November 15, 1999 by and among FaciliCom International, L.L.C. and Nortel Networks Inc. (incorporated by reference to Exhibit 10.34 to World Access' Form 10-K for the year ended December 31, 1999, filed March 30, 2000). 10.34** -- Participation Agreement dated as of February 11, 2000 by and between Foothill Capital Corporation and World Access, Inc. 10.35** -- Amendment Number One To Participation Agreement dated as of May 23, 2000 by and between Foothill Capital Corporation and World Access, Inc. 10.36** -- Executive Management Services Agreement dated as of August 1, 2000 by and between World Access, Inc. and Communication TeleSystems International d/b/a WorldxChange Communications. 10.37** -- Executive Employment Agreement between World Access, Inc. and Bryan D. Yokley dated as of June 1, 2000. 16.1** -- Letter of PricewaterhouseCoopers LLP 21.1 -- Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to World Access' Form 10-K for the year ended December 31, 1999, filed March 30, 2000). 23.1 -- Consent of Long Aldridge & Norman LLP (included in Exhibit 5.1). 23.2 -- Consent of Ernst & Young LLP with respect to the financial statements of World Access, Inc. 23.3 -- Consent of PricewaterhouseCoopers LLP with respect to the financial statements of World Access, Inc. 23.4 -- Consent of Deloitte & Touche LLP with respect to the financial statements of FaciliCom International, Inc. 23.5 -- Consent of Ernst & Young LLP with respect to the financial statements of Long Distance International, Inc. 23.6 -- Consent of Arthur Andersen LLP with respect to the financial statements of STAR Telecommunications, Inc. 23.7 -- Consent of Ernst & Young LLP with respect to the financial statements of Communications Telesystems International d/b/a WorldxChange Communications. 23.8 -- Consent of BDO Deutsche Warentreuhand with respect to the financial statements of TelDaFax AG. 23.9 -- Consent of Deutsche Bank Securities, Inc. with respect to the financial opinion of Deutsche Bank Securities, Inc. 23.10 -- Consent of Donaldson, Lufkin & Jenrette Securities Corporation with respect to the financial opinions of Donaldson, Lufkin & Jenrette Securities Corporation. 24.1 -- Power of Attorney of World Access (included in the signature pages hereto). 99.1** -- Form of proxy for World Access stockholders. 99.2** -- Form of proxy for STAR stockholders. 99.3** -- Form of Letter of Transmittal for STAR stockholders. 99.4** -- Form of Letter of Transmittal for WorldxChange shareholders.
- --------------- * To be filed by amendment. ** Previously filed. (B) Financial Statement Schedules. The financial statement schedules that are required by Regulation S-X are incorporated herein by reference to our Annual Report on Form 10-K for the year ended December 31, 1999. II-6 410 ITEM 22. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided, that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. (5) Insofar as the indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-7 411 (6) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (7) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-8 412 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 3 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on October 6, 2000. WORLD ACCESS, INC. By: /s/ JOHN D. PHILLIPS ------------------------------------ John D. Phillips Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the registration statement has been signed by the following persons in the capacities indicated as of October 6, 2000.
SIGNATURES TITLE ---------- ----- /s/ JOHN D. PHILLIPS Chairman and Chief Executive Officer (Principal - --------------------------------------------------- Executive Officer) John D. Phillips /s/ BRYAN D. YOKLEY Executive Vice President and Chief Financial - --------------------------------------------------- Officer (Principal Financial Officer) Bryan D. Yokley /s/ MARTIN D. KIDDER Vice President and Corporate Controller - --------------------------------------------------- (Principal Accounting Officer) Martin D. Kidder * President and Director - --------------------------------------------------- Walter J. Burmeister * Director - --------------------------------------------------- Kirby J. Campbell * Director - --------------------------------------------------- Bryan Cipoletti * Director - --------------------------------------------------- Stephen J. Clearman * Director - --------------------------------------------------- John P. Imlay, Jr. * Director - --------------------------------------------------- Massimo Prelz Oltramonti * Director - --------------------------------------------------- John P. Rigas * Director - --------------------------------------------------- Carl E. Sanders
II-9 413
SIGNATURES TITLE ---------- ----- * Director - --------------------------------------------------- Dru A. Sedwick * Director - --------------------------------------------------- Lawrence C. Tucker *By: /s/ JOHN D. PHILLIPS ---------------------------------------------- John D. Phillips Attorney-in-fact
II-10 EX-4.3 2 g60284a3ex4-3.txt INDENTURE DATED AS OF 12/7/1999 1 EXHIBIT 4.3 =============================================================================== WORLD ACCESS, INC., Issuer TO FIRST UNION NATIONAL BANK, Trustee ---------------------- Indenture Dated as of December 7, 1999 ---------------------- $300,000,000 13.25% Senior Notes due 2008 =============================================================================== 2 WORLD ACCESS, INC. Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of December 7, 1999
Trust Indenture Act Section Indenture Section - --------------- ----------------- (ss.) 310(a)(1)............................................. 607 (a)(2)............................................. 607 (b) ............................................. 608 (ss.) 312(c)................................................ 701 (ss.) 313(a)................................................ 702 (ss.) 313(c)................................................ 703 (ss.) 314(a)................................................ 703 (a)(4)............................................. 1008(a) (c)(1)............................................. 102 (c)(2)............................................. 102 (e) ............................................. 102 (ss.) 315(b)................................................ 601 (ss.) 316(a)(last sentence)................................. 101 ("Outstanding") (a)(1)(A).......................................... 502, 512 (a)(1)(B).......................................... 513 (b) ............................................. 508 (c) ............................................. 104(d) (ss.) 317(a)(1)............................................. 503 (a)(2)............................................. 504 (b) ............................................. 1003 (ss.) 318(a)................................................ 111
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS
Page ---- PARTIES ..........................................................................................................1 RECITALS OF THE COMPANY...........................................................................................1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions........................................................................1 SECTION 102. Compliance Certificates and Opinions..............................................22 SECTION 103. Form of Documents Delivered to Trustee............................................22 SECTION 104. Acts of Holders...................................................................23 SECTION 105. Notices, Etc., to Trustee, Company................................................24 SECTION 106. Notice to Holders; Waiver.........................................................24 SECTION 107. Effect of Headings and Table of Contents..........................................25 SECTION 108. Successors and Assigns............................................................25 SECTION 109. Separability Clause...............................................................25 SECTION 110. Benefits of Indenture.............................................................25 SECTION 111. Governing Law.....................................................................25 SECTION 112. Legal Holidays....................................................................26 ARTICLE TWO NOTE FORMS SECTION 201. Forms Generally...................................................................26 SECTION 202. Restrictive Legends...............................................................27 ARTICLE THREE THE NOTES SECTION 301. Title and Terms...................................................................27 SECTION 302. Denominations.....................................................................28 SECTION 303. Execution, Authentication, Delivery and Dating....................................28 SECTION 304. Temporary Notes...................................................................29 SECTION 305. Registration, Registration of Transfer and Exchange...............................30 SECTION 306. Mutilated, Destroyed, Lost and Stolen Notes.......................................31 SECTION 307. Payment of Interest; Interest Rights Preserved....................................31 SECTION 308. Persons Deemed Owners.............................................................32 SECTION 309. Cancellation......................................................................33 SECTION 310. Computation of Interest...........................................................33 SECTION 311. Book-Entry Provisions for Global Notes............................................33 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture...........................................34 SECTION 402. Application of Trust Money........................................................35
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Page ---- ARTICLE FIVE REMEDIES SECTION 501. Events of Default.................................................................36 SECTION 502. Acceleration of Maturity; Rescission and Annulment................................38 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee...................38 SECTION 504. Trustee May File Proofs of Claim..................................................39 SECTION 505. Trustee May Enforce Claims Without Possession of Notes............................40 SECTION 506. Application of Money Collected....................................................40 SECTION 507. Limitation on Suits...............................................................41 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest..........................................................................41 SECTION 509. Restoration of Rights and Remedies................................................42 SECTION 510. Rights and Remedies Cumulative....................................................42 SECTION 511. Delay or Omission Not Waiver......................................................42 SECTION 512. Control by Holders................................................................42 SECTION 513. Waiver of Past Defaults...........................................................43 SECTION 514. Waiver of Stay or Extension Laws..................................................43 ARTICLE SIX THE TRUSTEE SECTION 601. Notice of Defaults................................................................43 SECTION 602. Certain Rights of Trustee.........................................................44 SECTION 603. Trustee Not Responsible for Recitals or Issuance of Notes.........................45 SECTION 604. May Hold Notes....................................................................46 SECTION 605. Money Held in Trust...............................................................46 SECTION 606. Compensation and Reimbursement....................................................46 SECTION 607. Corporate Trustee Required; Eligibility...........................................47 SECTION 608. Resignation and Removal; Appointment of Successor.................................47 SECTION 609. Acceptance of Appointment by Successor............................................48 SECTION 610. Merger, Conversion, Consolidation or Succession to Business.......................49 ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Disclosure of Names and Addresses of Holders......................................49 SECTION 702. Reports by Trustee................................................................49 SECTION 703. Reports by Company................................................................49 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms..............................50 SECTION 802. Successor Substituted.............................................................51 SECTION 803. Notes to Be Secured in Certain Events.............................................52
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Page ---- ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders................................52 SECTION 902. Supplemental Indentures with Consent of Holders...................................53 SECTION 903. Execution of Supplemental Indentures..............................................54 SECTION 904. Effect of Supplemental Indentures.................................................54 SECTION 905. Conformity with Trust Indenture Act...............................................54 SECTION 906. Reference in Notes to Supplemental Indentures.....................................54 SECTION 907. Notice of Supplemental Indentures.................................................54 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if Any, and Interest...............................55 SECTION 1002. Maintenance of Office or Agency...................................................55 SECTION 1003. Money for Note Payments to Be Held in Trust.......................................55 SECTION 1004. Corporate Existence...............................................................57 SECTION 1005. Payment of Taxes and Other Claims.................................................57 SECTION 1006. Maintenance of Properties.........................................................57 SECTION 1007. Insurance.........................................................................57 SECTION 1008. Statement by Officers as to Default...............................................58 SECTION 1009. Provision of Financial Statements and Reports.....................................58 SECTION 1010. Repurchase of Notes upon Change of Control........................................58 SECTION 1011. Limitation on Indebtedness........................................................60 SECTION 1012. Limitation on Restricted Payments.................................................63 SECTION 1013. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries...........................................................66 SECTION 1014. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries......................................................................67 SECTION 1015. Limitation on Transactions with Stockholders and Affiliates.......................67 SECTION 1016. Limitation on Liens...............................................................69 SECTION 1017. Limitation on Asset Sales.........................................................69 SECTION 1018. Limitation on Issuances of Guarantees of Indebtedness by Restricted Subsidiaries......................................................................71 SECTION 1019. Business of the Company; Restriction on Transfers of Existing Business..........................................................................72 SECTION 1020. Limitation on Investments in Unrestricted Subsidiaries............................72 SECTION 1021. Limitation on Sale-Leaseback Transactions.........................................72 SECTION 1022. Waiver of Certain Covenants.......................................................73 ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 1101. Right of Redemption...............................................................73 SECTION 1102. Applicability of Article..........................................................73 SECTION 1103. Election to Redeem; Notice to Trustee.............................................74 SECTION 1104. Selection by Trustee of Notes to Be Redeemed......................................74 SECTION 1105. Notice of Redemption..............................................................74 SECTION 1106. Deposit of Redemption Price.......................................................75 SECTION 1107. Notes Payable on Redemption Date..................................................75
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Page ---- SECTION 1108. Notes Redeemed in Part............................................................76 ARTICLE TWELVE SECURITY SECTION 1201. Security..........................................................................76 ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance......................77 SECTION 1302. Defeasance and Discharge..........................................................77 SECTION 1303. Covenant Defeasance...............................................................78 SECTION 1304. Conditions to Defeasance or Covenant Defeasance...................................78 SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions.............................................80 SECTION 1306. Reinstatement.....................................................................81
TESTIMONIUM SIGNATURES AND SEALS Schedule A World Access Charitable Trust Arrangements EXHIBIT A Form of Note iv 7 INDENTURE, dated as of December 7, 1999, between WORLD ACCESS, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 945 East Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326, as issuer, and FIRST UNION NATIONAL BANK, a national banking association, as Trustee (the "Trustee"). RECITALS OF THE COMPANY WHEREAS, the Company and FaciliCom International, Inc., a Delaware corporation ("FaciliCom") and certain shareholders of FaciliCom have entered into an Agreement and Plan of Merger, dated as of August 17, 1999, with respect to the Merger (the "Merger") of FaciliCom with and into the Company and in connection with the Merger the Company has offered to exchange its 13.25% Senior Notes due 2008 (the "Notes") and certain other consideration for FaciliCom's outstanding 10 1/2% Senior Notes due 2008 (the "FaciliCom Notes"); WHEREAS, the Company has duly authorized the creation of an issue of the Notes, of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. WHEREAS, this Indenture is subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. WHEREAS, all things necessary have been done to make the Notes, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of the Company, in accordance with their and its terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. 8 For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition by the Company or a Restricted Subsidiary and not incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of such Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon the consummation of the transactions by which such Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be considered as Indebtedness. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, is defined to mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Armstrong" means Armstrong Holdings, Inc. "Asset Acquisition" means (i) an investment by the Company or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary of the Company or shall be merged into or consolidated with the Company 2 9 or any of its Restricted Subsidiaries or (ii) an acquisition by the Company or any of its Restricted Subsidiaries of the property and assets of any Person (other than the Company or any of its Restricted Subsidiaries) that constitute substantially all of a division or line of business of such Person. "Asset Disposition" means the sale or other disposition by the Company or any of its Restricted Subsidiaries (other than to the Company or another Restricted Subsidiary of the Company) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary of the Company or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Restricted Subsidiaries. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transactions) in one transaction or a series of related transactions by the Company or any of its Restricted Subsidiaries to any Person (other than the Company or any of its Restricted Subsidiaries) of (i) all or any of the Capital Stock of any Restricted Subsidiary (other than in respect of any director's qualifying shares or investments by foreign nationals mandated by applicable law), (ii) all or substantially all of the property and assets of an operating unit or business of the Company or any of its Restricted Subsidiaries or (iii) any other property and assets of the Company or any of its Restricted Subsidiaries outside the ordinary course of business of the Company or such Restricted Subsidiary and, in each case, that is not governed by Article Eight and which, in the case of any of clause (i), (ii) or (iii) above, whether in one transaction or a series of related transactions, (a) have a Fair Market Value in excess of $1 million or (b) are for net proceeds in excess of $1 million; provided that sales or other dispositions of inventory, receivables and other current assets in the ordinary course of business shall not be included within the meaning of "Asset Sale". "Attributable Value" means, as to any particular lease under which any Person is at the time liable other than a Capitalized Lease Obligation, and at any date as of which the amount thereof is to be determined, the total net amount of rent required to be paid by such person under such lease during the remaining term thereof (whether or not such lease is terminable at the option of the lessee prior to the end of such term), including any period for which such lease has been, or may, at the option of the lessor, be extended, discounted from the last date of such term to the date of determination at a rate per annum equal to the discount rate which would be applicable to a Capitalized Lease Obligation with like term in accordance with GAAP. The net amount of rent required to be paid under any lease for any such period shall be the aggregate amount of rent payable by the lessee with respect to such period after excluding amounts required to be paid on account of insurance, taxes, assessments, utility, operating and labor costs and similar charges. "Attributable Value" means, as to a Capitalized Lease Obligation under which any Person is at the time liable and at any date as of which the amount thereof is to be determined, the capitalized amount thereof that would appear on the face of a balance sheet of such Person in accordance with GAAP. "Average Life" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of 3 10 years from such date to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund requirements) of such Indebtedness and (b) the amount of each such principal payment by (ii) the sum of all such principal payments. "Board of Directors" means the board of directors of the Company or its equivalent, including managers of a limited liability company, general partners of a partnership or trustees of a business trust, or any duly authorized committee thereof. "Board Resolution" means a copy of a resolution certified by the secretary or any assistant secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York or The City of Atlanta are authorized or obligated by law or executive order to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents (however designated, whether voting or non-voting) in equity of such Person, whether now outstanding or issued after the date of this Indenture, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease Obligation" means any obligation under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed) that is required to be classified and accounted for as a capital lease obligation under GAAP, and, for the purpose of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Change of Control" means such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of the then outstanding Voting Stock of the Company on a fully diluted basis; (ii) individuals who at the beginning of any period of two consecutive calendar years constituted the Board of Directors (together with any directors who are members of the Board of Directors on the date hereof and any new directors whose election by the Board of Directors or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the members of the Board of Directors then still in office who either were members of the Board of Directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of such Board of Directors then in office; (iii) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one transaction or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any such "person" or "group" (other than to the Company or a Restricted Subsidiary); (iv) the merger or consolidation of the Company, with or into another corporation or the merger of another corporation with or into the Company in one or a series of related 4 11 transactions with the effect that immediately after such transaction any such "person" or "group" of persons or entities shall have become the beneficial owner of securities of the surviving corporation of such merger or consolidation representing a majority of the total voting power of the then outstanding Voting Stock of the surviving corporation; or (v) the adoption of a plan relating to the liquidation or dissolution of the Company. "Change of Control Offer" has the meaning specified in Section 1010. "Change of Control Payment" has the meaning specified in Section 1010. "Change of Control Payment Date" has the meaning specified in Section 1010. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, participations, rights in or other equivalents (however designated, whether voting or non-voting) of such Person's common stock, whether now outstanding or issued after the date of this Indenture, including, without limitation, all series and classes of such common stock. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person and references to the "Company" shall include FaciliCom after giving effect to the Merger. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its chairman, its president, any Vice President, its treasurer or any assistant treasurer, and delivered to the Trustee. "Consolidated Cash Flow" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) income taxes, to the extent such amount was deducted in calculating Consolidated Net Income (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iv) depreciation expense, to the extent such amount was deducted in calculating Consolidated Net Income, (v) amortization expense, to the extent such amount was deducted in calculating Consolidated Net Income, and (vi) all other non-cash items reducing Consolidated Net Income (excluding any non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period), less all non-cash items increasing Consolidated Net Income, all as determined on a consolidated basis for the Company and its Restricted Subsidiaries in conformity with GAAP. 5 12 "Consolidated Fixed Charges" means, for any period, Consolidated Interest Expense plus dividends declared and payable on Preferred Stock. "Consolidated Interest Expense" means, for any period, the aggregate amount of interest in respect of Indebtedness (including capitalized interest, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with any Interest Rate Agreements; and interest on Indebtedness that is Guaranteed or secured by the Company or any of its Restricted Subsidiaries) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Company and its Restricted Subsidiaries during such period. "Consolidated Net Income" means, with respect to any Person, for any period, the consolidated net income (or loss) of such Person and its Restricted Subsidiaries for such period as determined in accordance with GAAP, adjusted, to the extent included in calculating such net income, by excluding, without duplication, (i) all extraordinary gains or losses, (ii) net income (or loss) of any Person combined in such Person or one of its Restricted Subsidiaries on a "pooling of interests" basis attributable to any period prior to the date of combination, (iii) gains or losses (on an after-tax basis) in respect of any Asset Sales by such Person or one of its Restricted Subsidiaries, (iv) the net income of any Restricted Subsidiary of such Person to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its stockholders, (v) any gain or loss realized as a result of the cumulative effect of a change in accounting principles, (vi) any amount paid or accrued as dividends on Preferred Stock of the Company or Preferred Stock of any Restricted Subsidiary owned by Persons other than the Company and any of its Restricted Subsidiaries and (vii) the net income (or loss) of any Person (other than net income (or loss) attributable to a Restricted Subsidiary) in which any Person (other than the Company or any of its Restricted Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries by such other Person during such period. "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Company and its Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation), less any amounts attributable to Redeemable Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of its Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). 6 13 "Corporate Trust Office" means the corporate trust operations office of the Trustee, at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at First Union National Bank, Corporate Trust Department, 1525 West W.T. Harris Boulevard, 3C3 NC-1153, Charlotte, North Carolina 28262. "corporation" includes corporations, associations, companies and business trusts. "covenant defeasance" has the meaning specified in Section 1303. "Credit Facilities" means one or more debt facilities or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "Cumulative Consolidated Cash Flow" means, for the period beginning on the Exchange Date through and including the end of the last fiscal quarter (taken as one accounting period) preceding the date of any proposed Restricted Payment, Consolidated Cash Flow of the Company and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. "Cumulative Consolidated Fixed Charges" means the Consolidated Fixed Charges of the Company and its Restricted Subsidiaries for the period beginning on the Exchange Date through and including the end of the last fiscal quarter (taken as one accounting period) preceding the date of any proposed Restricted Payment, determined on a consolidated basis in accordance with GAAP. "Cumulative Consolidated Interest Expense" means, for the period beginning on the Exchange Date through and including the end of the last fiscal quarter (taken as one accounting period) preceding the date of any proposed Restricted Payment, Consolidated Interest Expense of the Company and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP. "Currency Agreement" means any foreign exchange contract, currency swap agreement and any other arrangement and agreement designed to provide protection against fluctuations in currency (or currency unit) values. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 307. 7 14 "defeasance" has the meaning specified in Section 1302. "Depositary" means The Depository Trust Company, its nominees and successors or any replacement thereof. "Eligible Accounts Receivable" means the accounts receivable (net of any reserves and allowances for doubtful accounts in accordance with GAAP) of any Person that are not more than 60 days past their due date and that were entered into in the ordinary course of business on normal payment terms as shown on the most recent consolidated balance sheet of such Person filed with the Commission, all in accordance with GAAP. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million or its equivalent in foreign currency, and has outstanding debt with a rating of "A-3" or higher according to Moody's Investors Service, Inc., or "A-" or higher according to Standard & Poor's Ratings Services (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)), at the time as of which any investment or rollover therein is made. "Event of Default" has the meaning specified in Section 501. "Excess Proceeds" has the meaning specified in Section 1017. "Excess Proceeds Offer" has the meaning specified in Section 1017. "Excess Proceeds Payment" has the meaning specified in Section 1017. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Date" means the date of issuance of the Notes upon the consummation of the registered exchange offer pursuant to which holders of the FaciliCom Notes tendered such notes in exchange for the Notes issued by the Company pursuant to this Indenture. "Existing Indebtedness" means Indebtedness outstanding on the date hereof. "FaciliCom" has the meaning specified in the recitals to this Indenture. "FaciliCom Notes" has the meaning specified in the recitals to this Indenture. "FaciliCom Pledge Account" means an account established with the FaciliCom Trustee in its name as trustee under the Original Indenture pursuant to the terms of the FaciliCom Pledge Agreement. 8 15 "FaciliCom Pledge Agreement" means the Collateral Pledge and Security Agreement, dated as of January 28, 1998, from FaciliCom to the FaciliCom Trustee governing the FaciliCom Pledge Account and the disbursements of funds therefrom. "FaciliCom Pledged Securities" means the securities purchased by FaciliCom with the portion of the net proceeds from the original offering of the FaciliCom Notes consisting of U.S. Government Obligations and which were deposited in the FaciliCom Pledge Account pursuant to the FaciliCom Pledge Agreement. "FaciliCom Trustee" means State Street Bank and Trust Company, as trustee under the Original Indenture. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession of the United States. "Global Notes" has the meaning specified in Section 201. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Holder" means a Person in whose name a Note is registered in the Register. "Incur" or "Incurrence" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an Incurrence of Indebtedness by reason of the acquisition of more than 50% of the Capital Stock of 9 16 any Person; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all obligations of such Person as lessee under Capitalized Lease Obligations and the Attributable Value under any Sale-Leaseback Transaction of such Person, (vi) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the Fair Market Value of such asset at such date of determination or (B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person, (viii) the maximum fixed redemption or repurchase price of Redeemable Stock of such Person at the time of determination and (ix) to the extent not otherwise included in this definition, obligations under Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation; provided (x) that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP and (y) that Indebtedness shall not include any liability for federal, state, local or other taxes. "Indenture" means this instrument and the Pledge Agreement as originally executed and as they may from time to time be supplemented or amended by one or more indentures supplemental hereto and pledge agreements supplemental thereto entered into pursuant to the applicable provisions hereof. "Indirect Participant" means a Person who holds a beneficial interest in a Global Note through a Participant. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Notes. "Interest Rate Agreements" means any interest rate swap agreements, interest rate cap agreements, interest rate insurance, and other arrangements and agreements designed to provide protection against fluctuations in interest rates. 10 17 "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding advances to customers in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Company or its Restricted Subsidiaries) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person. For purposes of the definition of "Unrestricted Subsidiary" and Sections 1012 and 1014, (i) "Investment" shall include (a) the Fair Market Value of the assets (net of liabilities) of any Restricted Subsidiary of the Company at the time that such Restricted Subsidiary of the Company is designated an Unrestricted Subsidiary and shall exclude the Fair Market Value of the assets (net of liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company and (b) the Fair Market Value, in the case of a sale of Capital Stock in accordance with Section 1014 such that a Person no longer constitutes a Restricted Subsidiary, of the remaining assets (net of liabilities) of such Person after such sale, and shall exclude the Fair Market Value of the assets (net of liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of the Company and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of such transfer, in each case as determined by the Board of Directors in good faith. "Investment Grade Company" means a Person whose debt securities are rated BBB- or higher by Standard & Poor's Ratings Service, Inc. or Baa3 or higher by Moody's Investor Service, Inc. (or an equivalent rating by another nationally recognized rating agency). "IRU" means Indefeasible Right of Use, which is the right to use a telecommunications system with most of the rights and duties of ownership, but without the right to control or manage such facility and, depending upon the particular agreement, without any right to salvage or duty to dispose of such system's cable at the end of its useful life. "Junior Preferred Stock" has the meaning specified in Section 1012. "Lien" means any mortgage, charge, pledge, security interest, encumbrance, lien (statutory or other), hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, any sale with recourse against the seller or any Affiliate of the seller, or any agreement to give any security interest). "MAOU" means Minimum Assignable Ownership Units which is capacity on a telecommunications system that has been acquired on an ownership basis. "Market Price" means the average closing price of the shares of the Company's Common Stock on the principal trading market of such Common Stock over the five consecutive 11 18 trading days up to and including the trading day prior to the last full trading day before the closing of the Merger. "Market Value" means the average of the closing price of the applicable security on such security's principal trading market over the five consecutive trading days up to and including the trading day prior to the last full trading day before the initiation of any Offer to Purchase described in clause (i) (B) of the second paragraph of Section 1017 or the time any commitment to effect an Asset Sale is entered into as described in the first paragraph of Section 1017. "Marketable Securities" means: (i) U.S. Government Obligations which have a remaining weighted average life to maturity of not more than one year from the date of Investment therein; (ii) any time deposit account, money market deposit and certificate of deposit maturing not more than 180 days after the date of acquisition issued by, or time deposit of, an Eligible Institution; (iii) certificates of deposit, Eurodollar time deposits and bankers' acceptances with maturity of 90 days or less and overnight bank deposits of any financial institution that is organized under the laws of the United States of America or any state hereof, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $300 million (or, to the extent non-United States dollar denominated, the United States Dollar Equivalent of such amount) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act); (iv) commercial paper maturing not more than 180 days after the date of acquisition issued by a corporation (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "P-1" or higher according to Moody's Investors Service, Inc., or "A-1" or higher according to Standard & Poor's Ratings Services (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (v) auction rate preferred securities whose rates are reset based on market level for a par security not more than 90 days after the date of acquisition with a rating, at the time as of which any investment therein is made, of "A-3" or higher according to Moody's Investors Service, Inc., or "A-" or higher according to Standard & Poor's Ratings Services (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and issued by a corporation that is not an Affiliate of the Company; (vi) any banker's acceptance or money market deposit accounts issued or offered by an Eligible Institution; (vii) repurchase obligations with a term of not more than seven days for U.S. Government Obligations entered into with an Eligible Institution; (viii) any obligations of the Trustee to the extent such obligations qualify as such under clauses (i) through (vii) above and (ix) any fund investing exclusively in investments of the types described in clauses (i) through (viii) above. "Maturity", when used with respect to any Notes, means the date on which the principal of such Notes or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or otherwise. 12 19 "Maturity Date" means January 15, 2008. "Merger" means the merger of FaciliCom with and into the Company pursuant to the Agreement and Plan of Merger dated August 17, 1999 between the Company and FaciliCom. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary of the Company) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole (after taking into account any available offsetting tax credits or deductions and any tax sharing arrangements), (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary of the Company as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP, and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary of the Company) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Notes" means any of the Notes as defined in the first recital of this Indenture and more particularly means any Notes authenticated and delivered under this Indenture. "Offer Payment Date" has the meaning specified in Section 1017. "Offer to Purchase" has the meaning specified in Section 1017. "Offer to Purchase Payment" has the meaning specified in Section 1017. 13 20 "Officer's Certificate" means a certificate signed by the chairman, the president, a Vice President, the treasurer, an assistant treasurer, the secretary or an assistant secretary of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be acceptable to the Trustee. "Original Indenture" means the Indenture, dated as of January 28, 1998, among FaciliCom and the FaciliCom Trustee, as supplemented by the First Supplemental Indenture thereto, pursuant to which FaciliCom issued the FaciliCom Notes. "Original Issue Date" means January 28, 1998, the date FaciliCom issued the FaciliCom Notes. "Outstanding", when used with respect to Notes, means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (i) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Notes, except to the extent provided in Sections 1302 and 1303, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Thirteen; and (iv) Notes which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Notes are held by a bona fide purchaser in whose hands the Notes are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by Section 313 of the TIA, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in 14 21 relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which the Trustee actually knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or such other obligor. "Participant" means, with respect to the Depositary or its nominee, an institution that has an account therewith. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any) or interest on any Notes on behalf of the Company. The initial Paying Agent shall be the Trustee. "Payment Account" has the meaning specified in Section 402. "Permitted Business" means any business involving voice, data and other telecommunications services or equipment. "Permitted Indebtedness" has the meaning specified in Section 1011(b). "Permitted Investment" means (i) an Investment in a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into, or transfer or convey all or substantially all its assets to, the Company or a Restricted Subsidiary; (ii) any Investment in Marketable Securities or Pledged Securities; (iii) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) loans or advances to officers and employees made in the ordinary course of business that do not in the aggregate exceed $1 million at any time outstanding; (v) stock, obligations or securities received in satisfaction of judgments; (vi) Investments in any Person received as consideration for Asset Sales to the extent permitted under Section 1017; (vii) Investments in any Person at any one time outstanding (measured on the date each such Investment was made without giving effect to subsequent changes in value) in an aggregate amount not to exceed the greater of (A) $15 million or (B) 5% of the Company's total consolidated assets; (viii) Investments in deposits with respect to leases or utilities provided to third parties in the ordinary course of business; (ix) Investments in Currency Agreements and Interest Rate Agreements on commercially reasonable terms entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business in connection with the operation of the business of the Company or its Restricted Subsidiaries; provided that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; (x) repurchases or redemptions by the Company of Capital Stock from officers and other employees of the Company or any of its Subsidiaries or their authorized representatives upon the death, disability or termination of employment of such individuals, in an aggregate amount not 15 22 exceeding $1 million in any calendar year and $3 million from the date of this Indenture; and (xi) Investments in evidences of Indebtedness, securities or other property received from another Person by the Company or any of its Restricted Subsidiaries in connection with any bankruptcy proceeding or by reason of a composition or readjustment of debt or a reorganization of such Person or as a result of foreclosure, perfection or enforcement of any Lien in exchange for evidences of Indebtedness, securities or other property of such Person held by the Company or any of its Subsidiaries, or for other liabilities or obligations of such Person to the Company or any of its Subsidiaries that were created, in accordance with the terms of this Indenture. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal property purchased or leased after the Original Issue Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred in compliance with Section 1011 (1) to finance the cost (including the cost of design, development, construction, acquisition, installation or integration) of the item of property or assets subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property or (2) to refinance any Indebtedness previously so secured, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property or assets other than such item of property or assets and any improvements on such item; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease Obligation or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases; (xi) Liens on property of, or on shares of stock or Indebtedness of, any corporation existing at the time such corporation becomes, or 16 23 becomes a part of, any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets acquired and were not created in contemplation of such transaction; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Company or any Restricted Subsidiary of the Company that does not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits and other Liens that are either within the general parameters customary in the industry or incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Restricted Subsidiaries prior to the Exchange Date; (xviii) Liens existing on the Original Issue Date or securing the Notes or the FaciliCom Notes or any Guarantee of the Notes or the FaciliCom Notes; (xix) Liens granted after the Exchange Date on any assets or Capital Stock of the Company or its Restricted Subsidiaries created in favor of the Holders; (xx) Liens securing Indebtedness which is incurred to refinance secured Indebtedness which is permitted to be Incurred under clause (viii) of paragraph (b) of Section 1011; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; and (xxi) Liens securing Indebtedness under Credit Facilities incurred in compliance with clause (iii), or securing Indebtedness to finance the cost of Telecommunication Assets under clause (iv) of paragraph (b) of Section 1011. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Pledge Account" means an account established with the Trustee in its name as Trustee hereunder pursuant to the terms of the Pledge Agreement for the deposit of the Pledged Securities. "Pledge Agreement" means the Collateral Pledge and Security Agreement, dated as of the date of this Indenture, from the Company to the Trustee, governing the Pledge Account and the disbursement of funds therefrom. "Pledged Securities" means the FaciliCom Pledged Securities or portion thereof which are to be transferred from the FaciliCom Pledge Account to, and deposited in, the Pledge Account pursuant to the Pledge Agreement. The Pledged Securities may be held in book-entry form through the Trustee acting as securities intermediary. 17 24 "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 306 in exchange for a mutilated security or in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations, rights or other equivalents (however designated, whether voting or non-voting) of such Person's preferred or preference stock, whether now outstanding or issued after the date of the Indenture, including, without limitation, all series and classes of such preferred or preference stock. "Pro Forma Consolidated Cash Flow" means, for any period, the Consolidated Cash Flow of the Company for such period calculated on a pro forma basis to give effect to any Asset Disposition or Asset Acquisition not in the ordinary course of business (including acquisitions of other Persons by merger, consolidation or purchase of Capital Stock) during such period as if such Asset Disposition or Asset Acquisition had taken place on the first day of such period. "Public Equity Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Money Indebtedness" means the principal of, premium, if any, and interest on, and any other payment obligations in respect of, any Indebtedness of the Company incurred to finance the purchase of plant, property, equipment, machinery or similar assets (including, without limitation, indebtedness for money borrowed for such purpose and indebtedness in respect of installment payment arrangements). "Purchase Price" has the meaning set forth in Section 1010. "Redeemable Stock" means any class or series of Capital Stock of any Person that by its terms (or by the terms of any security into which it is exchangeable) or otherwise is (i) required to be redeemed on or prior to the date that is 123 days after the date of the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time on or prior to the date that is 123 days after the date of the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity on or prior to the date that is 123 days after the date of the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Redeemable Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring on or prior to the date that is 123 days after the date of the Stated Maturity of the Notes shall not constitute Redeemable Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such 18 25 Capital Stock than the provisions contained in Sections 1010 and 1017 and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provisions, on or prior to the date that is 123 days after the date of the Company's repurchase of such Notes as are required to be repurchased pursuant to Sections 1010 and 1017. "Redemption Date", when used with respect to any Note to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Note to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Register" and "Registrar" have the respective meanings specified in Section 305. "Regular Record Date" for the interest payable on any Interest Payment Date means the January 1 or July 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Trustee, means any officer of its corporate trust department or similar group having direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Payments" has the meaning specified in Section 1012. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Sale-Leaseback Transaction" of any person means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by such person of any property or asset of such person which has been or is being sold or transferred by such person after the acquisition thereof or the completion of construction or commencement of operation thereof to such lender or investor or to any person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. The stated maturity of such arrangement shall be the date of the last payment of rent or any other amount due under such arrangement prior to the first date on which such arrangements may be terminated by the lessee without payment of a penalty. "Securities Act" means the Securities Act of 1933, as amended. "Senior Preferred Stock" has the meaning specified in Section 1012. 19 26 "Significant Subsidiary" means a Restricted Subsidiary that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity" means (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity including, without limitation, partnerships and limited liability companies, of which more than 50% of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Telecommunications Assets" means, with respect to any Person, equipment used in the telecommunications business or ownership rights with respect to IRUs, MAOUs or minimum investment units (or similar ownership interests) in fiber optic cable and international or domestic telecommunications switches or other transmission facilities (or Common Stock of a Person that becomes a Restricted Subsidiary, the assets of which consist primarily of any such Telecommunications Assets), in each case purchased or acquired through Indebtedness, provided that such Indebtedness does not exceed the Fair Market Value of such assets, by the Company or a Restricted Subsidiary after the Original Issue Date. "Tested Transaction" has the meaning stated in the definition of "United States Dollar Equivalent". "The 1818 Fund" has the meaning specified in Section 1012. "TMG" means Telecommunications Management Group, Inc. "Total Equity Market Capitalization" of any Person means, as of any date of determination, the product of (i) the aggregate number of outstanding shares of Common Stock of such Person on such date on a fully-diluted basis and (ii) the average closing price of such Common Stock over the five consecutive trading days immediately preceding such date. If no closing price exists with respect to shares of any such class, the value of such shares shall be determined by the Board of Directors in good faith and evidenced by a resolution of the Board of Directors filed with the Trustee. "Trade Payables" means any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by the Company or any of 20 27 its Restricted Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods and services. "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Company or any of its Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 905. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Uniform Commercial Code" means the Uniform Commercial Code as in effect in New York State. "United States Dollar Equivalent" means, with respect to any monetary amount in a currency other than the United States dollar, at any time for the determination thereof, the amount of United States dollars obtained by converting such foreign currency involved in such computation into United States dollars at the spot rate for the purchase of United States dollars with the applicable foreign currency as quoted by Reuters at approximately 11:00 a.m. (New York City time) on the date not more than two business days prior to such determination. For purposes of determining whether any Indebtedness can be incurred (including Permitted Indebtedness), any Investment can be made and any transaction described in Section 1015 can be undertaken (a "Tested Transaction"), the United States Dollar Equivalent of such Indebtedness, Investment or transaction described in Section 1015 will be determined on the date Incurred, made or undertaken and no subsequent change in the United States Dollar Equivalent shall cause such Tested Transaction to have been Incurred, made or undertaken in violation of this Indenture. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; provided (A) that the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, that such designation would be permitted under Section 1012, and such Subsidiary is not liable, directly or indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary Indebtedness. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Company; provided that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under the first paragraph of Section 1011 and (y) no Default or Event of Default shall have occurred and be continuing. Any such designation by the 21 28 Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Unrestricted Subsidiary Indebtedness" means Indebtedness of any Unrestricted Subsidiary (i) as to which neither the Company nor any Restricted Subsidiary is directly or indirectly liable (by virtue of the Company or any such Restricted Subsidiary being the primary obligor on, guarantor of, or otherwise liable in any respect to, such Indebtedness), and (ii) which, upon the occurrence of a default with respect thereto, does not result in, or permit any holder of any Indebtedness of the Company or any Restricted Subsidiary to declare, a default on such Indebtedness of the Company or any Restricted Subsidiary or cause the payment thereof to be accelerated or payable prior to its Stated Maturity. "U.S. Government Obligations" has the meaning specified in Section 1304. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned", with respect to any Subsidiary, means a Subsidiary of the Company if all of the outstanding Capital Stock in such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) is owned by the Company or one or more Wholly Owned Subsidiaries of the Company. "World Access Charitable Trust" means that certain World Access Charitable Trust dated August 19, 1999, by and between World Access Investment Corp., a Delaware corporation, and Clay C. Long, Esq., as trustee, in favor of World Access Foundation, Inc., a Georgia nonprofit corporation. SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. 22 29 Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 1008(a)) shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. 23 30 (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient. (c) The principal amount and serial numbers of Notes held by any Person, and the date of holding the same, shall be proved by the Register. (d) If the Company shall solicit from the Holders of Notes any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Notes shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note shall bind every future Holder of the same Note and the 24 31 Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 105. Notices, Etc., to Trustee, Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this Indenture, or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. SECTION 107. Effect of Headings and Table of Contents. 25 32 The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. All covenants and "agreements" in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 109. Separability Clause. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Indenture. Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Notes Registrar and their successors hereunder, and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 111. Governing Law. This Indenture and the Notes shall be governed by and construed in accordance with the laws of the State of New York. This Indenture is subject to the provisions of the Trust Indenture Act that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. Each of the parties hereto submits to the jurisdiction of the U.S. federal and any New York state court located in the Borough of Manhattan, The City and State of New York with respect to any actions brought against it as defendant in any suit, action or proceeding arising out of or relative to this Indenture or the Notes and waives any rights to which it may be entitled on account of place of residence or domicile. SECTION 112. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, sinking fund payment date or Stated Maturity or Maturity of any Note shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on such Interest Payment Date, Redemption Date or sinking fund payment date, or at the Stated Maturity or Maturity; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, sinking fund payment date, Stated Maturity or Maturity, as the case may be. 26 33 ARTICLE TWO NOTE FORMS SECTION 201. Forms Generally. The Notes and the Trustee's certificate of authentication shall be substantially in the form annexed hereto as Exhibit A with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange agreements to which the Company is subject or usage. The Company shall approve the form of the Notes and any notation, legend or endorsement on the Notes. The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Notes shall be issued initially in the form of one or more permanent global Notes in registered form, substantially in the form set forth in Exhibit A (the "Global Notes"), registered in the name of the Depositary or the nominee of the Depositary, deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. Ownership of beneficial interests in Global Notes will be limited to Participants or Indirect Participants. The definitive Notes shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Notes may be listed, all as determined by the officers executing such Notes, as evidenced by their execution of such Notes. SECTION 202. Restrictive Legends. Each Global Note shall bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED, BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS 27 34 IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 311 OF THE INDENTURE. ARTICLE THREE THE NOTES SECTION 301. Title and Terms. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to $300,000,000, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 303, 304, 305, 306, 906, 1010, 1017 or 1108. The Notes shall be known and designated as the "13.25% Senior Notes due 2008" of the Company. The Stated Maturity of the principal of the Notes shall be January 15, 2008 and they shall bear interest at the rate of 13.25% per annum, payable on January 15 and July 15 of each year, commencing on January 15, 2000 (or July 15, 2000, if the Exchange Date does not occur prior to January 1, 2000), until the principal thereof is paid or duly provided for. Interest on the Notes will accrue from the most recent Interest Payment Date for which interest has been paid or, if no interest has been paid, from the Exchange Date. The principal of (and premium, if any) and interest on the Notes shall be payable at the office or agency of the Company maintained for such purpose pursuant to Section 1002, or, at the option of the Company, interest may be paid by check mailed to addresses of the Persons entitled thereto as such addresses shall appear on the Register; provided that all payments with respect to the Global Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. The Notes shall be redeemable as provided in Article Eleven. 28 35 SECTION 302. Denominations. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Notes shall be executed on behalf of the Company by its chairman, its president, chief financial officer or any Vice President. The signature of any of these officers on the Notes may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Notes directing the Trustee to authenticate the Notes and certifying that all conditions precedent to the issuance of Notes contained herein have been fully complied with, and the Trustee in accordance with such Company Order shall authenticate and deliver such Notes. The Trustee shall be entitled to receive an Officer's Certificate and an Opinion of Counsel of the Company that it may reasonably request in connection with such authentication of Notes. Such order shall specify the amount of Notes to be authenticated and the date on which the original issue of Notes is to be authenticated. Each Note shall be dated the date of its authentication. No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication, substantially in the form provided for in Exhibit A, duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety in a transaction or a series of transactions to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Notes authenticated or 29 36 delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Notes surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Notes as specified in such request for the purpose of such exchange. If Notes shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section in exchange or substitution for or upon registration of transfer of any Notes, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Notes at the time Outstanding for Notes authenticated and delivered in such new name. SECTION 304. Temporary Notes. Pending the preparation of definitive Notes, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are issued, the Company shall cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 1002 without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and upon Company Order the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 305. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the "Registrar") for the purpose of registering Notes and transfers of Notes as herein provided. 30 37 Upon surrender for registration of transfer of any Note at the office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denomination or denominations of a like aggregate principal amount. At the option of the Holder, Notes may be exchanged for other Notes of any authorized denomination and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or for exchange shall be duly endorsed and be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 304, 906, 1010, 1017 or 1108 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the selection of Notes to be redeemed under Section 1104 and ending at the close of business on the day of such mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 306. Mutilated, Destroyed, Lost and Stolen Notes. If (i) any mutilated Note is surrendered to the Trustee, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount, bearing a number not contemporaneously outstanding. 31 38 In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any new Note under this Section 306, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Note issued pursuant to this Section 306 in lieu of any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section 306 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 307. Payment of Interest; Interest Rights Preserved. Interest on any Note which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Note (or Predecessor Notes) is registered at the close of business on the Regular Record Date (or if a Predecessor Note is outstanding on such Regular Record Date, such Predecessor Note) for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002 or, at the option of the Company, interest may be paid by check mailed to the address of the Person entitled thereto as such address shall appear on the Register; provided that all payments with respect to Global Notes the Holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Notes (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date ("Special Record Date") for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid 32 39 on each Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided for in Section 106 not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section 307, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. SECTION 308. Persons Deemed Owners. Prior to the due presentment of a Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Note is registered as the owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 307) interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. 33 40 SECTION 309. Cancellation. All Notes surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to, and promptly cancelled by, the Trustee. The Company may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Notes previously authenticated hereunder which the Company has not issued and sold, and all Notes so delivered shall be promptly cancelled by the Trustee. If the Company shall so acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Notes held by the Trustee shall be disposed of by the Trustee in accordance with its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that cancelled Notes be returned to it after being appropriately designated as cancelled. SECTION 310. Computation of Interest. Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 311. Book-Entry Provisions for Global Notes. (a) Each Global Note initially shall (i) be registered in the name of the Depositary for such Global Notes or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 202. Except as provided in Section 311(b), owners of beneficial interests in the Global Notes will not have Notes registered in their names, will not receive physical delivery of Notes in certificated form and will not be considered the registered owner or Holder thereof under this Indenture for any purpose. Members of, or Participants in, the Depositary shall have no rights under this Indenture with respect to any Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Participants, the operation of customary practices governing the exercise of the rights of a beneficial owner of any Note. The registered Holder of a Global Note may grant proxies and otherwise authorize any person, including Participants and persons that 34 41 may hold interests through Participants, to take any action which a Holder is entitled to take under this Indenture or the Notes. (b) Interests of beneficial owners in a Global Note may be transferred in accordance with the applicable rules and procedures of the Depositary. Transfers of a Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, a nominee of the Depositary, its successors or their respective nominees. Interests of beneficial owners in the Global Notes may be transferred in accordance with the rules and procedures of the Depositary. Notes in certificated form shall be transferred to beneficial owners in exchange for their beneficial interests in the Global Note, as the case may be, if (i) the Depositary (A) notifies the Company that it is unwilling or unable to continue as depository for the Global Notes and the Company thereupon fails to appoint a successor depository or (B) has ceased to be a clearing agency registered under the Exchange Act; (ii) there shall have occurred and be continuing an Event of Default with respect to the Notes; or (iii) the Company, at its option, notifies the Trustee in writing that it elects to cause issuance of the Notes in certificated form. In connection with a transfer of an entire Global Note to beneficial owners pursuant to clause (i), (ii) or (iii) of this paragraph (b), the applicable Global Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the applicable Global Note, an equal aggregate principal amount of certificated notes of authorized denominations. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Notes as expressly provided for herein or pursuant hereto) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when (1) either (A) All Notes theretofore authenticated and delivered (other than (i) Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Notes for whose payment money has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or 35 42 (B) all such Notes not theretofore delivered to the Trustee for cancellation (other than Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306) (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose in an amount sufficient to pay and discharge the entire Indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be, together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at Stated Maturity or redemption, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 606 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money On or prior to the effective date of this Indenture, the Trustee shall establish a segregated, non-interest bearing corporate trust account (the "Payment Account") maintained by the Trustee for the benefit of the Holders in which all amounts paid to the Trustee for the benefit of the Holders in respect of the Notes will be held (except for amount designated to be deposited into the Pledge Account) and from which the Trustee (if the Trustee is the Paying Agent) shall 36 43 make payments to the Holders in accordance with this Indenture and the Notes. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 and otherwise pursuant to this Indenture shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest on any Note when due and payable as to any Interest Payment Date falling on or prior to January 15, 2001; or (2) default in the payment of interest on any Note when due and payable as to any Interest Payment Date following after January 15, 2001, and any such failure continued for a period of 30 days; or (3) default in the payment of the principal of (or premium, if any, on) any Note at its Stated Maturity, upon acceleration, redemption or otherwise; or (4) default in the payment of principal or interest on any Note required to be purchased pursuant to an Offer to Purchase or an Excess Proceeds Offer as described in Section 1017 or pursuant to a Change of Control Offer as described in Section 1010; or (5) failure to perform or comply with the provisions of Section 801; or (6) default in the performance or breach of any covenant or agreement of the Company in this Indenture or under the Notes (other than a default in the performance, or breach, of a covenant or agreement which is specifically dealt with elsewhere in this Section), and continuance of such default or breach for a period of 30 consecutive days after there has been given to the Company by the Trustee or the Holders of at least 25% or more in aggregate principal amount of the Notes then Outstanding a written notice specifying such default or breach; or 37 44 (7) (A) there shall have occurred with respect to any issue or issues of Indebtedness of the Company or any Restricted Subsidiary having an outstanding principal amount of $5 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the Holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled by the expiration of any applicable grace period and/or (II) the failure to make a principal payment at the final (but not any interim) fixed Maturity Date thereon and such defaulted payment shall not have been made, waived or extended by the expiration of any applicable grace period; or (8) any final judgment or order (not covered by insurance) for the payment of money in excess of $5 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Restricted Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $5 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (9) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any of its Significant Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any of its Significant Subsidiaries or for all or substantially all of the property and assets of the Company or any of its Significant Subsidiaries or (C) the winding up or liquidation of the affairs of the Company or any of its Significant Subsidiaries and, in each case, such decree or order shall remain unstayed and in effect for a period of 30 consecutive days; or (10) the Company or any of its Significant Subsidiaries (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any of its Significant Subsidiaries or for all or substantially all of the property and assets of the Company or any of its Significant Subsidiaries or (C) effects any general assignment for the benefit of creditors; or (11) the Company asserts in writing that the Pledge Agreement ceases to be in full force and effect before payment in full of the obligations thereunder. 38 45 SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(9) or 501(10)) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Notes Outstanding by a notice in writing to the Company (and to the Trustee if such notice given by such Holders), may, and the Trustee at the request of such Holders shall, declare the principal of, premium, if any, and accrued but unpaid interest on all the Notes to be immediately due and payable. Upon any such declaration of acceleration, such principal of, premium, if any, and accrued interest shall become immediately due and payable. If an Event of Default specified in Section 501(9) or 501(10) occurs, then the principal of, premium, if any, and accrued interest shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made, the Holders of at least a majority in aggregate principal amount of the Notes Outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (1) all existing Events of Default, other than the nonpayment of amounts of principal of, premium, if any, and accrued and unpaid interest on the Notes which have become due solely by such declaration of acceleration, have been cured or waived subject to the limitations set forth in Section 513; and (2) the rescission, in the opinion of counsel, would not conflict with any judgment or decrees of a court of competent jurisdiction. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Notes because an Event of Default specified in Section 501(7) shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or the Holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness, and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company and countersigned by the Holders of such Indebtedness or a trustee, fiduciary or agent for such Holders, within 60 days after such declaration of acceleration in respect of the Notes, and no other Event of Default has occurred during such 60-day period which has not been cured or waived during such period. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if 39 46 (a) default is made in the payment of any installment of interest on any Note when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Note at the Maturity thereof, the Company shall pay to the Trustee for the benefit of the Holders of such Notes, the whole amount then due and payable on such Notes for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest at the rate borne by the Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, fees expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Notes and to file such other papers or documents and take other actions as the Trustee may deem necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable 40 47 compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 606. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 606; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and 41 48 THIRD: The balance, if any, to the Person or Persons entitled thereto. SECTION 507. Limitation on Suits. Except to enforce the right to receive payment of principal or premium, if any, or interest when due, no Holder of any Notes shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless the following conditions have been met: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Outstanding Notes shall have made written request to the Trustee to pursue the remedy in respect of such Event of Default in its own name as trustee hereunder; (3) such Holder or Holders have offered to the Trustee indemnity satisfactory to the Trustee against any costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee has failed to institute any such proceeding for 60 days after its receipt of such notice, request and offer of indemnity; and (5) during such 60-day period, no direction inconsistent with such written request has been given to the Trustee by the Holders of a majority or more in aggregate principal amount of the Outstanding Notes; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Thirteen) and in such Note of the principal of (and premium, if any) and (subject to Section 307) interest on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment on or after such Stated Maturities, and such rights shall not be impaired without the consent of such Holder. 42 49 SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (1) the Trustee need not take any action that conflicts with law or this Indenture, which might involve the Trustee in personal liability or which, in the good faith determination of the Trustee, may be unduly prejudicial to rights Holders not joining in the giving of such direction, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. 43 50 SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Notes may on behalf of the Holders of all the Notes waive any past default hereunder and its consequences, except a default (1) in respect of the payment of the principal of (or premium, if any) or interest on any Note, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Note affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 514. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Notice of Defaults. Within 90 days after the occurrence of any Default hereunder, the Trustee shall transmit in the manner and to the extent provided in TIA Section 313(c), notice of such Default hereunder of the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of (or premium, if any) or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice 44 51 is in the interest of the Holders; and provided further that in the case of any Default of the character specified in Section 501(7), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. SECTION 602. Certain Rights of Trustee. Subject to the provisions of TIA Sections 315(a) through 315(d): (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, may require and rely upon an Officer's Certificate; (4) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further 45 52 inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (8) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (9) any permissive right or power available to the Trustee under this Indenture or any supplement hereto shall not be construed to be a mandatory duty or obligation; (10) the Trustee shall not be charged with knowledge of any matter (including any default, other than as described in Section 501(1), (2) or (3)) unless and except to the extent actually known to a Responsible Officer of the Trustee or to the extent written notice thereof is received by the Trustee at the Corporate Trust Office; and (11) the Trustee shall have no liability for any inaccuracy in the books or records of, or for any actions or omissions of the Depositary. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. The Trustee shall not be required to examine any of the reports and documents filed with it pursuant to Sections 703 or 1009 to determine whether or not the Company is in compliance with the covenants set forth at Sections 1010 through 1021. SECTION 603. Trustee Not Responsible for Recitals or Issuance of Notes. The recitals contained in this Indenture and in the Notes, except for the Trustees certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. 46 53 The Trustee shall not be accountable for the use or application by the Company of Notes or the proceeds thereof. SECTION 604. May Hold Notes. The Trustee, any Paying Agent, any Registrar or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Registrar or such other agent. SECTION 605. Money Held in Trust. Money held by the Trustee in trust hereunder shall be segregated from other funds. The Trustee shall be under no liability for interest on any money received by it hereunder. SECTION 606. Compensation and Reimbursement. The Company agrees: (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder and under the Pledge Agreement (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture and under the Pledge Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence or bad faith on its part, arising out of or in connection with the acceptance and administration of its duties under the Pledge Agreement or the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Company, the Trustee shall have a claim prior to the Notes upon all property and funds 47 54 held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Notes. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(8) or (9), the expenses (including the reasonable charges and expenses of its counsel) of and the compensation for such services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law; provided, however, that if any such amounts are not paid as expenses of administration, they may be collected by the Trustee as amounts payable to it pursuant to Section 506. The provisions of this Section 606 shall survive the termination of this Indenture. SECTION 607. Corporate Trustee Required; Eligibility. There shall be at all times a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $50 million. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 607, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 608. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 609. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 609 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes, delivered to the Trustee and to the Company. (d) If at any time: 48 55 (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or (2) the Trustee shall cease to be eligible under Section 607 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in aggregate principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders in the manner provided for in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 609. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver 49 56 an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 610. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder (provided such corporation shall be otherwise qualified and eligible under this Article), without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes. In case at that time any of the Notes shall not have been authenticated, any successor Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee. In all such cases such certificates shall have the full force and effect which this Indenture provides for the certificate of authentication of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Disclosure of Names and Addresses of Holders. Every Holder of Notes, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company or the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). 50 57 SECTION 702. Reports by Trustee. Within 60 days after February 15 of each year commencing with the first February 15 after the first issuance of Notes, the Trustee shall transmit to the Holders, in the manner and to the extent provided in TIA Section 313(c), a brief report dated as of such February 15 if required by TIA Section 313(a). SECTION 703. Reports by Company. The Company shall: (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to all Holders, in the manner and to the extent provided in TIA Section 313(c), within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. 51 58 The Company shall not consolidate with, or merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially as an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into the Company and the Company shall not permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in the sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of the properties and assets of the Company or the Company and its Restricted Subsidiaries, taken as a whole, to any other Person or Persons, unless: (1) either (A) the Company shall be the continuing Person, (B) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company (i) shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and (ii) shall expressly assume, by an indenture supplemental hereto, duly executed and delivered to the Trustee, all of the obligations of the Company with respect to all the Notes and under this Indenture or (C) in the case of any such transaction or series of transactions entered into by any Restricted Subsidiary, the Person into which the Restricted Subsidiary is merged is another Restricted Subsidiary; (2) immediately after giving effect to such transaction on a pro forma basis, no Default or Event of Default shall have occurred and be continuing; (3) immediately after giving effect to such transaction on a pro forma basis, the Company, or any Person becoming the successor obligor of the Notes, shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction; (4) immediately after giving effect to such transaction on a pro forma basis, the Company, or any Person becoming the successor obligor of the Notes, as the case may be, could Incur at least $1.00 of Indebtedness under paragraph (a) of Section 1011; and (5) the Company delivers to the Trustee an Officer's Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (3) and (4) above) and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with; provided, however, that clauses (3) and (4) above shall not apply if, in the good faith determination of the Board of Directors of the Company, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of incorporation of the Company; and provided further that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. 52 59 SECTION 802. Successor Substituted. Upon any consolidation of the Company with or merger of the Company with or into any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and in the event of any such conveyance or transfer, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of this Indenture or any successor Person which shall theretofore become such in the manner described in Section 801), except in the case of a lease, shall be discharged of all obligations and covenants under this Indenture and the Notes and may be dissolved and liquidated. SECTION 803. Notes to Be Secured in Certain Events. If, upon any such consolidation of the Company with, or merger of the Company into, any other corporation, or upon any conveyance, lease or transfer of the property of the Company substantially as an entirety to any other Person, any property or assets of the Company would thereupon become subject to any Lien, then unless such Lien could be created pursuant to Section 1016 without equally and ratably securing the Notes, the Company, prior to or simultaneously with such consolidation, merger, conveyance, lease or transfer, will, as to such property or assets, secure the Notes Outstanding (together with, if the Company shall so determine any other Indebtedness of the Company now existing or hereinafter created which is not subordinate in right of payment to the Notes) equally and ratably with (or prior to) the Indebtedness which upon such consolidation, merger, conveyance, lease or transfer is to become secured as to such property or assets by such Lien, or shall cause such Notes to be so secured. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Notes; or 53 60 (2) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default; or (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 609; or (5) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided that such action shall not adversely affect the interests of the Holders in any material respect; or (6) to secure the Notes pursuant to the requirements of Section 803 or Section 1016 or otherwise. SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Notes, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Note affected thereby: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note; (ii) reduce the principal amount of, or premium, if any, or interest on any Note or extend the time for payment of interest on, or alter the redemption provisions of, any Note; (iii) change the place or currency of payment of principal of, or premium, if any, or interest on any Note; (iv) impair the right of any Holder to receive payment of, principal of and interest on such Holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Note; 54 61 (v) reduce the percentage of Outstanding Notes the consent of whose Holders is necessary to modify, amend, waive, supplement or consent to take any action under this Indenture or the Notes; (vi) waive a default in the payment of principal of, premium, if any, or accrued and unpaid interest on the Notes; (vii) reduce or change the rate or time for payment of interest on the Notes; (viii) [Reserved] (ix) modify any provisions of any Guarantees in a manner adverse to the Holders; or (x) modify any provisions of this Section 902 or Sections 513 and 1022, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustees own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to the Article shall conform to the requirements of the Trust Indenture Act as then in effect. 55 62 SECTION 906. Reference in Notes to Supplemental Indentures. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and upon Company Order authenticated and delivered by the Trustee in exchange for Outstanding Notes. SECTION 907. Notice of Supplemental Indentures. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Note affected thereby, in the manner provided for in Section 106, setting forth in general terms the substance of such supplemental indenture. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if Any, and Interest. The Company covenants and agrees for the benefit of the Holders that it shall duly and punctually pay the principal of (and premium, if any) and interest on the Notes in accordance with the terms of the Notes and this Indenture. SECTION 1002. Maintenance of Office or Agency. The Company shall maintain in The City of New York, an office or agency where Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The office of the Trustee located at 40 Broad Street, Suite 550, New York, New York 10004 shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. In addition, the Company shall maintain an office or agency where the Notes may be presented or surrendered for payment (which shall be the Corporate Trust Office of the Trustee, unless the Company shall designate and maintain some other office or agency for one or more such purposes). The Company shall give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. 56 63 The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Note Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it shall, on or before each due date of the principal of (or premium, if any) or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and shall promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Notes, it shall, on or before each due date of the principal of (or premium, if any) or interest on any Notes, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company shall promptly notify the Trustee of such action or any failure so to act. The Company shall cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 1003, that such Paying Agent shall: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Notes) in the making of any payment of principal (and premium, if any) or interest on the Notes; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were 57 64 held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest on any Note and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining shall be repaid to the Company. SECTION 1004. Corporate Existence. Subject to Article Eight, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence (or in the case of its Subsidiaries, existence under the applicable statutes for non-corporate business entities such as partnerships and limited liability companies), rights (charter and statutory) and franchises of the Company and each Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries as a whole and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1005. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (b) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien (other than a Permitted Lien) upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1006. Maintenance of Properties. 58 65 The Company shall cause all properties owned by the Company or any Subsidiary or used or held for use in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1007. Insurance. The Company shall at all times keep all of its and its Subsidiaries properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties. SECTION 1008. Statement by Officers as to Default. (a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year, an Officer's Certificate from the principal executive officer, principal financial officer or principal accounting officer to the effect that a review has been conducted of the activities of the Company and the Company's performance under this Indenture, and that the Company has fulfilled its obligations thereunder or, if there has been a default in the fulfillment of any such obligation, specifying each such default and the nature and status thereof. For purposes of this Section 1008(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) When any Default has occurred and is continuing under this Indenture, or if the trustee for or the Holder of any other evidence of Indebtedness of the Company or any Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness in the principal amount of less than $1,000,000) shall deliver to the Trustee by registered or certified mail or by telegram, telex or facsimile transmission an Officer's Certificate specifying such event, notice or other action within five Business Days of its occurrence. SECTION 1009. Provision of Financial Statements and Reports. (a) The Company shall file on a timely basis with the Commission, to the extent such filings are accepted by the Commission and whether or not the Company has a class of securities registered under the Exchange Act, the annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Section 13 or 15 of the Exchange Act. All such annual reports shall include the geographic segment financial 59 66 information contemplated by Item 101(d) of Regulation S-K under the Securities Act, and all such quarterly reports shall provide the same type of interim financial information that, as of the date of this Indenture, is the Company's practice to provide. (b) The Company shall also be required (i) to file with the Trustee, and provide to each Holder, without cost to such Holder, copies of such reports and documents within 15 days after the date on which the Company files such reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and (ii) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to supply at the Company's cost copies of such reports and documents to any prospective Holder promptly upon request. SECTION 1010. Repurchase of Notes upon Change of Control. (a) Upon the occurrence of a Change of Control, each Holder shall have the right to require the Company to repurchase such Holder's Notes in whole or in part (the "Change of Control Offer"), at a purchase price (the "Purchase Price") in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest, to the date of purchase (subject to the right of Holders of record to receive interest on the relevant Interest Payment Date) (the "Change of Control Payment") in accordance with the procedures set forth in paragraphs (c) and (d) of this Section. (b) [Reserved] (c) Within 30 days following any Change of Control, the Company shall give to each Holder and the Trustee in the manner provided in Section 106 a notice stating: (i) that a Change of Control has occurred, that the Change of Control Offer is being made pursuant to this Section 1010 and that all Notes validly tendered will be accepted for payment; (ii) the circumstances and relevant facts regarding such Change of Control (including but not limited to information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (iii) the Purchase Price and date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Change of Control Payment Date"); (iv) that any Note not tendered will continue to accrue interest pursuant to its terms; 60 67 (v) that, unless the Company defaults in the payment of the Change of Control Payment, any Note accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest on and after the Change of Control Payment Date; (vi) that Holders electing to have any Note or portion thereof purchased pursuant to the Change of Control Offer will be required to surrender such Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of such Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Change of Control Payment Date; (vii) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Change of Control Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (viii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. (d) [Reserved]. (e) On the Change of Control Payment Date, the Company shall: (i) accept for payment Notes or portions thereof tendered pursuant to the Change of Control Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee, all Notes or portions thereof so accepted together with an Officer's Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail, to the Holders so accepted, payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. For purposes of this Section 1010, the Trustee shall act as Paying Agent. 61 68 The Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes a Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. The Company shall comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in the event that a Change of Control occurs and the Company is required to repurchase the Notes under this Section 1010. SECTION 1011. Limitation on Indebtedness. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, Incur any Indebtedness; provided, however, that the Company may Incur Indebtedness if immediately thereafter the ratio of (i) the aggregate principal amount (or accreted value, as the case may be) of Indebtedness of the Company and its Restricted Subsidiaries on a consolidated basis outstanding as of the Transaction Date to (ii) the Pro Forma Consolidated Cash Flow for the preceding two full fiscal quarters multiplied by two, determined on a pro forma basis as if any such Indebtedness had been Incurred and the proceeds thereof had been applied at the beginning of such two fiscal quarters, would be greater than zero and less than 5 to 1. (b) The foregoing limitations of paragraph (a) of this covenant will not apply to any of the following Indebtedness ("Permitted Indebtedness"), each of which shall be given independent effect: (i) Indebtedness of the Company evidenced by the Notes or the FaciliCom Notes; (ii) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Exchange Date; (iii) Indebtedness of the Company or any Restricted Subsidiary under one or more Credit Facilities, in an aggregate principal amount at any one time outstanding not to exceed the greater of (x) $135.0 million and (y) 80% of Eligible Accounts Receivable at any one time outstanding, subject to any permanent reductions required by any other terms of this Indenture; (iv) Indebtedness of the Company or any Restricted Subsidiary Incurred to finance the cost (including the cost of design, development, construction, acquisition, installation or integration) of Telecommunications Assets; (v) Indebtedness of a Restricted Subsidiary owed to and held by the Company or another Restricted Subsidiary, except that (A) any transfer of such Indebtedness by the Company or a Restricted Subsidiary (other than to the Company or another Restricted Subsidiary) or (B) the sale, transfer or other disposition by the Company or any Restricted 62 69 Subsidiary of Capital Stock of a Restricted Subsidiary which is owed Indebtedness of another Restricted Subsidiary shall, in each case, be an Incurrence of Indebtedness by such Restricted Subsidiary, subject to the other provisions of this Indenture; (vi) Indebtedness of the Company owed to and held by a Restricted Subsidiary which is unsecured and subordinated in right to the payment and performance to the obligations of the Company under this Indenture and the Notes, except that the limitations of paragraph (a) of this Section 1011 shall apply to such Indebtedness at such time as (A) any transfer of such Indebtedness by a Restricted Subsidiary (other than to another Restricted Subsidiary) and (B) the sale, transfer or other disposition by the Company or any Restricted Subsidiary of Capital Stock of a Restricted Subsidiary which is owed such Indebtedness, subject to other provisions of this Indenture; (vii) Indebtedness of the Company or a Restricted Subsidiary issued in exchange for, or the net proceeds of which are used to refinance (whether by amendment, renewal, extension or refunding), then outstanding Indebtedness of the Company or a Restricted Subsidiary, other than Indebtedness Incurred under clauses (iii), (v), (vi), (viii), (ix), (xi) and (xii) of this paragraph, and any refinancings thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, and reasonable fees and expenses); provided that such new Indebtedness shall only be permitted under this clause (vii) if: (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes and (C) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness of the Company be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (vii); (viii) Indebtedness of (x) the Company not to exceed, at any one time outstanding, 2.00 times the Net Cash Proceeds from the issuance and sale, other than to a Subsidiary, of Common Stock (other than Redeemable Stock) of the Company (less the amount of such proceeds used to make Restricted Payments as provided in clause (iii) or (iv) of the second paragraph of Section 1012) and (y) the Company or Acquired Indebtedness of a Restricted Subsidiary not to exceed, at one time outstanding, the Fair 63 70 Market Value of any Telecommunications Assets acquired by the Company in exchange for Common Stock of the Company issued after the Exchange Date; provided, however, that in determining the Fair Market Value of any such Telecommunications Assets so acquired, if the estimated Fair Market Value of such Telecommunications Assets exceeds (A) $2 million (as estimated in good faith by the Board of Directors), then the Fair Market Value of such Telecommunications Assets will be determined by a majority of the Board of Directors of the Company, which determination will be evidenced by a resolution thereof, and (B) $10 million (as estimated in good faith by the Board of Directors), then the Company shall deliver the Trustee a written appraisal as to the Fair Market Value of such Telecommunications Assets prepared by a nationally recognized investment banking or public accounting firm (or, if no such investment banking or public accounting firm is qualified to prepare such an appraisal, by a nationally recognized appraisal firm); and provided further that such Indebtedness does not mature prior to the Stated Maturity of the Notes and the Average Life of such Indebtedness is longer than that of the Notes; (ix) Indebtedness of the Company or any Restricted Subsidiary (A) in respect of performance, surety or appeal bonds or letters of credit supporting trade payables, in each case provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements covering Indebtedness of the Company; provided that such agreements do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder, and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations including, without limitation, the Company's indemnification obligations pursuant to that certain Indemnification Agreement dated August 19, 1999, by and between the Company and Clay C. Long, Esq., trustee of the World Access Charitable Trust, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in any case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary of the Company (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by the Company or any Restricted Subsidiary in connection with such disposition; (x) Indebtedness of the Company, to the extent that the net proceeds thereof are promptly (A) used to repurchase Notes tendered in a Change of Control Offer or (B) deposited to defease all of the Notes pursuant to Article Thirteen; (xi) Indebtedness of a Restricted Subsidiary represented by a Guarantee of the Notes permitted by and made in accordance with Section 1018; 64 71 (xii) Indebtedness of the Company and its Subsidiaries existing upon the consummation of the Merger; and (xiii) Indebtedness of the Company or any Restricted Subsidiary in addition to that permitted to be incurred pursuant to clauses (i) through (xi) above in an aggregate principal amount not in excess of $10 million (or, to the extent not denominated in United States dollars, the United States Dollar Equivalent thereof) at any one time outstanding. (c) For purposes of determining any particular amount of indebtedness under this Section 1011, Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included; provided, however, that the foregoing shall not in any way be deemed to limit the provisions of Section 1018. For purposes of determining compliance with this Section 1011, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion may, at the time of such Incurrence, (i) classify such item of Indebtedness under and comply with either of paragraph (a) or (b) of this covenant (or any of such definitions), as applicable, (ii) classify and divide such item of Indebtedness into more than one of such paragraphs (or definitions), as applicable, and (iii) elect to comply with such paragraphs (or definitions), as applicable in any order. SECTION 1012. Limitation on Restricted Payments. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, (i) (A) declare or pay any dividend or make any distribution in respect of the Company's Capital Stock to the holders thereof (other than dividends or distributions payable solely in shares of Capital Stock (other than Redeemable Stock) of the Company or in options, warrants or other rights to acquire such shares of Capital Stock) or (B) declare or pay any dividend or make any distribution in respect of the Capital Stock of any Restricted Subsidiary to any Person other than dividends and distributions, including a distribution payable solely in shares of Capital Stock (other than Redeemable Stock), payable to the Company or any Restricted Subsidiary or to all holders of Capital Stock of such Restricted Subsidiary on a pro rata basis; (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of the Company (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person or any shares of Capital Stock of any Restricted Subsidiary (including options, warrants and other rights to acquire such shares of Capital Stock) held by any Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate thereof) of 5% or more of the Company's Capital Stock; (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to the Notes; or (iv) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: 65 72 (A) a Default or Event of Default shall have occurred and be continuing; (B) the Company could not Incur at least $1.00 of Indebtedness under paragraph (a) of Section 1011; and (C) the aggregate amount of all Restricted Payments declared or made from and after the Exchange Date would exceed the sum of: (1) Cumulative Consolidated Cash Flow minus 200% of Cumulative Consolidated Fixed Charges; (2) 100% of the aggregate Net Cash Proceeds from the issue or sale to a Person, which is not a Subsidiary of the Company, of Capital Stock of the Company (other than Redeemable Stock) or of debt securities of the Company which have been converted into or exchanged for such Capital Stock (except to the extent such Net Cash Proceeds are used to Incur new Indebtedness outstanding pursuant to clause (viii) of paragraph (b) of Section 1011); and (3) to the extent any Permitted Investment that was made after the Exchange Date is sold for cash or otherwise liquidated or repaid for cash, the lesser of (i) the cash return of capital with respect to such Permitted Investment (less the cost of disposition, if any) and (ii) the initial amount of such Permitted Investment. The foregoing provision shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Notes including a premium, if any, and accrued and unpaid interest with the net proceeds of, or in exchange for, Indebtedness Incurred under clause (viii) of paragraph (b) of Section 1011; (iii) the repurchase, redemption or other acquisition of Capital Stock of the Company in exchange for, or out of the Net Cash Proceeds of a substantially concurrent (A) capital contribution to the Company or (B) offering of, shares of Capital Stock (other than Redeemable Stock) of the Company (except to the extent such proceeds are used to incur new Indebtedness outstanding pursuant to clause (viii) of paragraph (b) of Section 1011); (iv) the acquisition of Indebtedness of the Company which is subordinated in right of payment to the Notes in exchange for, or out of the proceeds of, a substantially concurrent (A) capital contribution to the Company or (B) offering of, shares of the Capital Stock of the Company (other than Redeemable Stock) (except to the extent such proceeds are used to incur new Indebtedness outstanding pursuant to clause (viii) of paragraph (b) of Section 1011); (v) payments or distributions to dissenting stockholders in accordance with applicable law, pursuant to or in connection with a consolidation, merger or transfer of assets that complies with Article Eight; (vi) the declaration or payment of any dividend or distribution in respect of, and in accordance with the terms of, the Company's (A) 50,000 outstanding shares of 4.25% 73 Cumulative Senior Perpetual Convertible Preferred Stock, Series A, par value $0.01 per share (the "Senior Preferred Stock"), and, in the event that The 1818 Fund III, L.P. ("The 1818 Fund") exercises its option to purchase up to 20,000 additional shares of Senior Preferred Stock, then such additional shares as well and (B) 23,174 outstanding shares of 4.25% Cumulative Junior Convertible Preferred Stock, Series B, par value $0.01 per share (the "Junior Preferred Stock"); (vii) the conversion of the Senior Preferred Stock, the Junior Preferred Stock or the Company's Convertible Preferred Stock, Series C, par value $0.01 per share, into Capital Stock of the Company in accordance with the terms of such preferred stock; (viii) the exercise of employee or non-employee options to purchase the Capital Stock of the Company; and (ix) other Restricted Payments not to exceed $2 million; provided that, except in the case of clause (i), no Default or Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the immediately preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof) and the Net Cash Proceeds from any capital contributions to the Company or issuance of Capital Stock referred to in clauses (iii) and (iv) of the immediately preceding paragraph, shall be included in calculating whether the conditions of clause (C) of the first paragraph of this Section 1012 have been met with respect to any subsequent Restricted Payments. In the event the proceeds of an issuance of Capital Stock of the Company are used for the redemption, repurchase or other acquisition of the Notes, then the Net Cash Proceeds of such issuance shall be included in clause (C) of the first paragraph of this Section 1012 only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of the Notes. SECTION 1013. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. So long as any of the Notes are Outstanding, the Company shall not, and shall not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to do any one of the following: (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary; (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary; (iii) make loans or advances to the Company or any other Restricted Subsidiary; or (iv) transfer any of its property or assets (including the Capital Stock of any Restricted Subsidiary) to the Company or any other Restricted Subsidiary. 67 74 The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Exchange Date in this Indenture or any other agreements or instruments in effect on the Exchange Date, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if the encumbrance or restriction applies only in the event of a default with respect to a financial covenant contained in such Indebtedness or agreement and such encumbrance or restriction is not materially, more disadvantageous to the Holders than is customary in comparable financing (as determined by the Company) and the Company determines that any such encumbrance or restriction will not materially affect the Company's ability to make principal or interest payments on the Notes; (iii) existing under or by reason of applicable law; (iv) existing with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (v) in the case of clause (iv) of the first paragraph of this Section 1013, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is, or is subject to, a lease, purchase mortgage obligation, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by this Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary; or (vi) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing contained in this Section 1013 shall prevent the Company or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in Section 1016 or (2) restricting the sale or other disposition of property or assets of the 68 75 Company or any of its Restricted Subsidiaries that secure Indebtedness of the Company or any of its Restricted Subsidiaries. SECTION 1014. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries. The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue, transfer, distribute, convey, sell, lease or otherwise dispose of any shares of Capital Stock (including options, warrants or other rights to purchase shares of such Capital Stock) of such or any other Restricted Subsidiary (other than to the Company or a Wholly Owned Restricted Subsidiary or in respect of any director's qualifying shares or sales of shares of Capital Stock to foreign nationals mandated by applicable law or pursuant to the exercise of employee or non-employee options to purchase the Capital Stock of the Company) to any Person unless (A) the Net Cash Proceeds from such issuance, transfer, conveyance, sale, lease or other disposition are applied in accordance with Section 1017, (B) immediately after giving effect to such issuance, transfer, conveyance, sale, lease or other disposition, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and (C) any Investment in such Person remaining after giving effect to such issuance, transfer, conveyance, sale, lease or other disposition would have been permitted to be made under Section 1012 if made on the date of such issuance, transfer, conveyance, sale, lease or other disposition (valued as provided in the definition of "Investment" contained in Section 101). SECTION 1015. Limitation on Transactions with Stockholders and Affiliates. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Company or any Restricted Subsidiary or with any Affiliate of the Company or any Restricted Subsidiary, unless the following conditions have been met: (i) such transaction or series of transactions is on terms no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate; (ii) if such transaction or series of transactions involves aggregate consideration in excess of $2 million, then such transaction or series of transactions is approved by a majority of the Board of Directors of the Company and is evidenced by a resolution therein; and (iii) if such transaction or series of transactions involves aggregate consideration in excess of $10 million, then the Company or such Restricted 69 76 Subsidiary shall deliver to the Trustee a written opinion as to the fairness to the Company or such Restricted Subsidiary of such transaction from a financial point of view from a nationally recognized investment banking firm (or, if an investment banking firm is generally not qualified to give such an opinion, by a nationally recognized appraisal firm or accounting firm). The foregoing limitation does not limit, and will not apply to (i) any transaction between the Company and any of its Restricted Subsidiaries or between Restricted Subsidiaries; (ii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; (iii) any Restricted Payments not prohibited by Section 1012; (iv) loans and advances to officers or employees of the Company and its Subsidiaries not exceeding at any one time outstanding $1.5 million in the aggregate, made in the ordinary course of business; (v) arrangements with TMG, Armstrong and/or its subsidiaries existing on the date of the Original Indenture and listed on Schedule A attached thereto as such arrangements may be extended or renewed; provided that the terms of any arrangement altered by any such extension or renewal may not be altered in a manner adverse to the Company or the Holders of the Notes; (vi) the issuance of up to 20,000 additional shares of Senior Preferred Stock to The 1818 Fund pursuant to an option agreement existing on the date of this Indenture; (vii) the sale to and purchase by the Company from MCI WorldCom, Inc. and its Affiliates of telecommunications services and equipment in the ordinary course of business; (viii) the issuance and sale by the Company of Common Stock whether pursuant to the conversion of the Senior Preferred Stock, the Junior Preferred Stock or the Company's Convertible Preferred Stock, Series C, par value $0.01 per share, into Capital Stock of the Company, the exercise of any employee or non-employee options to purchase the Capital Stock of the Company; and (ix) the Company's and any of its Restricted Subsidiaries' arrangements with the World Access Charitable Trust listed on Schedule A attached hereto as such arrangements exist on the Exchange Date and as such arrangements may be amended; provided that the terms of any such amendments are not materially adverse to the Company, any Restricted Subsidiary or the Holders of the Notes. SECTION 1016. Limitation on Liens. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien (other than Permitted Liens) on any of its assets or properties of any character (including, without limitation, licenses and trademarks), or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, whether owned at the date of this Indenture or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereof, without making effective provision for all of the Notes and all other amounts ranking pari passu with the Notes to be directly secured equally and ratably with the obligation or liability secured by such Lien or, if such obligation or liability is subordinated to the Notes and other amounts ranking pari passu with the Notes, without making provision for the Notes and such other amounts to be directly secured prior to the obligation or liability secured by such Lien. SECTION 1017. Limitation on Asset Sales. 70 77 The Company shall not, and shall not permit any Restricted Subsidiary to, make any Asset Sale unless (i) the Company or the Restricted Subsidiary, as the case may be, receives consideration at the time of such sale or other disposition at least equal to the Fair Market Value of the assets sold or disposed of as determined by the good faith judgment of the Board of Directors evidenced by a Board Resolution and (ii) at least 80% of the consideration received for such sale or other disposition consists of cash or cash equivalents or the assumption of unsubordinated Indebtedness; provided that any securities, notes or other obligations issued by an Investment Grade Company with a Total Equity Market Capitalization in excess of $25 billion determined at the time any commitment to effect any such Asset Sale is entered into which are received by the Company or the Restricted Subsidiary, as the case may be, and are converted within 180 days thereof into cash or cash equivalents shall be deemed to be cash or cash equivalents; provided further that the amount of cash or cash equivalents realized upon the sale of any such securities, notes or other obligations must be included within the amount of Net Cash Proceeds for purposes of clause (i)(B) of the next paragraph. The Company shall, or shall cause the relevant Restricted Subsidiary to, within 270 days after the date of receipt of the Net Cash Proceeds from an Asset Sale, (i) (A) apply an amount equal to such Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the Company or Indebtedness of any Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Restricted Subsidiaries, or (B) if the Net Cash Proceeds from such Asset Sale exceed $15 million, apply an amount equal to such Net Cash Proceeds to make an offer to purchase (an "Offer to Purchase") from the Holders on a pro rata basis an aggregate principal amount of Notes equal to such Net Cash Proceeds, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued and unpaid interest to the date of purchase and less the product of (a) the Market Value per share of the Common Stock of the Company and (b) the number of shares (including any portion of a share) of such Common Stock determined by dividing $50 by the Market Price of the Common Stock for each $1,000 in principal amount of Notes accepted for purchase by the Company (the "Offer to Purchase Payment"), provided that the Company shall not be obligated to make any Offer to Purchase after it has made one or more Offers to Purchase, which Offer or Offers to Purchase, in the aggregate, were for an aggregate principal amount of Notes equal to the aggregate principal amount of Notes issued on the Exchange Date (regardless of the actual aggregate principal amount of Notes actually tendered in such Offer or Offers to Purchase), or (C) if the Company has made sufficient Offers to Purchase such that it has satisfied its obligation as described in the final proviso to clause (B), invest an equal amount, or the amount not so applied pursuant to clause (A), in property or assets of a nature or type or that are used in a business (or in a company having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Restricted Subsidiaries existing on the date of such investment (as determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) and (ii) apply (no later than the end of the 270-day period referred to above) such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided in the following paragraphs of this Section 1017. The amount of such Net Cash Proceeds required to be applied (or to be 71 78 committed to be applied) during such 270-day period referred to above in the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds". If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined below) totals at least $10 million, the Company must, not later than the 30th Business Day thereafter, make an offer (an "Excess Proceeds Offer") to purchase from the Holders on a pro rata basis an aggregate principal amount of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the principal amount of the Notes, plus, in each case, accrued and unpaid interest to the date of purchase less the product of (a) the Market Value per share of the Common Stock of the Company and (b) the number of shares (including any portion of a share) of such Common Stock determined by dividing $50 by the Market Price of the Common Stock for each $1,000 in principal amount of Notes accepted for purchase by the Company (the "Excess Proceeds Payment"). The Company shall commence an Offer to Purchase or an Excess Proceeds Offer by mailing a notice to the Trustee and each Holder stating: (i) that the Offer to Purchase or Excess Proceeds Offer, as applicable, is being made pursuant to this Section 1017 and that all Notes validly tendered will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Offer Payment Date"); (iii) that any Note not tendered will continue to accrue interest pursuant to its terms; (iv) that, unless the Company defaults in the payment of the Offer to Purchase Payment or the Excess Proceeds Payment, as applicable, any Note accepted for payment pursuant to the Offer to Purchase or the Excess Proceeds Offer, as applicable, shall cease to accrue interest on and after the applicable Offer Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase or the Excess Proceeds Offer, as applicable, will be required to surrender the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the applicable Offer Payment Date; (vi) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the applicable Offer Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for purchase and a statement that such Holder is withdrawing his election to have such Notes purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. On the applicable Offer Payment Date, the Company shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to the Offer to Purchase or the Excess Proceeds Offer, as applicable; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officer's 72 79 Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall upon Company Order promptly authenticate and mail to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount of $1,000 or integral multiples thereof. With respect to any Excess Proceeds Offer, to the extent that the aggregate principal amount of Notes tendered is less than the Excess Proceeds, the Company may use any remaining Excess Proceeds for general corporate purposes. The Company shall publicly announce the results of the Excess Proceeds Offer as soon as practicable after the Offer Payment Date. For purposes of this Section 1017, the Trustee shall act as the Paying Agent. The Company shall comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company undertakes an Offer to Purchase or Excess Proceeds Offer under this Section 1017. SECTION 1018. Limitation on Issuances of Guarantees of Indebtedness by Restricted Subsidiaries. The Company shall not permit any Restricted Subsidiary, directly or indirectly, to Guarantee, assume or in any other manner become liable with respect to any Indebtedness of the Company, other than Indebtedness under Credit Facilities incurred under clause (iii) of paragraph (b) in Section 1011, unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a Guarantee of the Notes on terms substantially similar to the Guarantee of such Indebtedness, except that if such Indebtedness is by its express terms subordinated in right of payment to the Notes, any such assumption, Guarantee or other liability of such Restricted Subsidiary with respect to such Indebtedness shall be subordinated in right of payment to such Restricted Subsidiary's assumption, Guarantee or other liability with respect to the Notes substantially to the same extent as such Indebtedness is subordinated to the Notes and (ii) such Restricted Subsidiary waives, and shall not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Guarantee. Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary may provide by its terms that it will be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's and each Restricted Subsidiary's Capital Stock in, or all or substantially all of the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by this Indenture) or (ii) the release or discharge of the guarantee which resulted in the creation of such Guarantee, except a discharge or release by or as a result of payment under such Guarantee. SECTION 1019. Business of the Company; Restriction on Transfers of Existing Business. 73 80 The Company shall not, and shall not permit any Restricted Subsidiary to, be principally engaged in any business or activity other than a Permitted Business. In addition, the Company and any Restricted Subsidiary shall not be permitted to, directly or indirectly, transfer to any Unrestricted Subsidiary (i) any of the licenses, material agreements or instruments, permits or authorizations used in the Permitted Business of the Company and any Restricted Subsidiary on the Exchange Date or (ii) any material portion of the "property and equipment" (as such term is used in the Company's consolidated financial statements) of the Company or any Restricted Subsidiary used in the licensed service areas of the Company and any Restricted Subsidiary as they exist on the Exchange Date. SECTION 1020. Limitation on Investments in Unrestricted Subsidiaries. The Company shall not make, and shall not permit any of its Restricted Subsidiaries to make, any Investments in Unrestricted Subsidiaries if, at the time thereof, the aggregate amount of such Investments together with any other Restricted Payments made after the Exchange Date would exceed the amount of Restricted Payments then permitted to be made pursuant to Section 1012. Any Investments in Unrestricted Subsidiaries permitted to be made pursuant to this covenant (i) shall be treated as the making of a Restricted Payment in calculating the amount of Restricted Payments made by the Company or a Subsidiary and (ii) may be made in cash or property (if made in property, the Fair Market Value thereof as determined by the Board of Directors of the Company (whose determination shall be conclusive and evidenced by a Board Resolution) shall be deemed to be the amount of such Investment for the purpose of clause (i) of this Section 1020). SECTION 1021. Limitation on Sale-Leaseback Transactions. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, enter into any Sale-Leaseback Transaction with respect to any property of the Company or any of its Restricted Subsidiaries. Notwithstanding the foregoing, the Company may enter into Sale-Leaseback Transactions; provided, however, that (a) the Attributable Value of such Sale-Leaseback Transaction shall be deemed to be Indebtedness of the Company and (b) after giving pro forma effect to any such Sale-Leaseback Transaction and the foregoing clause (a), other than any Sale- Leaseback Transaction involving NACT Telecommunications, Inc.'s facility in Provo, Utah, the Company would be able to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 1011. SECTION 1022. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 803 or Sections 1007 through 1021, inclusive, if before or after the time for such compliance the Holders of at least a majority in aggregate principal amount of the Outstanding Notes, by Act of such Holders, waive such compliance in 74 81 such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE ELEVEN REDEMPTION OF NOTES SECTION 1101. Right of Redemption. (a) The Notes may be redeemed, at the election of the Company, as a whole or in part, at any time or from time to time, on or after January 15, 2003, subject to the conditions and at the Redemption Prices specified in the form of Note, together with accrued and unpaid interest thereon to the Redemption Date. (b) Notwithstanding the foregoing, prior to January 15, 2001, the Company may redeem up to 35% of the originally issued aggregate principal amount of the Notes on one or more occasions with the Net Cash Proceeds of one or more Public Equity Offerings at a redemption price equal to 110.5% of the aggregate principal amount thereof, plus accrued interest, if any, thereon to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date to receive interest due on an Interest Payment Date); provided that, immediately after giving effect to such redemption, at least 65% of the originally issued aggregate principal amount of the Notes remains Outstanding; and provided further that notice of such redemptions shall be given within 60 days of the date of closing of any such Public Equity Offering. SECTION 1102. Applicability of Article. Redemption of Notes at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Notes pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the Redemption Price and of the principal amount of Notes to be redeemed and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Notes to be redeemed pursuant to Section 1104. 75 82 SECTION 1104. Selection by Trustee of Notes to Be Redeemed. If less than all the Notes are to be redeemed, the particular Notes to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Notes not previously called for redemption, in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a national securities exchange, on a pro rata basis; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Note not redeemed to less than $1,000. The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of such Note which has been or is to be redeemed. SECTION 1105. Notice of Redemption. Notice of redemption shall be given in the manner provided for in Section 106 not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Notes to be redeemed. All notices of redemption shall state: (1) the Redemption Date; (2) the Redemption Price and the amount of accrued interest to the Redemption Date payable as provided in Section 1107, if any; (3) if less than all Outstanding Notes are to be redeemed, the identification (and, in the case of a partial redemption, the principal amounts) of the particular Notes to be redeemed; (4) in case any Note is to be redeemed in part only, the notice which relates to such Note shall state that on and after the Redemption Date, upon surrender of such Note, the Holder shall receive, without charge, a new Note or Notes of authorized denominations for the principal amount thereof remaining unredeemed; (5) that on the Redemption Date the Redemption Price (and accrued interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and 76 83 payable upon each such Note, or the portion thereof, to be redeemed, and that interest thereon will cease to accrue on and after said date; and (6) the place or places where such Notes are to be surrendered for payment of the Redemption Price and accrued interest, if any. Notice of redemption of Notes to be redeemed at the election of the Company shall be given by the Company or, at the Company's written request, by the Trustee in the name and at the expense of the Company. SECTION 1106. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and accrued interest on, all the Notes which are to be redeemed on that date. SECTION 1107. Notes Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Notes, or one or more Predecessor Notes, registered as such at the close of business on the relevant Regular Record Dates according to their terms and the provisions of Section 307. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Notes. SECTION 1108. Notes Redeemed in Part. Any Note which is to be redeemed only in part (pursuant to the provisions of this Article Eleven) shall be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall upon Company Order authenticate and deliver to the Holder of such Note without service charge, a new Note or Notes, 77 84 of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered. ARTICLE TWELVE SECURITY SECTION 1201. Security. (a) On the Exchange Date, the pro rata portion of the total amount of the FaciliCom Pledged Securities based on the percentage of the aggregate principal amount of the FaciliCom Notes exchanged for Notes shall be released from the FaciliCom Pledge Account and deposited in the Pledge Account by the Company to be held pursuant to the Pledge Agreement. The Pledged Securities shall be pledged by the Company to the Trustee for the benefit of the Holders and shall be held by the Trustee in the Pledge Account pending disposition pursuant to the Pledge Agreement. (b) Each Holder, by its acceptance of a Note, consents and agrees to the terms of the Pledge Agreement (including, without limitation, the provisions providing for foreclosure and release of the Pledged Securities) as the same may be in effect or may be amended from time to time in accordance with its terms, and authorizes and directs the Trustee to enter into the Pledge Agreement and to perform its respective obligations and exercise its respective rights thereunder in accordance therewith. The Company shall do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Pledge Agreement, to assure and confirm to the Trustee the security interest in the Pledged Securities contemplated hereby, by the Pledge Agreement or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture and of the Notes secured hereby, according to the intent and purposes herein expressed. The Company shall take, or shall cause to be taken, any and all actions reasonably required (and any action reasonably requested by the Trustee) to cause the Pledge Agreement to create and maintain, as security for the obligations of the Company under this Indenture and the Notes, valid and enforceable first priority liens in and on all the Pledged Securities, in favor of the Trustee, superior to and prior to the rights of third Persons and subject to no other Liens. (c) The release of any Pledged Securities pursuant to the Pledge Agreement will not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Pledged Securities are released pursuant to this Indenture and the Pledge Agreement. To the extent applicable, the Company shall cause TIA Section 314(d) relating to the release of property or securities from the Lien and security interest of the Pledge Agreement (other than pursuant to Sections 7(e) and 7(g) thereof) and relating to the substitution therefor of any property or securities to be subjected to the Lien and security interest of the Pledge Agreement to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an officer of the Company, except in cases where TIA Section 314(d) 78 85 requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected by the Company. (d) The Trustee, in its sole discretion and without the consent of the Holders, may, and at the request of the Holders of at least 25% in aggregate principal amount of Notes then Outstanding shall, on behalf of the Holders, take all actions it deems necessary or appropriate in order to (i) enforce any of the terms of the Pledge Agreement and (ii) collect and receive any and all amounts payable in respect of the obligations of the Company thereunder. The Trustee shall have power to institute and to maintain such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Pledged Securities (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders or of the Trustee). ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Notes, elect to have either Section 1302 or Section 1303 be applied to all Outstanding Notes upon compliance with the conditions set forth below in this Article Thirteen. SECTION 1302. Defeasance and Discharge. Upon the Company's exercise under Section 1301 of the option applicable to this Section 1302, the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes on the date the conditions set forth in Section 1304 are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Notes, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1305 and the other Sections of this Indenture referred to in (A) and (B) below, and to have satisfied all its other obligations under such Notes and this Indenture insofar as such Notes are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Notes to receive payments, (solely from monies deposited in trust) in respect of the principal of, premium, if any, and interest on such Notes when such payments are due, (B) the Company's obligations with respect to such Notes under Sections 304, 305, 306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Thirteen. Subject to 79 86 compliance with this Article Thirteen, the Company may exercise its option under this Section 1302 notwithstanding the prior exercise of its option under Section 1303 with respect to the Notes. SECTION 1303. Covenant Defeasance. Upon the Company's exercise under Section 1301 of the option applicable to this Section 1303, the Company shall be released from its obligations under any covenant contained in Section 801(3) and (4) and Section 803 and in Sections 1007 through 1022 with respect to the Outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(6), but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. SECTION 1304. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 1302 or Section 1303 to the Outstanding Notes: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 607 who shall agree to comply with the provisions of this Article Thirteen applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (A) cash in United States dollars, or (B) U.S. Government Obligations or (C) a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (i) the principal of (and premium, if any), and interest on, the Outstanding Notes on the Stated Maturity (or Redemption Date, if applicable) of such principal (and premium, if any) or installment of interest and (ii) any mandatory sinking fund payments or analogous payments applicable to the Outstanding Notes on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Notes; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Notes. Before such a deposit, the 80 87 Company may give to the Trustee, in accordance with Section 1103 hereof, a notice of its election to redeem all of the Outstanding Notes at a future date in accordance with Article Eleven hereof, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (2) No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit or, insofar as paragraph (9) or (10) of Section 501 hereof is concerned, at any time during the period ending on the 123rd day after the date of such deposit. (3) [Reserved] (4) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than this Indenture) to which the Company is a party or by which it is bound. (5) In the case of an election under Section 1302, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since January 15, 1998, there has been a change in the applicable federal income tax law, in either case to the effect, and based thereon such opinion shall confirm, that Holders will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (6) In the case of an election under Section 1303, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such 81 88 covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (7) The Company shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 1302 or the covenant defeasance under Section 1303 (as the case may be) have been complied with. SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1305, the "Trustee") pursuant to Section 1304 in respect of the Outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Governmental Obligations deposited pursuant to Section 1304 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders. Anything in this Article Thirteen to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 1304 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance, as applicable, in accordance with this Article. SECTION 1306. Reinstatement. If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 1305 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 1302 or 1303, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1305; provided, however, that if the Company makes any payment of principal of (or premium, if any) or interest 82 89 on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. This Indenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. 83 90 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. WORLD ACCESS, INC. By: ---------------------------------------- Name: Title: FIRST UNION NATIONAL BANK, Trustee By: ---------------------------------------- Name: Title: 84 EX-5.1 3 g60284a3ex5-1.txt OPINION OF LONG ALDRIDGE & NORMAN LLP 1 EXHIBIT 5.1 [Long Aldridge & Norman LLP Letterhead] October 6, 2000 World Access, Inc. 945 E. Paces Ferry Road, Suite 2200 Atlanta, Georgia 30326 RE: REGISTRATION STATEMENT ON FORM S-4 OF WORLD ACCESS, INC. Ladies and Gentlemen: We have acted as counsel to World Access, Inc., a Delaware corporation (the "Company"), in connection with a Registration Statement on Form S-4 (SEC Registration No. 333-37750) (the "Registration Statement") and the filing thereof with the Securities and Exchange Commission (the "Commission") for the purpose of registering under the Securities Act of 1933, as amended, an aggregate of 52,743,849 shares (the "Shares") of the Company's common stock, $.01 par value per share. The Company proposes to issue the Shares in connection with two business combinations. The first proposed business combination consists of a transaction in which STAR Telecommunications, Inc., a Delaware corporation ("STAR"), will become a wholly-owned subsidiary of the Company pursuant to the terms of an Agreement and Plan of Merger dated as of February 11, 2000, as amended June 7, 2000 and October 6, 2000 (the "STAR Merger Agreement"), among the Company, STAR and STI Merger Co., a Delaware corporation and wholly-owned subsidiary of the Company (the "STAR Merger"). The second proposed business combination consists of a transaction in which Communication TeleSystems International d/b/a WORLDxCHANGE Communications, a California corporation ("WORLDxCHANGE"), will become a wholly-owned subsidiary of the Company pursuant to the terms of an Agreement and Plan of Merger dated as of February 11, 2000, as amended May 23, 2000 (the "WORLDxCHANGE Merger Agreement"), among the Company, WORLDxCHANGE and WORLDxCHANGE Communications, Inc. (f/k/a CTI Merger Co.), a Delaware corporation and wholly-owned subsidiary of the Company (the "WORLDxCHANGE Merger"). Our Opinions (as defined below) are furnished solely with regard to the Registration Statement, may be relied upon only in connection with the Registration Statement and may not otherwise be used, quoted or referred to by or filed with any other person or entity without our prior written permission. In rendering our Opinions, we have examined such agreements, documents, instruments and records as we deemed necessary or appropriate under the circumstances, including: (i) the Certificate of Incorporation and Bylaws of the Company, in each case as amended through the date hereof; (ii) the Registration Statement; (iii) the minutes of the proceedings of the Board of Directors of the Company; (iv) the STAR Merger Agreement; and (v) the WORLDxCHANGE Merger Agreement. In making all of our examinations, we assumed (x) the legal capacity of all natural persons, (y) the approval by the shareholders of the Company of the STAR Merger Agreement and the WORLDxCHANGE Merger Agreement and the transactions 2 World Access, Inc. October 6, 2000 Page 2 contemplated thereby, and an amendment to Article IV of the Amended Certificate of Incorporation increasing the number of authorized shares of common stock from 150,000,000 shares to 290,000,000 shares, and (z) the due filing of a certificate of amendment reflecting the increase to 290,000,000 shares of authorized common stock with the office of the Delaware Secretary of State. We have also assumed the genuineness of all signatures, the authenticity and completeness of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies, and the authenticity of the originals of such documents. We further have assumed the due execution and delivery of all documents by any persons or entities other than the Company where due execution and delivery by such persons or entities is a prerequisite to the effectiveness of such documents. As to all questions of fact that are material to our Opinions, we have relied upon the factual statements set forth in a certificate of an officer of the Company and certificates of various public officials. We have not independently verified or investigated, nor do we assume any responsibility for, the factual accuracy or completeness of such factual statements. Because the Company is organized under, and the subject of each of our Opinions therefore is governed by, the General Corporation Law of the State of Delaware (the "Delaware Code"), we do not herein express any opinion concerning any matter respecting or affected by any laws other than the laws set forth in the Delaware Code that are on the date hereof in effect and that, in the exercise of reasonable professional judgment, are normally considered in transactions such as those contemplated by the issuance of the Shares. The Opinions hereinafter set forth are based upon pertinent laws and facts in existence as of the date hereof, and we expressly disclaim any obligation to advise you of changes to such pertinent laws or facts that hereafter may come to our attention. The only opinions rendered by this firm are in numbered paragraphs (1) and (2) below (our "Opinions"), and no other opinion is implied or to be inferred. Additionally, our Opinions are based upon and subject to the qualifications, limitations and exceptions set forth in this letter. Based on and subject to the foregoing, we are of the opinion that: (1) The Shares to be issued in the STAR Merger upon conversion of and in exchange for the shares of STAR capital stock issued and outstanding immediately prior to the effective time of the STAR Merger, when issued in accordance with the terms of the STAR Merger Agreement, will be validly issued, fully paid and nonassessable. (2) The Shares to be issued in the WORLDxCHANGE Merger upon conversion of and in exchange for the shares of WORLDxCHANGE capital stock issued and outstanding immediately prior to the effective time of the WORLDxCHANGE Merger, when issued in accordance with the terms of the WORLDxCHANGE Merger Agreement, will be validly issued, fully paid and nonassessable. 3 World Access, Inc. October 6, 2000 Page 3 We hereby consent to the filing of this letter as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters" set forth in the Prospectus forming a part of the Registration Statement. This letter supercedes in its entirety our opinion letter of September 8, 2000 filed as Exhibit 5.1 to the Registration Statement. Very truly yours, LONG ALDRIDGE & NORMAN LLP By: /s/ Leonard A. Silverstein -------------------------------- Leonard A. Silverstein 4 WORLD ACCESS, INC. CERTIFICATE OF OFFICER The undersigned, MARK A. GERGEL, in his capacity as Executive Vice President - Business Development of World Access, Inc., a Delaware corporation (the "Company"), does hereby certify as follows: 1. Attached hereto as Exhibit A is a true and complete copy of the Certificate of Incorporation of the Company, including all amendments and changes thereto, or restatements thereof. No amendment or other document relating to or affecting the Certificate of Incorporation of the Company has been authorized or filed in the office of the Secretary of State of the State of Delaware since June 29, 1999, and such Certificate of Incorporation is in full force and effect on the date hereof. 2. The Company has at all times had a registered agent and office in the State of Delaware. The Company has filed or caused to be filed all tax returns, annual reports and other filings which are required to be made or filed with the State of Delaware, and all of such filings have been made or effected in a timely manner. The Company has not received any notice from the Secretary of State of the State of Delaware of a determination that any grounds exist for administratively dissolving the Company or any of its subsidiaries, and neither the Company nor any of its subsidiaries has received notice of the commencement of any action to judicially dissolve the Company or any of its subsidiaries. The Company remains in good standing in the State of Delaware. 3. No proceeding for the dissolution, merger, consolidation or liquidation of the Company or for the sale of all or substantially all of its assets is pending or, to the best of my knowledge, threatened, and no such proceeding is contemplated by the Company. 4. Attached hereto as Exhibit B is a complete and correct copy of the Bylaws of the Company as in full force and effect on the date hereof, and no proposal for any amendment to such Bylaws of the Company is currently pending. 5. The minute books and records of the Company relating to all proceedings of the stockholders, the Board of Directors and the committees of the Board of Directors of the Company and its subsidiaries, as the same have been made available for review by Long Aldridge & Norman LLP, counsel for the Company, are the original minute books and records of the Company, or are true, correct and complete copies thereof, with respect to all proceedings of such stockholders, Board of Directors and committees. There have been no material changes, additions or alterations in the minute books, records and other documents that have not been disclosed to such counsel in writing. 6. The Company and its subsidiaries are duly qualified to do business in all states in which they are required to be so qualified, except where the failure to so qualify would not have a material adverse effect on the condition (financial or other), business, properties, net worth or results of operations of the Company and its subsidiaries, taken as a whole. 7. Attached hereto as Exhibit C is a complete and correct copy of the minutes of the meeting (the "Minutes") of the Board of Directors of the Company dated as of February 11, 2000 relating to the preparation and filing with the Securities and Exchange Commission of a Registration Statement on Form S-4 (the "Registration Statement") for the purpose of registering under the Securities Act of 1933, as amended, shares of the Company's common stock, $.01 par value per share, in accordance with the terms of a merger transaction with STAR Telecommunications, Inc. and a merger transaction with Communication 5 TeleSystems International d/b/a WORLDxCHANGE Communications (collectively, the "Mergers"). The Minutes were executed in compliance with all procedural or other requirements of the Company's Certificate of Incorporation and Bylaws and the Delaware General Corporation Law, as in effect on February 11, 2000. The Minutes have not been modified or rescinded since their execution and are in full force and effect as of the date hereof. The Minutes contain the only resolutions adopted by the Board of Directors of the Company or any duly authorized committee thereof relating to the Mergers and the transactions contemplated thereby. The foregoing actions of the Board of Directors are accurately reflected in the minute books of the Company. 8. Each person who, as a director or officer of the Company or attorney-in-fact of such director or officer, approved the Mergers, signed the Minutes or signed any other document delivered prior hereto or on the date hereof in connection with the transactions described in the Registration Statement was at the respective times of such approval or signing and delivery and is now duly elected or appointed, qualified and acting as such director or officer or duly appointed and acting as such attorney-in-fact, and the signatures of such persons appearing on such documents are their genuine signatures. 9. The Company is subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and during the preceding 12 months, the Company has filed all reports and other materials required to be filed pursuant to the requirements of the Exchange Act. 10. No consent or state or federal governmental approval or consent is required on the part of the Company for the Mergers, except such consents and approvals as may be required under (i) domestic and foreign antitrust laws; (ii) Blue Sky laws, federal securities laws or state securities governing the issuance of securities pursuant to the Mergers and (iii) the Federal Communications Commission. The undersigned understands and acknowledges that this certificate will be relied upon by Long Aldridge & Norman LLP in connection with its opinion to be given pursuant to the Registration Statement. IN WITNESS WHEREOF, I have hereunto signed my name as of this 6th day of October, 2000. /s/ Mark A. Gergel ----------------------------------------------- Mark A. Gergel Executive Vice President - Business Development EX-23.2 4 g60284a3ex23-2.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-4, Amendment No. 3 and related Prospectus of World Access, Inc. and subsidiaries for the registration of its common stock and to the incorporation by reference therein of our report dated March 20, 2000, with respect to the consolidated financial statements and schedules of World Access, Inc. and subsidiaries included in its Annual Report (Form 10-K/A, Amendment No. 3), for the year ended December 31, 1999, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Atlanta, Georgia October 5, 2000 EX-23.3 5 g60284a3ex23-3.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-4, as amended, of our report dated March 5, 1998, except for the discontinued operations reclassifications in the Consolidated Statements of Operations and Note C, which are as of March 14, 2000, relating to the financial statements and financial statement schedules of World Access, Inc. for the year ended December 31, 1997, which appears in World Access Inc.'s Annual Report on Form 10-K/A Amendment No. 3 for the year ended December 31, 1999. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Atlanta, Georgia October 5, 2000 EX-23.4 6 g60284a3ex23-4.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Amendment No. 3 to Registration Statement No. 333-37750 of World Access, Inc. on Form S-4 of our report dated December 7, 1999, on the consolidated financial statements of FaciliCom International, Inc. and subsidiaries, appearing in the Current Report on Form 8-K dated December 7, 1999 of World Access, Inc., and to the reference to us under the heading "Experts" in the Prospectus, which is part of such Registration Statement. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania October 5, 2000 EX-23.5 7 g60284a3ex23-5.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" in the Registration Statement on Form S-4, Amendment No. 3, and related Prospectus of World Access, Inc. and subsidiaries for the registration of its common stock and to the incorporation by reference therein of our report dated March 10, 2000, with respect to the consolidated financial statements of Long Distance International, Inc. included in the World Access, Inc. and subsidiaries Current Report on (Form 8-K, as amended) dated February 11, 2000, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP West Palm Beach, Florida October 5, 2000 EX-23.6 8 g60284a3ex23-6.txt CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report, which includes a matter of emphasis, dated April 14, 2000, included in the STAR Telecommunications, Inc.'s Form 10-K/A for the year ended December 31, 1999 and to all reference to our Firm included in this registration statement. /s/ ARTHUR ANDERSEN LLP Los Angeles, California October 4, 2000 EX-23.7 9 g60284a3ex23-7.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.7 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated December 10, 1999 (except for the fourth paragraph of Note 5 and sixth paragraph of Note 13, as to which the date is May 22, 2000), with respect to the financial statements of Communications Telesystems International d.b.a. WORLDxCHANGE Communications included in the Registration Statement (Amendment No. 3 to Form S-4 No. 333-37750) and related Prospectus of World Access, Inc. for the registration of shares of its common stock expected to be filed on or about October 6, 2000. /s/ ERNST & YOUNG LLP San Diego, California October 4, 2000 EX-23.8 10 g60284a3ex23-8.txt CONSENT OF BDO DEUTSCHE BANK SECURITIES, INC. 1 EXHIBIT 23.8 CONSENT OF INDEPENDENT AUDITORS Herrn Dr. Henning F. Klose Vorsitzender des Vorstands TelDaFax AG Postfach 22 06 35010 Marburg We hereby consent to the use in the Proxy Statement/Prospectus constituting a part of this Registration Statement on Form S-4 of our report dated August 2, 2000, relating to the consolidated financial statements of TelDaFax AG, which is contained in that Proxy Statement/Prospectus. We also consent to the reference to us under the caption "Experts" in the Proxy Statement/Prospectus. Wiesbaden, October 5, 2000 BDO Deutsche Warentreuhand Aktiengesellschaft Wirtschaftsprufungsgesellschaft /s/ H. G. Bungers /s/ M. Karlik - ------------------------- ------------------------- H. G. Bungers M. Karlik EX-23.9 11 g60284a3ex23-9.txt CONSENT OF DEUTSCHE BANK SECURITIES, INC 1 EXHIBIT 23.9 Consent of Deutsche Bank Securities, Inc. We hereby consent to the inclusion in the Registration Statement on Form S-4 of World Access, Inc. relating to the proposed mergers involving STAR Telecommunications, Inc. and World Access, Inc., and WORLDxCHANGE Communications, Inc. and World Access, Inc., of our opinion letter appearing as Annex E to the Joint Proxy Statement/Prospectus which is part of the Registration Statement on Form S-4, and to the use of our name under the captions "The Merger between World Access and STAR--Background of the STAR merger" and "The Merger between World Access and STAR--Opinion of STAR's financial advisor regarding the STAR merger" therein. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules adopted thereunder, nor do we admit that we are "experts" with respect to any part of the Registration Statement on Form S-4 within the meaning of the Securities Act of 1933, as amended, or the rules adopted thereunder. /s/ Dong-Gun Kim ------------------------------------ Deutsche Bank Securities, Inc. New York, New York October 4, 2000 EX-23.10 12 g60284a3ex23-10.txt CONSENT OF DONALDSON, LUFKIN & JENRETTE SECURITIES 1 EXHIBIT 23.10 Consent of Kaufman Bros., L.P. We hereby consent to the inclusion in the Registration Statement on Form S-4 of World Access, Inc. relating to the proposed mergers involving STAR Telecommunications, Inc. and World Access, Inc., and WORLDxCHANGE Communications, Inc. and World Access, Inc., of our opinion letter appearing as Annex G to the Joint Proxy Statement/Prospectus which is part of the Registration Statement on Form S-4, and to the use of our name under the captions "The PT-1 Asset Sale -- Background of the PT-1 asset sale", "-- Opinion of STAR's financial advisor regarding the PT-1 asset sale" and "-- Interests of certain persons in the PT-1 asset sale" therein. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules adopted thereunder, nor do we admit that we are "experts" with respect to any part of the Registration Statement on Form S-4 within the meaning of the Securities Act of 1933, as amended, or the rules adopted thereunder. /s/ Bradford Harris --------------------------------- Bradford Harris Kaufman Bros., L.P. New York, New York July 24, 2000 -----END PRIVACY-ENHANCED MESSAGE-----