-----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, VKFiIPQ8TTef6jlJErVCtv+r0klyELOy9OBnLyFKZCWuYyfWiSkAZYk21s2nhNC4 1I4a43UegxWoF7gfqKLAIQ== 0000950144-99-014242.txt : 19991223 0000950144-99-014242.hdr.sgml : 19991223 ACCESSION NUMBER: 0000950144-99-014242 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991207 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLD ACCESS INC /NEW/ CENTRAL INDEX KEY: 0001071645 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 582398004 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-29782 FILM NUMBER: 99779133 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 8-K 1 WORLD ACCESS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 22, 1999 (December 7, 1999) WORLD ACCESS, INC. (Exact name of registrant as specified in its charter) DELAWARE 0-29782 58-2398004 (State of (Commission File No.) (I.R.S. Employer incorporation) Identification No.) 945 EAST PACES FERRY ROAD, SUITE 2200 ATLANTA, GEORGIA 30326 (Address of principal executive offices, including zip code) (404) 231-2025 (Registrant's telephone number, including area code) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On December 7, 1999, World Access, Inc. completed its merger with FaciliCom International, Inc., a leading facilities-based provider of European and U.S. originated international long-distance voice, data and Internet services, pursuant to the terms of the Agreement and Plan of Merger dated as of August 17, 1999 among World Access, FaciliCom, Armstrong International Telecommunications, Inc., EPIC Interests, Inc. and BFV Associates, Inc. The combined company now has carrier grade switching and transport network facilities located strategically throughout the United States and 13 European countries to facilitate entry into deregulating retail markets worldwide. Pursuant to the terms of the Agreement and Plan of Merger, the stockholders of FaciliCom received approximately $370 million of Convertible Preferred Stock, Series C and $56 million in cash. The Preferred Stock bears no dividend and is convertible into shares of World Access common stock at a conversion rate of $20.38 per common share, subject to potential adjustment under certain circumstances. If the closing trading price of World Access common stock exceeds $20.38 per share for 60 consecutive trading days, the Preferred Stock will automatically convert into common stock. The holders of the Preferred Stock will vote on an as-converted basis with the holders of World Access common stock. As part of the merger transaction, World Access has issued $300 million of its 13.25% Senior Notes dues 2008 in exchange for all outstanding FaciliCom Senior Notes. As a result of the merger, Armstrong International Telecommunications, Inc., FaciliCom's majority stockholder, is now the largest stockholder of World Access, with approximately 20% of outstanding voting rights. Armstrong is a diversified, privately-held group of companies that own and operate cable television systems, independent telephone companies, international telecommunications companies, real estate companies, a residential and commercial security company and various other businesses. MCI WorldCom, Inc., previously World Access' largest stockholder, now owns approximately 9% of World Access' outstanding common stock. The merger will be accounted for as a purchase transaction. The consideration paid by World Access in connection with the merger was determined by arms' length negotiations between the parties. Donaldson, Lufkin & Jenrette served as advisor to World Access with respect to the transaction. The cash portion of the merger consideration was funded by a private placement of $75.0 million of World Access common stock to a group of institutional and sophisticated investors. On December 10, 1999, World Access announced that Walter J. Burmeister, Founder and President of FaciliCom, was named President of World Access and appointed to its Board of Directors. World Access also announced the appointment of three Armstrong executives, Kirby J. Campbell, Dru A. Sedwick and Bryan Cipoletti, to the World Access Board of Directors. Also, following the completion of the $75.0 million private placement, Massimo Prelz Oltramonti, Managing Director of Gilbert Global Equity Partners, and John P. Rigas, Managing Partner of Zilkha Capital Partners, were named to the World Access Board of Directors. -2- 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED: In accordance with Item 7(a) of Form 8-K, the following financial statements of FaciliCom prepared in accordance with Regulation S-X are included in this report: - Independent Auditors' Report. - Consolidated Balance Sheets at September 30, 1999 and 1998. - Consolidated Statements of Operations and Comprehensive Loss for the three years ended September 30, 1999. - Consolidated Statements of Capital Accounts for the three years ended September 30, 1999. - Consolidated Statements of Cash Flows for the three years ended September 30, 1999. - Notes to Consolidated Financial Statements. (b) PRO FORMA FINANCIAL INFORMATION. In accordance with Item 7(b)(2) of Form 8-K, any pro forma financial information required to be filed with the Commission will be filed as an amendment to this report under cover of Form 8-K/A on or before February 21, 2000. (c) EXHIBITS 2. Agreement and Plan of Merger dated as of August 17, 1999 among World Access, Inc., FaciliCom International, Inc., Armstrong International Telecommunications, Inc., EPIC Interests, Inc. and BFV Associates, Inc. (incorporated by reference to Appendix A to our Proxy Statement filed with the Commission on November 5, 1999). 23. Consent of Deloitte & Touche LLP. 99. Press Release dated December 7, 1999, announcing the completion of the merger of World Access and FaciliCom. -3- 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf of the undersigned hereunto duly authorized. WORLD ACCESS, INC. Date: December 22, 1999 By: /s/ Martin D. Kidder -------------------------------- Martin D. Kidder Vice President and Controller -4- 5 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FACILICOM INTERNATIONAL, INC.
Page Independent Auditors' Report................................................................................. F-2 Consolidated Balance Sheets at September 30, 1999 and 1998 F-3 Consolidated Statements of Operations and Comprehensive Loss for the three years ended September 30, 1999......................................................................................................... F-5 Consolidated Statements of Capital Accounts for the three years ended September 30, 1999..................... F-6 Consolidated Statements of Cash Flows for the three years ended September 30, 1999........................... F-7 Notes to Consolidated Financial Statements................................................................... F-8
F-1 6 INDEPENDENT AUDITORS' REPORT To the Board of Directors of FACILICOM INTERNATIONAL, INC.: We have audited the accompanying consolidated balance sheets of FaciliCom International, Inc. and subsidiaries (formerly FaciliCom International, LLC) (the "Company") as of September 30, 1999 and 1998, and the related consolidated statements of operations and comprehensive loss, capital accounts 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 these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of FaciliCom International, Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. As discussed in Note 3, on August 17, 1999, the Company entered into a merger agreement with World Access, Inc. and FaciliCom shareholders whereby the FaciliCom shareholders will exchange all the outstanding common stock of the Company for World Access, Inc. convertible preferred stock and cash or World Access, Inc. common stock. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania December 7, 1999 F-2 7 FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, 1999 1998 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................. $ 14,706 $ 68,129 Accounts receivable--net of allowance for doubtful accounts of $8,502 and $4,620 at September 30, 1999 and 1998, respectively ............ 104,005 59,915 Marketable securities ($31,849 and $31,394 at September 30, 1999 and 1998, respectively, restricted) .................................... 31,849 70,092 Prepaid expenses and other current assets ............................. 4,524 6,060 --------- --------- Total current assets............................................ 155,084 204,196 --------- --------- PROPERTY AND EQUIPMENT: Transmission and communications equipment ............................. 118,949 97,849 Transmission and communications equipment--leased ..................... 75,392 17,162 Furniture, fixtures and other ......................................... 21,258 11,154 --------- --------- 215,599 126,165 Less accumulated depreciation and amortization ........................ (29,409) (10,417) --------- --------- 186,190 115,748 --------- --------- OTHER ASSETS: Intangible assets, net of accumulated amortization of $3,283 and $1,673 at September 30, 1999 and 1998, respectively ....................... 4,521 5,630 Debt issue costs, net of accumulated amortization of $1,788 and $744 at September 30, 1999 and 1998, respectively .......................... 8,652 9,696 Note receivable ....................................................... 700 -- Advance to affiliate .................................................. 251 490 Marketable securities-restricted ...................................... 14,768 43,124 --------- --------- 28,892 58,940 --------- --------- TOTAL ASSETS ................................................................ $ 370,166 $ 378,884 ========= =========
See notes to consolidated financial statements. F-3 8 FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, 1999 1998 ---- ---- LIABILITIES AND CAPITAL ACCOUNTS CURRENT LIABILITIES: Accounts payable .................................................... $ 94,915 $ 63,802 Accounts payable--transmission equipment ........................... 10,944 24,668 Accounts payable--related party ..................................... 776 332 Accrued interest .................................................... 6,897 7,109 Other current obligations ........................................... 18,504 12,610 Line of credit ...................................................... 25,000 -- Capital lease obligations due within one year ....................... 11,364 3,407 Long-term debt due within one year .................................. 175 394 --------- --------- Total current liabilities ................................... 168,575 112,322 --------- --------- OTHER LIABILITIES: Capital lease obligations ........................................... 6,550 4,791 Long-term debt ...................................................... 321,871 300,346 --------- --------- Total other liabilities ..................................... 328,421 305,137 --------- --------- COMMITMENTS AND CONTINGENCIES ............................................. -- -- CAPITAL ACCOUNTS: Common stock, $.01 par value--300,000 shares authorized; 226,956 and 225,741 issued and outstanding at September 30, 1999 and 1998, respectively ..................................................... 2 2 Additional paid-in capital .......................................... 37,290 36,534 Stock-based compensation ............................................ 9,179 6,305 Accumulated other comprehensive (loss) income: Holding gain on marketable securities ............................ -- 24 Foreign currency translation adjustments ......................... (2,770) 3,450 Accumulated deficit ................................................. (170,531) (84,890) --------- --------- Total capital accounts ...................................... (126,830) (38,575) --------- --------- TOTAL LIABILITIES AND CAPITAL ACCOUNTS .................................... $ 370,166 $ 378,884 ========= =========
F-4 9 FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (IN THOUSANDS)
Years Ended September 30, ------------------------- 1999 1998 1997 ---- ---- ---- Revenues .......................................... $ 403,766 $ 184,246 $ 70,187 Cost of revenues .................................. 368,578 178,952 65,718 --------- --------- -------- Gross margin ...................................... 35,188 5,294 4,469 --------- --------- -------- Operating expenses: Selling, general and administrative ........ 52,375 32,797 13,072 Stock-based compensation expense ........... 3,630 6,017 -- Related party expense ...................... 3,270 1,550 439 Depreciation and amortization .............. 29,758 8,816 2,318 --------- --------- -------- Total operating expenses ............... 89,033 49,180 15,829 --------- --------- -------- Operating loss .................................... (53,845) (43,886) (11,360) --------- --------- -------- Other income (expense): Interest expense-related party ............. -- (195) (462) Interest expense ........................... (34,407) (22,417) (874) Interest income ............................ 4,356 8,152 -- Gain on settlement agreement ............... -- 791 -- Foreign exchange loss ...................... (1,590) (391) (1,335) --------- --------- -------- Total other expense .................... (31,641) (14,060) (2,671) --------- --------- -------- Loss before income taxes .......................... (85,486) (57,946) (14,031) Income tax benefit ................................ 10,995 11,351 -- --------- --------- -------- Net loss .......................................... (74,491) (46,595) (14,031) Other comprehensive (loss) income: Holding (loss) gain on marketable securities (24) 24 -- Foreign currency translation adjustment .... (6,220) 2,766 929 --------- --------- -------- Total comprehensive loss ............... $ (80,735) $ (43,805) $(13,102) ========= ========= ========
See notes to consolidated financial statements. F-5 10 FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL ACCOUNTS (IN THOUSANDS)
COMMON STOCK ADDITIONAL CLASS A CLASS B EXCESS CAPITAL STOCK- ------------ PAID-IN INITIAL INITIAL CONTRIBUTIONS BASED SHARES AMOUNT CAPITAL CAPITAL CAPITAL CLASS A COMPENSATION BALANCE September 30, 1996 -- $-- $-- $ 180 $ 60 $ 10,176 $ -- Net loss -- -- -- -- -- -- -- Converted loans from Owners -- -- -- -- -- 5,396 -- Guaranteed return -- -- -- -- -- -- -- Contribution to excess capital-guaranteed return -- -- -- -- -- 724 -- Foreign currency translation adjustments -- -- -- -- -- -- -- --- --- ------- ----- ---- -------- ------- BALANCE September 30, 1997 -- -- -- 180 60 16,296 -- Net loss -- -- -- -- -- -- -- Contributions -- -- -- -- -- 13,750 -- Converted loans from owners -- -- -- -- -- 6,250 -- Reorganization 226 2 36,534 (180) (60) (36,296) -- Utilization of tax benefit of the Company's operating loss by AHI -- -- -- -- -- -- -- Stock options granted -- -- -- -- -- -- 5,706 Phantom unit exchange -- -- -- -- -- -- 599 Holding gain on marketable securities -- -- -- -- -- -- -- Foreign currency translation adjustments -- -- -- -- -- -- -- BALANCE September 30, 1998 226 2 36,534 -- -- -- 6,305 Net loss -- -- -- -- -- -- -- Exercise of stock options 1 -- 756 -- -- -- (756) Utilization of tax benefit of the Company's operating loss by AHI -- -- -- -- -- -- -- Stock options granted -- -- -- -- -- -- 3,630 Holding loss on marketable securities -- -- -- -- -- -- -- Foreign currency translation adjustments -- -- -- -- -- -- -- --- --- ------- ----- ---- -------- ------- BALANCE September 30, 1999 227 $ 2 $37,290 $ -- $ -- $ -- $ 9,179 === === ======= ===== ==== ======== ======= HOLDING GAIN FOREIGN (LOSS) ON CURRENCY TOTAL MARKETABLE TRANSLATION ACCUMULATED CAPITAL SECURITIES ADJUSTMENTS DEFICIT ACCOUNTS BALANCE September 30, 1996 $ -- $ (245) $ (11,886) $ (1,715) Net loss -- -- (14,031) (14,031) Converted loans from owners -- -- -- 5,396 Guaranteed return -- -- (724) (724) Contribution to excess capital-guaranteed return -- -- -- 724 Foreign currency translation adjustments -- 929 -- 929 ---- ------- --------- --------- BALANCE September 30, 1997 -- 684 (26,641) (9,421) Net loss -- -- (46,595) (46,595) Contributions -- -- -- 13,750 Converted loans from owners -- -- -- 6,250 Reorganization -- -- -- -- Utilization of tax benefit of the Company's operating loss by AHI -- -- (11,654) (11,654) Stock options granted -- -- -- 5,706 Phantom unit exchange -- -- -- 599 Holding gain on marketable securities 24 -- -- 24 Foreign currency translation adjustments -- 2,766 -- 2,766 BALANCE September 30, 1998 24 3,450 (84,890) (38,575) Net loss -- -- (74,491) (74,491) Exercise of stock options -- -- -- -- Utilization of tax benefit of the Company's operating loss by AHI -- -- (11,150) (11,150) Stock options granted -- -- -- 3,630 Holding loss on marketable securities (24) -- -- (24) Foreign currency translation adjustments -- (6,220) -- (6,220) ---- ------- --------- --------- BALANCE September 30, 1999 $ -- $(2,770) $(170,531) $(126,830) ==== ======= ========= =========
See notes to consolidated financial statements. F-6 11 FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Years Ended September 30, ------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net loss................................................................... $(74,491) $ (46,595) $(14,031) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................................... 29,758 8,072 2,448 Non-cash restructuring costs........................................... 634 -- -- Non-cash stock-based compensation...................................... 3,630 6,017 -- Non-cash income tax benefit............................................ (11,150) (11,654) -- Amortization of bond discount.......................................... (2,353) 237 -- Changes in operating assets and liabilities: Accounts receivable................................................ (44,790) (40,107) (14,260) Prepaid expenses and other current assets.......................... 2,580 (3,048) (810) Accounts payable and other current liabilities..................... 39,282 51,510 17,903 Accounts payable--related party.................................... 444 (57) 389 Advance to affiliate............................................... (254) (490) -- -------- --------- -------- Net cash used in operating activities...................................... (56,710) (36,115) (8,361) -------- --------- -------- Cash flows from investing activities: Purchase of investments in subsidiaries.................................... -- (4,652) -- Purchase of investments in available-for-sale securities................... (7,407) (77,820) -- Maturities of available-for-sale securities................................ 13,378 30,582 -- Sales of available-for-sale securities..................................... 32,798 7,046 -- Purchase of investments in held-to-maturity securities..................... (1,298) (87,683) -- Maturities of held-to-maturity securities.................................. 31,481 14,446 -- Purchases of property and equipment........................................ (75,991) (66,487) (1,897) Other...................................................................... (456) (124) 233 -------- --------- -------- Net cash used in investing activities...................................... (7,495) (184,692) (1,664) -------- --------- -------- Cash flows from financing activities: Advances from owners....................................................... -- -- 9,726 Excess capital contributions............................................... -- 13,750 -- Proceeds from debt issuance................................................ -- 300,000 -- Proceeds from line of credit............................................... 25,000 -- -- Payments of long-term debt and capital leases.............................. (15,373) (18,156) (1,812) Payment of debt issuance costs............................................. -- (10,440) -- -------- --------- -------- Net cash provided by financing activities.................................. 9,627 285,154 7,914 -------- --------- -------- Effect of exchange rate changes on cash.......................................... 1,155 2,766 929 -------- --------- -------- (Decrease) increase in cash and cash equivalents................................. (53,423) 67,113 (1,182) Cash and cash equivalents, beginning of period................................... 68,129 1,016 2,198 -------- --------- -------- Cash and cash equivalents, end of period......................................... $ 14,706 $ 68,129 $ 1,016 ======== ========= ======== Supplemental cash flow information: Interest paid.............................................................. $ 34,619 $ 15,834 $ 747 ======== ========= ========
- -------- NONCASH TRANSACTIONS: (a) For the fiscal year ended September 30, 1998, the majority owner converted $6,250 of loans into capital and a $162 receivable was forgiven as part of the purchase of minority interest which reduced prepaid expenses and other current assets and increased goodwill. (b) FCI received $480 in FCI-Sweden convertible debentures during the year ended September 30, 1997 to satisfy an advance to affiliate, which reduced advance to affiliate and advances from owners. (c) During the year ended September 30, 1997, the majority owner converted $5,396 of loans and accrued interest into capital. (d) FCI received property and equipment under capital leases and financing agreements, which increased property and equipment and long-term obligations $24,678, 10,755, and $10,385 in the fiscal years ended September 30, 1999, 1998 and 1997, respectively. In addition, for the fiscal year ended September 30, 1998, FCI received equipment which decreased property and equipment and accounts payable transmission equipment by $24,668 (of which $13,724 was not yet placed in service as of September 30, 1998). (e) FCI recognized a tax benefit of $11,150 and $11,654 for the fiscal years ended September 30, 1999 and 1998, respectively. In accordance with the tax sharing agreement with AHI entered into on December 22, 1997, FCI recorded a dividend to AHI for the amount of the benefit to be realized by AHI (See Note 5 to the consolidated financial statements). See notes to consolidated financial statements. F-7 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL Organization--FaciliCom International, LLC ("FCI, LLC") is a Delaware limited liability company that was formed on May 5, 1995 to engage in various international telecommunications businesses. On December 22, 1997, the owners of FCI, LLC entered into an Investment and Shareholders Agreement ("Agreement"). Under the Agreement, the owners of FCI, LLC transferred all of their respective units in FCI, LLC and FCI (GP), LLC, a Delaware limited liability company, to FaciliCom International, Inc. ("FCI"), a Delaware corporation, and additionally Armstrong International Telecommunications, Inc. ("AIT") contributed $20,000,000 (in cash and assignment of indebtedness) to FCI, all in exchange for 225,741 shares of FCI's common stock. FCI was incorporated on November 20, 1997, and has 300,000 authorized shares of common stock. Since the reorganization was a combination of entities under common control, it was accounted for by combining the historical accounts of FCI, LLC, FCI (GP), LLC and FCI in a manner similar to a pooling of interests. FCI is authorized by the Federal Communications Commission (the "FCC") to provide global facilities-based services as well as switched international services through resale of the services and facilities of other international carriers. In addition, FCI has worldwide authorization for private line resale of noninterconnected private line services and authorization to resell interconnected private lines for switched services to Canada, the United Kingdom, Sweden, and New Zealand. FCI, LLC was and FCI is a majority-owned subsidiary of AIT, which is a wholly owned subsidiary of Armstrong Holdings, Inc. ("Armstrong" or "AHI"). On July 21, 1995, FCI acquired 66.5% of the outstanding capital stock of both Nordiska Tele8 AB ("Tele8" or "FCI-Sweden") and FGC, Inc. ("FGC"), entities related through common ownership. Subsequently, FCI acquired up to 99% of FCI-Sweden and sold all of its interest in FGC. The additional interest in FCI-Sweden was the result of three separate transactions (see Note 8). On March 14, 1997, $1,600,000 of FCI-Sweden convertible debentures were converted into 7,400 shares of FCI-Sweden common stock, on May 15, 1997, FCI paid $3,600,000 for 14,400 shares of FCI-Sweden common stock and on October 23, 1997, FCI paid $750,000 for substantially all of the minority interest outstanding and recorded $750,000 of goodwill. Also, on October 23, 1997, FCI sold all of its interest in FGC for $100 and recorded a loss of approximately $79,000 on the transaction. FCI-Sweden is a corporation organized under the laws of Sweden to provide national and international telecommunications services. These acquisitions were accounted for as purchase transactions with the purchase price being allocated to the assets and liabilities acquired based on their fair values as of the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and is being amortized over five years. The following summarizes the allocation of the original 1995 purchase price to the major categories of assets acquired and liabilities assumed (in thousands): Current assets ........................................ $ 343 Property and equipment ................................ 1,760 Excess of cost over net assets of businesses acquired . 1,715 Other intangibles ..................................... 32 ------ 3,850 Less liabilities assumed .............................. 3,010 ------ Cash paid ............................................. $ 840 ======
F-8 13 On April 27, 1998, FCI entered into an agreement to purchase 100% of the issued and outstanding capital stock of Oy Teleykkanen AB ("Tele 1" or "FCI-Finland"), a corporation formed under the laws of Finland, for $4.0 million in cash. FCI Finland is a Finnish provider of local and long distance international telecommunication services and has a carrier agreement to exchange customer traffic with Telecom Finland, the dominant carrier in Finland. This acquisition was accounted for using the purchase method of accounting. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill and is being amortized over five years. The results of operations for Tele 1 were included in consolidated results of operations since the date of acquisition. The following summarizes the allocation of the purchase price to the major categories of assets acquired and liabilities assumed (in thousands): Current assets ........................................ $1,017 Property and equipment ................................ 976 Excess of cost over net assets of businesses acquired . 3,911 Other assets .......................................... 126 ------ 6,030 Less liabilities assumed .............................. 1,966 ------ Cash paid ............................................. $4,064 ======
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Presentation--The accompanying consolidated financial statements include the accounts of FCI and its majority owned and wholly owned subsidiaries (together, "FaciliCom" or the "Company"). All intercompany transactions and balances have been eliminated in consolidation. Because losses applicable to the minority interest exceeded the minority interest in the equity capital and the minority stockholder was not obligated to provide additional funding with respect to the losses incurred, such losses were recorded by the Company prior to the purchase of the minority interest. b. Cash and Cash Equivalents--FaciliCom considers its investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost plus accrued interest and are highly liquid debt instruments of the U.S. government and commercial corporations and money market funds. c. Property and Equipment--Property and equipment is stated at cost. Depreciation is provided for financial reporting purposes using the straight-line method. Depreciation expense includes the amortization of capital leases. The estimated useful lives of property and equipment are as follows: Transmission and communications equipment .......... 5 to 25 years Transmission and communications equipment--leased .. 5 to 25 years Furniture, fixtures and other ...................... 5 to 7 years FaciliCom capitalizes the costs of software and software upgrades purchased for use in its transmission and communications equipment. The Company expenses the costs of software purchased for internal use. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. F-9 14 Depreciation expense for the fiscal years ended September 30, 1999, 1998 and 1997 was $28,099,000, $7,383,000, and $2,053,000, respectively. FaciliCom periodically evaluates its long-lived assets to confirm that the carrying values have not been impaired using the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In the 4th quarter of the year ended September 30, 1999, the Company replaced certain switching equipment with newer equipment. As such, the Company recorded a write-down of $3.6 million for the remaining net book value of the replaced equipment. d. Intangible Assets--Intangible assets, consisting primarily of goodwill, are amortized using the straight-line method over 5 years. FaciliCom periodically evaluates its intangible assets to confirm that the carrying values have not been impaired using the provisions of SFAS No. 121. e. Income Taxes--FCI, LLC is a limited liability company and is not subject to income tax, while FaciliCom International, Inc., incorporated on November 20, 1997 as a Delaware corporation is subject to income taxes. FaciliCom accounts for income taxes under the liability method in accordance with the provisions set forth in SFAS No. 109, "Accounting for Income Taxes," whereby deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing realization of deferred tax assets, the Company uses judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. Based on the weight of evidence, both negative and positive, including the lack of historical earnings, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is established. f. Initial and Excess Capital Contributions--Excess capital contributions were the amounts of capital an owner had contributed in excess of the owner's initial capital commitment. The owners were credited with a guaranteed return through September 30, 1997 for the use of their capital, and profits and losses were allocated, in accordance with the provisions in the FCI LLC Limited Liability Company Agreement ("LLC Agreement"). The guaranteed return was calculated as simple interest at a rate per annum equal to the lowest rate of interest available to AIT or any of its affiliates from time-to-time under any of their respective existing credit facilities. Upon liquidation of FCI LLC, allocations of annual net profits are allocated first to the Class A and Class B owners to the extent required to adjust capital accounts, then to the extent of cumulative net losses previously allocated in accordance with certain capital contribution priorities set forth in the LLC Agreement and thereafter 75% to Class A and 25% to Class B owners. Allocations of annual net losses are allocated to the extent of cumulative net profits previously allocated and then to the extent of owner's capital contributions and thereafter to the Class A owner. Net losses allocated to the Class B owner may not cause such owner's account to result in a deficit. The Company may make distributions after first paying any F-10 15 unpaid guaranteed return and then in accordance with the owner's respective capital contributions and thereafter 75% to the Class A owner and 25% to the Class B owner. Upon dissolution, the LLC Agreement provides for liquidation of FCI LLC's assets and any distribution to owners will be in accordance with the balance of their respective capital accounts. Following distribution of assets, owners having a capital account with a deficit balance shall be required to restore the account. The LLC Agreement provides that FCI LLC shall terminate on December 31, 2025. In consideration of all capital contributions made through September 30, 1997, the Class A and Class B owners owned 15,390,000 and 3,610,000 membership interests in FCI LLC, respectively, representing 81% and 19%, respectively, of such interests. g. Foreign Currency Translation--For non-U.S. subsidiaries, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Translation adjustments are reported as a separate component of comprehensive loss. Exchange losses and gains resulting from foreign currency transactions are included in the results of operations based upon the provisions of SFAS No. 52, "Foreign Currency Translation." h. 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. i. Revenue Recognition--FaciliCom records revenues from the sale of telecommunications services at the time of customer usage based upon minutes of traffic processed at contractual fees. The Company has entered into, and continues to enter into, operating agreements with telecommunications carriers in several foreign countries under which international long distance traffic is both delivered and received. Under these agreements, the foreign carriers are contractually obligated to adhere to the policy of the FCC, whereby traffic from the foreign country is routed to U.S. based international carriers, such as the Company, in the same proportion as traffic carried into the country. Mutually exchanged traffic between the Company and foreign carriers is settled through a formal settlement policy at an agreed upon rate which allows for the offsetting of receivables and payables with the same carrier (settlement on a net basis). Although the Company can reasonably estimate the revenue it will receive under the FCC's proportional share policy, there is no guarantee that the Company will receive return traffic and the Company is unable to determine what impact changes in future settlement rates will have on net payments made and revenue received. Accordingly, the Company does not record this revenue until the service is provided. j. Cost of Revenue--Cost of revenue includes network costs which consist of access, transport and termination costs. Such costs are recognized when incurred in connection with the provision of telecommunication services, including costs incurred under operating agreements. k. Stock-Based Compensation--FaciliCom accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation cost is measured as the excess, if any, of the market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. F-11 16 l. Financial Instruments--FaciliCom has financial instruments, which include cash and cash equivalents, marketable securities and long-term debt obligations. The carrying values of these instruments in the balance sheets, except for certain marketable securities and 10-1/2% Senior Notes due 2008 (the "Notes") (see Note 4), approximated their fair market value. See Note 16 for disclosure of fair market value for marketable securities. The estimated fair value of the Company's Notes at September 30, 1999 and 1998 was $255.0 million and $261.0 million, respectively, and was estimated using quoted market prices. The fair values of the other instruments were based upon quoted market prices of the same or similar instruments or on the rate available to FaciliCom for instruments of similar maturities. m. Fiber Optic Cable Arrangements--FaciliCom obtains capacity on certain fiber optic cables under three types of arrangements. The Indefeasible Right of Use ("IRU") basis provides the Company the right to use a fiber optic cable, with most of the rights and duties of ownership, but without the right to control or manage the facility and without any right to salvage or duty to dispose of the cable at the end of its useful life. Because of this lack of control and an IRU term approximates the estimated economic life of the asset, FaciliCom accounts for such leases as leased transmission and communications equipment and as capital leases. The Minimum Assignable Ownership Units ("MAOU") basis provides the Company an ownership interest in the fiber optic cable with certain rights to control and to manage the facility. Because of the ownership features, the Company records these fiber optic cables as owned transmission and communications equipment and as long-term debt. The Carrier Lease Agreement basis involves a shorter term agreement which provides the Company the right to use capacity on a cable but without any rights and duties of ownership. The Company accounts for such leases as operating leases. n. Impact of Recently Issued Accounting Standards--In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which (i) establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements, and (ii) requires an enterprise to report a total for comprehensive income in condensed financial statements of interim periods. FaciliCom adopted SFAS No. 130 in fiscal 1999 and has elected to display the components of Comprehensive Income (Loss) within the Consolidated Statements of Operations and Comprehensive Loss. Prior period amounts have been appropriately disclosed. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measuring those instruments at fair value, with the potential effect on operations dependent upon certain conditions being met. The statement (as amended by SFAS No. 137) is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management has not determined the impact that implementing SFAS No. 133 will have on FaciliCom's financial position or results of operations. o. Reclassifications--Certain amounts in the September 30, 1998 and 1997 consolidated financial statements have been reclassified to conform with the presentation of the September 30, 1999 consolidated financial statements. F-12 17 3. MERGER AGREEMENT On August 17, 1999, the Company entered into a merger agreement with World Access, Inc ("World Access") providing that the Company will merge with and into World Access. Upon consummation of the merger, the separate existence of the Company will cease and World Access will continue as the surviving corporation. Pursuant to the terms of the merger agreement, the shareholders of FaciliCom will receive approximately $436 million consideration, in the form of Convertible Preferred Stock, Series C and approximately $56.0 million of cash or World Access common stock. The Series C Preferred Stock bears no dividend and is convertible into shares of World Access common stock at a conversion rate of $20.38 per common share, subject to potential adjustment under certain circumstances. If the closing trading price of World Access common stock exceeds $20.38 per share for 60 consecutive trading days, the Series C Preferred Stock will automatically convert into World Access common stock. Adoption of certain proposed amendments to the FaciliCom Indenture (see Note 4) is required to consummate the merger. Accordingly, under the terms of the merger agreement, the consummation of the merger was conditioned upon the adoption of the proposed amendments. In addition, the closing of the merger was subject to the approval of World Access stockholders and certain regulatory agencies. Certain stockholders of World Access had entered into a voting agreement whereby they have committed to vote in favor of a merger. The merger closed on December 7, 1999. 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Revolving Credit Facility - On May 24, 1999, FaciliCom entered into a $35.0 million revolving credit facility (the "Credit Facility"), which is scheduled to terminate on May 23, 2000. The Credit Facility contains interest rate options based upon the London Interbank Offered Rate ("LIBOR") or Prime, plus applicable margin percentages. The Credit Facility requires the Company to pay a .375% per annum commitment fee on the unused balance of the line. At September 30, 1999, availability under the Credit Facility was $10.0 million. The Credit Facility contains certain restrictive covenants and is guaranteed by Armstrong. Long-Term Debt - On January 28, 1998, FCI issued $300 million aggregate principal amount of Notes bearing interest at 10-1/2% due 2008 pursuant to an Indenture (the "Offering"). The Notes are unsecured obligations of FCI and interest on the Notes is payable semiannually in arrears on January 15 and July 15 of each year, commencing on July 15, 1998. The Notes are redeemable at the option of FCI, in whole or in part at any time on or after January 15, 2003, at specified redemption prices plus accrued and unpaid interest. In addition, at any time prior to January 15, 2001, FCI, may redeem from time to time up to 35% of the originally issued aggregate principal amount of the Notes at the specified redemption prices with the net cash proceeds (as defined in the Indenture) of one or more public equity offerings. In the event of a change in control of ownership of FCI, Inc., each holder of the Notes has the right to require FCI, to purchase all or any of such holder's Notes at a purchase price in cash equal to 101% of the aggregate principal amount. FCI used approximately $86.5 million of the proceeds from the Offering to purchase investments consisting of U.S. Government Obligations, which are pledged as security and restricted for the first six scheduled interest payments on the Notes (see Note 16). F-13 18 The Notes require maintenance of certain financial and nonfinancial covenants, including limitations on additional indebtedness, restricted payments including dividends, transactions with affiliates, liens and asset sales. During 1999, the Company entered into Promissory Note ("Note") and Security Agreements with Nortel Networks, Inc. in order to finance the purchase of certain telecommunications equipment. The Promissory Note is collateralized by the related telecommunications equipment. The Promissory Note was due and payable with interest at approximately 9.2% on November 15, 1999. On November 15, 1999, the Company entered into a Credit Agreement with Nortel Networks, Inc. ("Equipment Credit Facility") to refinance the Promissory Note and to provide a $40.0 million revolving loan facility to finance equipment purchases from Nortel Networks, Inc. The Equipment Credit Facility is scheduled to terminate on December 29, 2000 and contains interest rate options based on Prime or Eurodollar rates. Loans under the Equipment Credit Facility are secured by the related equipment. The Equipment Credit Facility contains certain restrictive covenants. The amount borrowed under the Promissory Note at September 30, 1999 has been classified as long-term because of the refinancing. During 1997, FCI entered into an Equipment Loan and Security Agreement with NTFC Capital Corporation ("NTFC") to finance up to $5,000,000 for the purchase of transmission and communications equipment. Interest was payable quarterly and was calculated based upon LIBOR plus 4%. Quarterly principal payments were to commence on June 30, 1999. The loan was collateralized by the related equipment purchased under such agreement. The Company used a portion of the proceeds from the offering of Notes to pay off the indebtedness under the Equipment Loan and Security Agreement and the agreement was terminated. During 1995, FCI entered into an equipment financing agreement with Ericsson I.F.S. to purchase certain equipment. The original agreement was amended and restated on December 30, 1996, to increase the borrowing limit to $7,000,000 and certain terms were further revised on June 12, 1997 and November 21, 1997. Interest was calculated based upon LIBOR plus 4%. Quarterly principal payments were to commence on June 30, 1998. The loan was collateralized by the related equipment purchased under the financing agreement. The Company used a portion of the proceeds from the offering of Notes to pay off the indebtedness under the equipment financing agreement and the agreement was terminated. Long-term debt at September 30, 1999 and 1998 consists of the following (dollars in thousands):
INTEREST RATE 1999 1998 ------------- ---- ---- Indenture notes, due 2008.............................. 10.5% $ 300,000 $ 300,000 Nortel Networks, due 2001.............................. 9.2% 21,717 -- Revolving line of credit, due 2000..................... LIBOR+1.75% 25,000 -- Cable capacity debt, due 2001.......................... LIBOR+4.5% 329 740 --------- --------- Sub-total........................................... 347,046 300,740 Less: Current portion of long-term debt................ (175) (394) Less: Revolving line of credit......................... (25,000) -- --------- --------- $ 321,871 $ 300,346 ========= =========
The LIBOR rate was 5.4% and 5.8% on September 30, 1999 and 1998, respectively. F-14 19 Capital Leases--The Company leases certain fiber optic cables under agreements permitting the use of the cables over periods up to 25 years with payment requirements over periods not exceeding five years. Payments are made quarterly and interest is calculated at LIBOR plus 4% to 4.5%. In May 1998, the Company entered into a Memorandum of Understanding ("MOU") with Qwest. The MOU incorporates agreements to provide Qwest with international direct dial termination service to various destinations and provides the Company an IRU for domestic and international fiber optic capacity. The IRU is for 25 years, for which the Company has agreed to pay $24 million. Delivery of the capacity segments occurred during the year ended September 30, 1999. In addition, during the three-year period, Qwest has the right of first refusal pursuant to additional capacity purchases made by the Company. Future minimum payments on long-term debt and capital lease obligations at September 30, 1999 are as follows (in thousands):
LONG- CAPITAL TERM LEASES DEBT 2000 ............................................................................................ $ 25,175 $ 13,106 2001 ............................................................................................ 21,871 4,462 2002 ............................................................................................ -- 544 2003 ............................................................................................ -- 365 2004 ............................................................................................ -- 329 Thereafter ...................................................................................... 300,000 1,342 -------- -------- Total future minimum payments ................................................................... $347,046 20,148 ======== Less: Amount representing interest (using September 30, 1999 LIBOR rate) ........................ (2,234) -------- $ 17,914 ========
5. INCOME TAXES At September 30, 1999 and 1998, FaciliCom has approximately $41.0 million and $6.0 million of cumulative net operating losses ("NOLs"), respectively, to offset future U.S. federal taxable income. Similarly, at September 30, 1999 and 1998, FaciliCom has approximately $73.0 million and $25.3 million of NOLs, respectively, to offset future foreign taxable income for those subsidiaries taxed in foreign jurisdictions. The tax asset recorded for this temporary difference reflects the fact that certain foreign operations are treated as branches for U.S. tax purposes and are subject to tax in both the U.S. and the foreign jurisdictions. The U.S. NOLs expire in up to twenty years, while the foreign NOLs expire at various times ranging from five to ten years with some jurisdictions providing for an indefinite carryforward period. A valuation allowance was also established for the net deferred tax assets related to the NOLs at September 30, 1999 and 1998. Deferred tax assets of approximately $3,130,000 at September 30, 1997 were related to the NOLs of foreign subsidiaries taxed in foreign jurisdictions totaling approximately $11,100,000. A valuation allowance was established for the amount of deferred tax assets at September 30, 1997. On December 22, 1997, FaciliCom adopted a tax sharing agreement with AHI, whereby the Company is obligated to file a consolidated federal income tax return with AHI and subsidiaries. Under this agreement, FCI is obligated to pay, with certain exceptions, its share of the consolidated tax liability to AHI and FCI will not be paid by AHI for tax benefits realized in the consolidated tax return. At December 31, 1997, FCI had approximately $1,018,000 of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax F-15 20 purposes that amounted to approximately $393,000 and was recorded as a deferred tax liability and deferred income tax expense for the change in tax status for the year ended September 30, 1998. The components of loss before income taxes for the periods ended September 30, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997 ------- ------- ------- Domestic .............................. $37,810 $43,432 $ 6,978 Foreign ............................... 47,676 14,514 7,053 ------- ------- ------- Total ............................. $85,486 $57,946 $14,031 ======= ======= =======
The components of the income tax provision for the years ended September 30, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997 ------- ------- ------- Current taxes .................... $10,995 $11,351 $ -- Deferred taxes ................... 19,301 7,916 2,010 Valuation allowance .............. (19,301) (7,916) (2,010) ------- ------- ------- $10,995 $11,351 $ -- ======= ======= =======
A reconciliation of the total tax benefit with the amount computed by applying the statutory federal income tax rate to the loss before taxes for the year ended September 30, 1999 and 1998 is as follows (in thousands):
1999 1998 -------- -------- Benefit applying statutory rate .. $ 29,920 $ 19,700 State taxes ...................... 1,671 226 Valuation allowance .............. (19,301) (7,916) Other ............................ (1,295) (659) -------- -------- Income tax benefit ............... $ 10,995 $ 11,351 ======== ========
There are no pro forma income tax amounts presented giving effect to the change in tax status for the statements of operations presented as the Company would have been a stand alone taxpaying entity and a valuation allowance would have been established for any net deferred tax benefit related to net operating losses. The components of deferred tax assets and liabilities at September 30, 1999 and 1998 are as follows (in thousands):
1999 1998 -------- -------- Net operating loss carryforward (foreign and domestic) $ 24,360 $ 6,076 Property and equipment ............................... (858) 600 Stock-based compensation ............................. 3,530 2,522 Allowance for doubtful accounts ...................... 3,315 1,848 Valuation allowance .................................. (30,347) (11,046) -------- -------- $ -- $ -- ======== ========
F-16 21 6. OPERATING LEASES The Company leases office facilities and certain fiber optic cables and switching facilities under noncancelable operating leases. Rental expense for the fiscal years ended September 30, 1999, 1998 and 1997 was $30.9 million, $21.9 million and $4.7 million, respectively, of which $26.2 million, $19.2 million and $3.8 million, respectively, relates to fiber optic cable leases, which are generally for less than one year. Future minimum lease payments under noncancelable operating leases as of September 30, 1999 are as follows (in thousands): 2000 ................................... $ 4,057 2001 ................................... 3,515 2002 ................................... 3,185 2003 ................................... 2,915 2004 ................................... 2,501 Thereafter ............................. 8,695 -------- Total .................................. 24,868 Less: Subleases ........................ (788) -------- $ 24,080 ========
7. BORROWINGS FROM OWNERS At September 30, 1996, the Company had outstanding interest-bearing working capital advances from Armstrong totaling $1,549,000. On November 1, 1996, FCI entered into a Convertible Line of Credit Agreement with Armstrong. The outstanding advances were converted into borrowings under the line of credit agreement. Under such agreement, FCI had a $15,000,000 credit facility of which $5,000,000 was available in cash and $10,000,000 was available for letter of credit needs. Armstrong had the right, at any time on or before October 31, 1999, to convert the entire principal amount of the cash loan into a maximum of 3.1% of additional ownership and convert the letter of credit balance outstanding into a maximum additional 4.44% ownership. In 1997, Armstrong converted the outstanding balance of $5,396,000 under the cash portion of the agreement into an ownership interest. At September 30, 1997, FCI had $10,000,000 for letter of credit needs of which it had outstanding letters of credit of $6,136,000 under the Convertible Line of Credit Agreement. In 1997, FCI entered into a Bridge Loan Agreement with Armstrong in which FCI could borrow up to $10,000,000. Interest was calculated based upon prime plus 1%. The prime rate was 8.5% at September 30, 1997. The loan was due on October 1, 1998. The outstanding balance at September 30, 1997 was $6,250,000. During the year ended September 30, 1998, Armstrong converted the outstanding balance of $6,250,000 into an ownership interest (see Note 1). Additionally, as of September 30, 1996, FCI-Sweden had outstanding convertible debentures in the amount of $480,000 to a minority stockholder of both FCI-Sweden and FGC (the "Minority Stockholder"). Such convertible debentures accrued interest at LIBOR plus 4%. Interest was payable annually on September 30, with the full principal amount due on September 30, 2003. In December 1996, these convertible debentures were assigned to FCI (see Note 8). F-17 22 FCI's total interest expense under the above borrowings was $195,000 and $462,000 for the years ended September 30, 1998 and 1997, respectively. 8. OTHER RELATED PARTY TRANSACTIONS As of September 30, 1996, FCI had an outstanding advance to the Minority Stockholder of $499,000. As of September 30, 1996, FCI and the Minority Stockholder held $1,120,000 and $480,000, respectively, of FCI-Sweden debentures totaling $1,600,000 which earned interest at LIBOR plus 4%. The holder of the debentures had the right to convert the outstanding principal balance into FCI-Sweden common stock at a predetermined price ranging from $200 to $250 per share. On December 23, 1996, the Minority Stockholder assigned its right, title and interest in the FCI-Sweden convertible debentures to FCI to satisfy the outstanding advance due to FCI from the Minority Stockholder. On March 14, 1997, FCI converted all of its FCI-Sweden convertible debentures into 7,400 shares of FCI-Sweden common stock. On May 15, 1997, FCI-Sweden issued 14,400 additional shares of common stock to FCI for consideration of $3,600,000. In March 1996, Tele8 Kontakt, a subsidiary of FCI at that time, was awarded a license agreement from the Swedish government for certain rights relating to communications systems and technology. During October 1996, FCI distributed its rights under such license agreement to its owners. FCI has contracted with AHI, since its inception, for the performance of certain services by AHI for FCI, including but not limited to financial accounting, professional and billing services. In May 1998, an agreement was entered into for such services. The agreement expires on September 30, 2002. Expenses related to such contracted services of approximately $3.3 million, $1.6 million and $439,000 are included in the statements of operations for the years ended September 30, 1999, 1998 and 1997, respectively. The terms of the agreements include professional services billed at hourly rates, check processing at an amount per check and data center services based on usage and disk storage space. The Company believes that the terms of the agreements are competitive with similar services offered in the industry. As of September 30, 1999 and 1998 an affiliate of AHI had issued letters of credits on behalf of the Company totaling $6.9 million and $9.4 million, respectively. 9. BENEFIT PLANS Foreign Operations--Various foreign subsidiaries contribute to their respective government pension funds, social insurance, medical insurance and unemployment charters for their employees. The total contribution was $2.3 million, $1.3 million and $781,000 for the years ended September 30, 1999, 1998 and 1997, respectively. 401(k)--Employees of FCI may participate in a salary reduction 401(k) plan administered by AHI. All contributions represent employee salary reductions. 10. CONCENTRATION OF RISK Financial instruments that potentially subject the Company to concentration of credit risk are accounts receivable. Four of the Company's customers accounted for approximately 13.0% of gross accounts F-18 23 receivable as of September 30, 1998. The Company performs on-going credit evaluations of its customers and in certain circumstances requires collateral to support customer receivables. However, many of the Company's customers, including these four, are suppliers to whom the Company has accounts payable that mitigate this risk. In addition, the Company is dependent upon certain suppliers for the provision of telecommunication services to its customers. The Company has not experienced, and does not expect, any disruption of such services. Approximately 24% of FaciliCom's revenues for the year ended September 30, 1997 were derived from two customers each with percentages in excess of 10%. No one customer represented 10% or more of the Company's revenues for the years ended September 30, 1999 and 1998. 11. COMMITMENTS The Company has entered into an agreement that provides the Company with an IRU for international fiber optic capacity in the Pacific Rim. Delivery of the capacity under the agreement is not expected before January 1, 2000. The IRU is for 15 years for which the Company has agreed to pay approximately $22.5 million, of which approximately $2.5 million has already been paid as a deposit and an additional $20.0 million is expected to be paid in the fiscal year ended September 30, 2000. 12. CONTINGENCIES AND LITIGATION The Company is involved in various claims and possible actions arising in the normal course of its business. Although the ultimate outcome of these claims cannot be ascertained at this time, it is the opinion of the Company's management, based on its knowledge of the facts and advice of counsel, that the resolution of such claims and actions will not have a material adverse effect on the Company's financial condition or results of operations. In August 1997, FaciliCom entered into a settlement agreement relating to litigation arising from a certain 1996 FCI-Sweden international telephone services agreement and related billing, collection and factoring agreements with third parties. For the fiscal year ended September 30, 1996, selling, general and administrative expenses included approximately $708,000 of losses relating to the settlement of which $500,000 represents a reserve on advances, paid at the time of the settlement agreement, on behalf of the telephone service company. Under the settlement agreement all of the above amounts were paid to fully satisfy any amounts which may be owing from the Company and the telephone services company to a company under a factoring agreement. At the date of settlement, the management of the Company believed the amounts advanced to the telephone services company were uncollectible. The settlement agreement also provided for the factoring company to assign to the Company any and all receivable claims the factoring company may have against the billing and collection agent ("Agent"). The Company filed a complaint against the Agent for breach of contract and related claims pursuant to an agreement between the Company and the Agent. The Agent placed in escrow the sum of $1,431,324. On May 8, 1998, the balance of the escrow account was distributed among various entities. The Company received $791,000. F-19 24 13. STOCK-BASED COMPENSATION Through December 22, 1997, certain employees and directors were eligible to participate in a Performance Unit Plan established by the Company, under which a maximum of 1,254,000 units could have been granted. A unit is a right to receive a cash payment equal to the excess of the fair market value of a unit on its maturity date over the initial value of a unit. Fair market value of a unit was determined by the management committee of the Company. At September 30, 1997 and 1996, 484,500 and 152,000 units had been granted, respectively. Participants vested in their units over a period not to exceed two years and were entitled to receive cash compensation equivalent to the value of the units at the time a participant retires provided the participant had 10 years of continuous service or, if earlier, upon the occurrence of certain events, including a change in control of the Company. The Company accrued to expense over the participant's service vesting period (10 years) amounts based on the value of the unit at year end. Amounts charged to expense for this plan for the year ended September 30, 1997 was $288,000. No amounts were expensed in prior years. On December 22, 1997, the Board of Directors adopted the 1997 Phantom Stock Rights Plan (the "Phantom Stock Plan"). The Phantom Stock Plan provided for the granting of phantom stock rights ("Phantom Shares") to certain directors, officers and key employees of the Company and its subsidiaries. The total number of Phantom Shares eligible for grant pursuant to the Phantom Stock Plan was 6,175, subject to adjustments for stock splits and stock dividends. All of the units granted under the Company's Performance Unit Plan were exchanged for equivalent phantom rights with equivalent terms under the new Phantom Stock Plan. Accordingly, 4,845 Phantom Shares had been granted of which 3,182 had vested. All of the provisions of the Phantom Stock Plan including vesting, forfeiture and cash settlement mirror the provisions of the Company's Performance Unit Plan. On March 31, 1998, the Board of Directors adopted the FaciliCom International, Inc. 1998 Stock Option Plan (the "1998 Stock Option Plan"). By resolution of the Board of Directors on March 31, 1998, the Company's Certificate of Incorporation was amended to create 25,000 shares of a non-voting class of common stock. At September 30, 1998, the Company has 300,000 authorized shares, of which 275,000 are a voting class of common stock. The 1998 Stock Option Plan provides for the grant of options to purchase shares of the Company's non-voting common stock to certain directors, officers, key employees and advisors of the Company. The aggregate number of options that may be granted under the 1998 Stock Option Plan is 22,574 and no option may be granted after March 31, 2008. No option is exercisable within the first six months of grant and options expire after ten years. Also on March 31, 1998, all of the Phantom Shares previously granted to employees of the Company under the Company's Phantom Stock Plan were converted to options under the 1998 Stock Option Plan, and the Company granted additional options to purchase 6,448 shares of non-voting common stock to employees, directors and advisors under the 1998 Stock Option Plan. The exchange of employees' Phantom Shares for options resulted in additional compensation cost for the incremental value of the new option amortized over the vesting period of the option that is shorter than the service period of the Phantom Shares. Total unrecognized compensation cost approximated $1,672,375 at time of conversion. F-20 25 A summary of the stock option activity for the years ended September 30, 1999 and 1998 is as follows:
OPTION OPTION OPTION OPTION OPTION OPTION OPTION SHARES SHARES SHARES SHARES SHARES SHARES SHARES (EXERCISE (EXERCISE (EXERCISE (EXERCISE (EXERCISE (EXERCISE (EXERCISE PRICE PRICE PRICE PRICE PRICE PRICE PRICE $1) $263) $500) $526) $700) $950) $1,000) Options granted in the year ended September 30, 1998 9,918 670 735 -- -- -- 200 -------------------------------------------------------------------------- Options outstanding at September 30, 1998 9,918 670 735 -- -- -- 200 Options granted 2,683 304 50 100 100 868 -- Options exercised (1,182) -- (33) -- -- -- -- Options forfeited/cancelled (1,888) -- (183) -- -- (100) -- -------------------------------------------------------------------------- Options outstanding at September 30, 1999 9,531 974 569 100 100 768 200 ========================================================================== Options exercisable September 30, 1999 9,379 755 173 -- -- -- 67 ========================================================================== Options exercisable September 30, 1998 9,490 380 -- -- -- -- -- ==========================================================================
All of the options outstanding have a 10-year life and an option price range from $.01 to $1,000 per option share. The options vest over a period up to 5 years and in the years ended September 30, 1999 and 1998, respectively, there were 2,379 and 8,826 options granted that vested immediately. The Company recognized compensation cost of $3,630,000 and $5,706,000 for the years ended September 30, 1999 and 1998, respectively, relating to options granted and recognized compensation cost of $311,592 for the year ended September 30, 1998 relating to the Company's Phantom Stock Plan. For the years ended September 30, 1999 and 1998 compensation cost includes $3,259,911 and $2,112,640, respectively, for options granted to certain non-employee directors and advisors related to certain directors of the Company. The fair value of options granted during the years ended September 30, 1999 and 1998 was as follows:
OPTION SHARES OPTION FAIR VALUE EXERCISE PRICE AT DATE OF GRANT 1999 1998 $ 1........................................................................ $ 1,364 $ 640 $ 263........................................................................ $ 730 $ 423 $ 500........................................................................ $ 539 $ 306 $ 526........................................................................ $ 520 $ -- $ 700........................................................................ $ 400 $ -- $ 950........................................................................ $ 266 $ -- $ 1,000........................................................................ $ -- $ 135
The fair value of the option grant was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes model are: dividend yield 0%, volatility 30%, risk free interest rate of 6%, assumed forfeiture rate of 0% and an expected life of 3 to 5 years. If the Company would have recorded compensation cost for the Company's stock option plan consistent with the fair value-based method of accounting prescribed under SFAS No. 123 it would have had an immaterial effect on the net loss of the Company for the fiscal years ended September 30, 1999 and 1998. F-21 26 14. VALUATION AND QUALIFYING ACCOUNTS Activity in the Company's allowance accounts for the periods ended September 30, 1999, 1998 and 1997 were as follows (in thousands):
DOUBTFUL ACCOUNTS ADDITIONS ---------------------------- BALANCE AT CHARGED TO BEGINNING OF COSTS AND CHARGE TO BALANCE AT PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS END OF PERIOD 1997 $ -- $ 1,263 $ -- $(1,102) $ 161 1998 $ 161 $ 3,771 $ 745 $ (57) $4,620 1999 $ 4,620 $ 6,500 $ -- $(2,618) $8,502
DEFERRED TAX ASSET VALUATION ALLOWANCE ------------------------------ BALANCE AT CHARGE TO BEGINNING OF COSTS AND BALANCE AT PERIOD EXPENSE END OF PERIOD 1997 $ 1,120 $ 2,010 $ 3,130 1998 $ 3,130 $ 7,916 $ 11,046 1999 $ 11,046 $ 19,301 $ 30,347
15. GEOGRAPHIC DATA In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company adopted the provisions of SFAS No. 131 in fiscal 1999 and all prior year disclosures have been recast for consistency. Under the provisions of SFAS No. 131, the Company has defined its operating segments by geographical location. F-22 27 FaciliCom operates as a provider of international long-distance telecommunications services. The Company is a multinational company operating in many countries including the United States, and several European Countries. Sales between geographic areas represent the providing of services through carrying and ultimate termination of customer traffic originated in the other geographic area and are accounted for based on established transfer prices. Revenues from external customers for individual countries represent traffic originated in those countries. In computing operating losses for foreign operations, no allocations of general corporate expenses have been made. Summary information with respect to the Company's geographic operations is as follows (in thousands):
OPERATING SEGMENTS YEAR ENDED SEPTEMBER 30, ---------------------------------------- 1999 1998 1997 REVENUES United States - External Customers ................ $ 173,163 $ 116,384 $ 53,821 - Intercompany ...................... 126,843 25,742 2,046 United Kingdom - External Customers ................ 63,308 22,972 1,052 - Intercompany ...................... 49,435 6,151 39 Germany - External Customers ................ 63,143 2,383 -- - Intercompany ...................... 17,602 2,127 -- Sweden - External Customers ................ 31,300 26,488 15,235 - Intercompany ...................... 30,776 32,591 7,861 Other - External Customers ................ 72,852 16,019 447 - Intercompany ...................... 23,696 3,664 -- Eliminations ......................... (248,352) (70,275) (10,314) --------- --------- -------- Total ............................ $ 403,766 $ 184,246 $ 70,187 ========= ========= ======== OPERATING LOSS United States ........................ $ (7,759) $ (22,771) $ (6,411) United Kingdom ....................... (8,595) (4,728) (876) Germany .............................. (6,594) (714) -- Sweden ............................... (7,611) (4,234) (4,080) Other ................................ (23,286) (11,439) 7 --------- --------- -------- Total operating loss ............. (53,845) (43,886) (11,360) Interest expense (income), net ... (30,051) (14,460) (1,336) Foreign exchange loss ............ (1,590) (391) (1,335) Other ............................ -- 791 -- --------- --------- -------- Loss before income taxes ......... $ (85,486) $ (57,946) $(14,031) ========= ========= ======== ASSETS United States ........................ $ 627,095 $ 488,649 $ 38,116 United Kingdom ....................... 41,832 44,274 4,098 Germany .............................. 34,165 15,165 -- Sweden ............................... 57,493 37,935 17,046 Other ................................ 77,378 53,618 119 Eliminations ......................... (467,797) (260,757) (16,041) --------- --------- -------- Total ............................ $ 370,166 $ 378,884 $ 43,338 ========= ========= ======== CAPITAL EXPENDITURES United States ........................ $ 81,187 $ 35,922 $ 6,905 United Kingdom ....................... 5,636 15,611 3,226 Germany .............................. 5,019 8,534 -- Sweden ............................... 5,515 10,505 2,773 Other ................................ 8,184 28,068 -- --------- --------- -------- Total ............................ $ 105,541 $ 98,640 $ 12,904 ========= ========= ========
F-23 28 16. MARKETABLE SECURITIES In accordance with SFAS 115, the Company's debt securities are considered either held-to-maturity or available-for-sale. Held-to-maturity securities represent those securities that the Company has both the positive intent and the ability to hold to maturity, and are carried at amortized cost. This classification includes those securities purchased and pledged for payment of interest on the Notes. Available-for-sale securities represent those securities that do not meet that classification of held-to-maturity, are not actively traded and are carried at fair value. Unrealized gains and losses on these securities are excluded from earnings and are reported as a separate component of comprehensive loss until realized. The amortized cost and estimated fair value of the marketable securities are as follows:
SEPTEMBER 30, 1999 --------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE Held-to-Maturity (IN THOUSANDS) U.S. Government Securities -------------- Maturing in 1 year or less ... $ 31,849 $ -- $ 46 $31,803 Maturing between 1 and 3 years 14,768 -- 116 14,652 ----------- ----------- ---- ------- Total held-to-maturity ............ $ 46,617 $ -- $162 $46,455 =========== =========== ==== =======
SEPTEMBER 30, 1998 -------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE (IN THOUSANDS) Held-to-Maturity U.S. Government Securities Maturing in 1 year or less ... $ 31,394 $ 79 $ -- $ 31,473 Maturing between 1 and 3 years 43,124 546 -- 43,670 -------- -------- -------- -------- Total held-to-maturity ............ 74,518 625 -- 75,143 -------- -------- -------- -------- Available-for-sale Commercial paper ............. 6,887 -- -- 6,887 Government backed securities 31,787 24 -- 31,811 -------- -------- -------- -------- Total available-for-sale .......... 38,674 24 -- 38,698 -------- -------- -------- -------- Total marketable securities ....... $113,192 $ 649 $ -- $113,841 ======== ======== ======== ========
AS REPORTED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS): 1999 1998 - ------------------------------------------------------- ------- ------- Current Assets: Held-to-maturity (at amortized cost) ................ $31,849 $31,394 Available-for-sale (at fair value) .................. -- 38,698 ------- ------- Total current assets ..................................... $31,849 $70,092 ======= ======= Noncurrent Assets Held-to-maturity (at amortized cost) ................ $14,768 $43,124 ======= ======= Capital Accounts: Holding gain on marketable securities ............... $ -- $ 24 ======= =======
* * * * * F-24 29 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT ---------------------- 2. Agreement and Plan of Merger dated as of August 17, 1999 among World Access, Inc., FaciliCom International, Inc., Armstrong International Telecommunications, Inc., EPIC Interests, Inc. and BFV Associates, Inc. (incorporated by reference to Appendix A to our Proxy Statement filed with the Commission on November 5, 1999). 23. Consent of Deloitte & Touche LLP. 99. Press Release dated December 7, 1999, announcing the completion of the merger of World Access and FaciliCom.
EX-23 2 CONSENT OF DELOITTE & TOUCHE LLP 1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-66723, No. 333-66731, No. 333-68125, No. 333-68619, No. 333-68623 and No. 333-68625 of World Access, Inc. on Forms S-8 of our report, dated December 7, 1999, on the consolidated financial statements of FaciliCom International, Inc. and subsidiaries appearing in this Form 8-K of World Access, Inc. /s/ Deloitte & Touche LLP Pittsburgh, Pennsylvania December 22, 1999 EX-99 3 PRESS RELEASE DATED DECEMBER 7, 1999 1 EXHIBIT 99 WORLD ACCESS COMPLETES MERGER WITH FACILICOM INTERNATIONAL Annual Revenue Run Rate of ILD Traffic Now Exceeds $1 Billion; FaciliCom's State-of-the-Art Network Provides Foundation for European Retail, Data and Internet Services; Company Ideally Poised to Capitalize on the Consolidation of the ILD Industry ATLANTA, Dec. 7 /PRNewswire/ -- World Access, Inc. (Nasdaq: WAXS) announced today that it has completed its merger with FaciliCom International, Inc., following the receipt of stockholder approval at the Company's special stockholders meeting held earlier today. The combined company now has carrier grade switching and transport network facilities located strategically throughout the U.S. and 13 European countries to facilitate entry into deregulating retail markets worldwide. FaciliCom, a leading facilities-based provider of European and U.S. originated international long-distance voice, data and Internet services, will continue to operate under the FaciliCom name throughout Europe. John D. Phillips, Chairman and Chief Executive Officer of World Access said, "This merger positions World Access as a leading player in the international long distance ("ILD") market. With one of the most extensive and highest quality switching and transport networks in Europe, as well as significant traffic volumes and scale, we are ideally positioned to capitalize on the rapid consolidation expected to take place in the ILD market. Our objective is to become a premier provider of bundled voice, data and Internet services to small and medium enterprise ("SME") markets throughout Europe and other strategic regions of the world. We intend to leverage our network capacity to actively pursue the expansion of our international retail operations through acquisitions of ILD providers and Internet Service Providers ("ISP's") and internal growth." Walter J. Burmeister, President and Founder of FaciliCom, will be named President of World Access at a Board of Directors meeting to be held later this week. Mr. Burmeister commented, "Together we now have the management and financial resources to leverage our extensive network and rapidly expand our business, both in the retail ILD sector as well as data and Internet services. In addition, as the largest non-incumbent wholesale provider in the world, our combined traffic volume and significant scale provides us with a tremendous platform for integrating future acquisitions. We expect to aggressively pursue attractive acquisition targets as we execute our strategy of providing bundled voice, data and Internet services to SME customers." The shareholders of FaciliCom received approximately $370 million of Convertible Preferred Stock, Series C ("Preferred Stock") and $56 million in cash. The Preferred Stock bears no dividend and is convertible into shares of World Access common stock at a conversion rate of $20.38 per common share, subject to potential adjustment under certain circumstances. If the closing trading price of World Access common stock exceeds $20.38 per share for 60 consecutive trading days, the Preferred Stock will automatically convert into common stock. The holders of the Preferred Stock will vote on an as-converted basis with the holders of World Access common stock. As a result of the merger, the Armstrong Group of Companies, FaciliCom's majority shareholder, is now the largest shareholder of World Access, with approximately 20% of outstanding voting rights. Armstrong is a diversified, privately held group of companies that own and operate cable television systems, independent telephone companies, international telecommunications companies, real estate companies, a residential and commercial security company and various other businesses. MCI WorldCom, Inc., previously World Access' largest shareholder, now owns approximately 9% of outstanding common shares. As part of the merger transaction, World Access has issued $300 million of its 13.25% Senior Notes due 2008, in exchange for all outstanding FaciliCom 2 Senior Notes. Donaldson, Lufkin & Jenrette served as advisor to World Access with respect to the transaction. World Access provides international long distance services and proprietary network equipment to the global telecommunications markets. The World Access Telecommunications Group competitively provides end-to-end communications services through its redundant digital network which is capable of supporting voice and data services, including frame relay, Internet Protocol (IP), asynchronous transfer mode (ATM) and multimedia applications. Located strategically throughout the US and 13 European countries, World Access's network backbone consists of gateway and tandem switches, linked by an extensive fiber network encompassing tens of millions of circuit miles. The World Access Equipment Group develops, manufactures and markets intelligent multiplexers, digital microwave radio systems, digital switches, billing and network telemanagement systems, cellular base stations, fixed wireless local loop systems and other telecommunications network products. For additional information regarding World Access and its divisions, please refer to the Company's website at http://www.waxs.com. This press release may contain financial projections or other forward-looking statements made pursuant to the safe harbor provisions of the Securities Reform Act of 1995. Such statements involve risks and uncertainties which may cause actual results to differ materially. These risks include: potential inability to identify, complete and integrate acquisitions; difficulties in expanding into new business activities; delays in new product developments or introductions; the potential termination of certain service agreements or the inability to enter into additional service agreements; and other risks described in the Company's SEC filings, including the Company's Annual Report on Form 10-K for the year ended December 31, 1998, the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 1999, June 30, 1999 and September 30, 1999 and the Company's Registration Statement on Form S-3 (No. 333-43497), as such filings have been amended, all of which are incorporated by reference into this press release. CONTACT: Investor Relations of World Access, Inc., 404-231-2025 -----END PRIVACY-ENHANCED MESSAGE-----