1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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) MARK A. GERGEL 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 only 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, please 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, please 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(c) 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. [ ] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value(1)............... 22,895,719(1) $6.522(3) $149,325,879.32 $39,422.03 - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value(2)............... 29,848,130(2) $5.864(4) $175,029,434.32 $46,207.77 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- (1) Based upon the maximum number of shares of common stock, par value $0.01 per share, of World Access, Inc. that may be issued pursuant to the acquisition of STAR Telecommunications, Inc. (2) Based upon the maximum number of shares of common stock, par value $0.01 per share, of World Access, Inc. that may be issued pursuant to the acquisition of Communication TeleSystems International d/b/a WORLDxCHANGE Communications. (3) Pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities Act of 1933, as amended (the "Act"), the proposed maximum offering price and registration fee are based upon the average of the high and low price of the STAR common stock to be received by World Access in the STAR merger as reported on the Nasdaq National Market on May 23, 2000. (4) Pursuant to Rule 457(f)(2) under the Act, the maximum offering price and registration fee have been calculated based on the book value of the WORLDxCHANGE common stock to be received by World Access in the WORLDxCHANGE merger as of May 23, 2000. ------------------------ 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, INC. 945 E. PACES FERRY ROAD, SUITE 2200 ATLANTA, GEORGIA 30326 Dear Stockholder: You are cordially invited to attend a special meeting in lieu of an annual meeting of stockholders of World Access, Inc. to be held at our principal executive offices located at 945 E. Paces Ferry Road, Atlanta, Georgia 30326, on , 2000 at 11:00 a.m., local time. At the special meeting, you will be asked to consider and vote upon (i) the approval and adoption of an Agreement and Plan of Merger, dated as of February 11, 2000, among World Access, STI Merger Co., a Delaware corporation and wholly-owned subsidiary of World Access, and STAR Telecommunications, Inc., a Delaware corporation, and the transactions contemplated thereby and (ii) the approval and adoption of an Agreement and Plan of Merger, dated as of February 11, 2000, as amended May 23, 2000, among World Access, WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., a Delaware corporation and wholly-owned subsidiary of World Access, and Communication TeleSystems International d/b/a WORLDxCHANGE Communications, a California corporation. You are also being asked to consider and vote upon (i) an amendment to the World Access amended certificate of incorporation to increase the number of shares of common stock World Access has the authority to issue from 150,000,000 shares to 290,000,000 shares, (ii) an amendment to the World Access amended certificate of incorporation to increase the maximum number of authorized directors from 12 to 15 and eliminate the classification of the World Access board of directors, (iii) an amendment to the World Access Directors' Warrant Incentive Plan to increase the number of warrants issuable under the Directors' Warrant Incentive Plan from 600,000 warrants to 1,200,000 warrants and to modify the performance criteria of World Access common stock under the plan and (iv) the election of the nominees for director described in the enclosed joint proxy statement/prospectus. Please read carefully the accompanying joint proxy statement/prospectus for more detailed information concerning the proposals to be considered and voted upon at the special meeting. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE STAR MERGER AND THE WORLDXCHANGE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF WORLD ACCESS AND HAS UNANIMOUSLY APPROVED THE STAR MERGER AGREEMENT, THE WORLDXCHANGE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF WORLD ACCESS VOTE FOR THE APPROVAL AND ADOPTION OF THE STAR MERGER AGREEMENT, THE WORLDXCHANGE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. YOUR BOARD OF DIRECTORS ALSO RECOMMENDS THAT YOU VOTE FOR THE AMENDMENTS TO OUR AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK WE HAVE THE AUTHORITY TO ISSUE, INCREASE THE MAXIMUM NUMBER OF AUTHORIZED DIRECTORS AND ELIMINATE THE CLASSIFICATION OF OUR BOARD OF DIRECTORS, FOR THE AMENDMENT TO OUR DIRECTORS' WARRANT INCENTIVE PLAN TO INCREASE THE NUMBER OF WARRANTS ISSUABLE UNDER THE DIRECTORS' WARRANT INCENTIVE PLAN FROM 600,000 TO 1,200,000 AND FOR THE NOMINEES FOR DIRECTOR DESCRIBED IN THE ENCLOSED JOINT PROXY STATEMENT/PROSPECTUS. 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. You may revoke your proxy in the manner described in the accompanying joint proxy statement/prospectus at any time before it has been voted at the special meeting. 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. Your prompt cooperation will be greatly appreciated. We look forward to seeing you on , 2000. Sincerely, /s/ John D. Phillips John D. Phillips Chairman and Chief Executive Officer , 2000 3 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.: NOTICE IS HEREBY GIVEN that a special meeting in lieu of an annual meeting of the stockholders of World Access, Inc., a Delaware corporation, will be held 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: 1. Proposal 1. To consider and vote upon a proposal to approve the adoption of an Agreement and Plan of Merger, dated as of February 11, 2000, among World Access, STI Merger Co., a Delaware corporation and wholly-owned subsidiary of World Access, and STAR Telecommunications, Inc., a Delaware corporation, and the transactions contemplated thereby. The STAR merger agreement provides, among other things, for the merger of STAR with and into STI Merger Co., pursuant to which each outstanding share of STAR common stock will be converted into the right to receive, at the election of World Access, (i) 0.3905 shares of World Access common stock, subject to adjustment as described in the enclosed joint proxy statement/prospectus, or (ii) a combination of shares of World Access common stock and cash. 2. Proposal 3. To consider and vote upon a proposal to approve the adoption of an Agreement and Plan of Merger, dated as of February 11, 2000, as amended May 23, 2000, among World Access, WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., a Delaware corporation and wholly-owned subsidiary of World Access, and Communication TeleSystems International d/b/a WORLDxCHANGE Communications, a California corporation, and the transactions contemplated thereby. The WORLDxCHANGE merger agreement provides, among other things, for the merger of WORLDxCHANGE with and into WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., pursuant to which each outstanding share of WORLDxCHANGE common stock (including shares of preferred stock deemed to be automatically converted into shares of common stock immediately prior to completion of the WORLDxCHANGE merger) will be converted into the right to receive 0.6583 shares of World Access common stock. 3. Proposal 4. 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. 4. Proposal 5. 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 and 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. 5. 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 Directors' Warrant Incentive Plan from 600,000 warrants to 1,200,000 warrants and to modify the performance criteria of World Access common stock under the plan. 6. Proposal 7. To elect as directors the nominees named in this joint proxy statement/prospectus to serve (i) 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 (ii) 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. 7. To transact such other business as may properly come before the special meeting or any adjournments or postponements thereof. 4 The World Access stockholders are not being asked to consider and vote upon Proposal 2 regarding the proposed sale by STAR of its wholly-owned subsidiary, PT-1 Communications, Inc. Only the STAR stockholders will consider and vote upon Proposal 2. 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, and World Access convertible preferred stock, Series D, on , 2000 are entitled to notice of and to vote at the special meeting and any adjournments or postponements thereof. 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 in the manner described in the accompanying joint proxy statement/prospectus at any time before it has been voted at the special meeting. 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 you sign, date and mail your proxy card without indicating how you want to vote, World Access will vote your proxy in favor of adopting the proposals set forth above. If you do not return your card, except with respect to the election of the nominees for director, the effect will be a vote against the proposals. 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 5 [STAR Logo] , 2000 To the Stockholders of STAR Telecommunications, Inc.: We have entered into a merger agreement with World Access, Inc. The STAR merger agreement provides for a merger that would result in STAR becoming a wholly-owned subsidiary of World Access. As a stockholder of STAR, you would become a stockholder of World Access as a result of the STAR merger. The STAR merger agreement also provides for the sale to a third party of PT-1 Communications, Inc., our wholly-owned subsidiary. As a result of the STAR merger, each outstanding share of STAR common stock will be converted into the right to receive, at the election of World Access, (a) 0.3905 shares of World Access common stock, subject to adjustment as described in the accompanying joint proxy statement/prospectus, or (b) a combination of shares of World Access common stock and cash. As further described in the joint proxy statement/prospectus, we are also seeking stockholder approval for the PT-1 sale. We have entered into a letter of intent with a third party, PT-1 acquiror, for the PT-1 sale and we anticipate that we will enter into a definitive agreement with PT-1 acquiror. This joint proxy statement/prospectus describes the PT-1 letter of intent in detail. We are seeking stockholder approval to proceed with the PT-1 sale to PT-1 acquiror, or in the event that we do not reach a definitive agreement with PT-1 acquiror, to such other buyer and on such other terms as our board of directors shall subsequently approve, subject to the minimum requirements set forth in the joint proxy statement/prospectus, including our receipt of a sales price of at least $ , obtaining the opinion of our financial advisor in connection with the sale and approval by our board of directors of a definitive sale agreement containing terms that our board of directors determines to be in the best interests of STAR. Except as requested in the joint proxy statement/prospectus, we will not solicit any further stockholder vote for the PT-1 sale. Accordingly, you will not have the opportunity to vote on a definitive PT-1 sale agreement. 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 May 22, 2000 was $11 9/16 per share. We cannot complete the STAR merger or the PT-1 sale without the approval of our stockholders. We have scheduled a special meeting on , , 2000 at , local time, at , to vote on these transactions. A joint proxy statement/prospectus accompanies this letter and provides detailed information about the special meeting, the STAR merger and the PT-1 sale. We urge you to read the joint proxy statement/prospectus document carefully. Your board of directors recommends that you vote to approve the STAR merger agreement and the PT-1 sale. Please use this opportunity to take part in the affairs of STAR by voting on these important matters. Whether or not you plan to attend the meeting, please complete, sign, date and return the accompanying proxy in the enclosed envelope. Returning the proxy will not deprive you of your right to attend the special meeting and vote in person. Your vote is very important. Sincerely, /s/ Mary A. Casey Mary A. Casey President and Secretary 6 [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, subject to your approval, to merge STAR with a subsidiary of World Access, Inc. We also have agreed with World Access to sell PT-1 Communications, Inc., our wholly-owned subsidiary, to a third party. The PT-1 sale also requires your approval. If the STAR merger agreement is approved by our stockholders and the STAR merger is completed, each outstanding share of STAR common stock will be converted into the right to receive, at the election of World Access, (a) 0.3905 shares of World Access common stock, subject to adjustment as described in the joint proxy statement/prospectus, or (b) a combination of shares of World Access common stock and cash. If STAR does not sell PT-1 prior to the completion of the STAR merger, or if STAR does not receive net cash proceeds of at least $150.0 million from the PT-1 sale, then World Access does not have to complete the STAR merger. We will hold a special meeting of stockholders on , , 2000 at , local time, at , for the following purposes: 1. Proposal 1. To approve the Agreement and Plan of Merger, dated as of February 11, 2000, among World Access, STI Merger Co. and STAR, which will result in STAR becoming a wholly-owned subsidiary of World Access; 2. Proposal 2. To consider a resolution authorizing the PT-1 sale subject to the minimum requirements set forth in the accompanying joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor as to the fairness from a financial point of view of the consideration to be received in the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR; and 3. To transact any other business that is properly brought before the special meeting, or any adjournment or postponement of the special meeting. The accompanying joint proxy statement/prospectus describes the STAR merger agreement, the PT-1 sale and the PT-1 letter of intent pursuant to which STAR anticipates that it will enter into a definitive agreement in detail. The STAR merger agreement is attached as Annex A to the joint proxy statement/prospectus. The PT-1 letter of intent is attached as Annex F to the joint proxy statement/prospectus. Only persons who held STAR common stock as of the close of business on , 2000 are entitled to notice of and to vote at the special meeting. A list of stockholders eligible to vote at the meeting will be available for inspection at the meeting and for a period of ten days prior to the meeting during regular business hours at STAR's corporate headquarters in Santa Barbara, California. Holders of STAR common stock may be entitled to appraisal rights under the Delaware General Corporation Law in connection with the STAR merger. The attached joint proxy statement/prospectus discusses the possible appraisal rights of these stockholders. Holders of STAR common stock are not entitled to appraisal rights in connection with the PT-1 sale. 7 You are urged to vote upon the matters presented in this 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. Proxies are revocable at any time prior to the vote, and the execution of your proxy will not affect your right to 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. 8 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MAY 24, 2000. JOINT PROXY STATEMENT/PROSPECTUS WORLD ACCESS, INC. STAR TELECOMMUNICATIONS, INC. COMMUNICATION TELESYSTEMS INTERNATIONAL D/B/A WORLDXCHANGE COMMUNICATIONS The boards of directors of World Access and STAR have approved a merger agreement pursuant to which STAR will merge with a wholly-owned subsidiary of World Access. Upon completion of the STAR merger, STAR will become a wholly-owned subsidiary of World Access. The board of directors of STAR has also approved the sale of PT-1 to a third party, subject to the minimum requirements set forth in this joint proxy statement/prospectus. The boards of directors of World Access and WORLDxCHANGE have approved a merger agreement pursuant to which WORLDxCHANGE will merge with a wholly-owned subsidiary of World Access. Upon completion of the WORLDxCHANGE merger, WORLDxCHANGE will become a wholly-owned subsidiary of World Access. Both the STAR merger and the WORLDxCHANGE merger require the approval of a majority in voting power of the shares of World Access common stock, World Access Series A preferred stock, World Access Series C preferred stock and World Access Series D preferred stock entitled to vote and voting as a single class. World Access has scheduled a special meeting of the World Access stockholders on , 2000 to vote on the mergers and the other proposals described in this joint proxy statement/prospectus. The STAR merger and the PT-1 sale also require the approval of a majority of the outstanding shares of STAR common stock. STAR has scheduled a special meeting of the STAR stockholders on , 2000 to vote on the STAR merger and the PT-1 sale. The WORLDxCHANGE merger also requires the approval of a majority of the outstanding shares of WORLDxCHANGE common stock. WORLDxCHANGE IS NOT ASKING THE WORLDxCHANGE SHAREHOLDERS FOR A PROXY, AND THE WORLDxCHANGE SHAREHOLDERS ARE REQUESTED NOT TO SEND US A PROXY. This document provides you with detailed information about the proposed mergers and the PT-1 sale. This document also provides the World Access stockholders with information about proposals to: - approve an amendment to the World Access amended certificate of incorporation to increase the number of shares of common stock World Access is authorized to issue from 150,000,000 to 290,000,000; - approve an amendment to the World Access amended certificate of incorporation to increase the number of authorized directors from 12 to 15 and to end the division of the directors into three classes; - approve an amendment to the World Access Directors' Warrant Incentive Plan to increase the number of warrants issuable under the plan from 600,000 to 1,200,000 and to modify the performance criteria of World Access common stock under the plan; and - elect as directors the nominees named in this joint proxy statement/prospectus. Please read this entire document carefully. While the STAR merger is conditioned on the PT-1 sale, neither the STAR merger nor the WORLDxCHANGE merger is conditioned 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. 9 The World Access common stock is traded on the Nasdaq Stock Market under the symbol "WAXS." FOR A DISCUSSION OF CERTAIN RISK FACTORS WHICH YOU SHOULD CONSIDER IN EVALUATING THE MERGERS AND THE PT-1 SALE, SEE "RISK FACTORS" BEGINNING ON PAGE 38. This joint proxy statement/prospectus is also a prospectus of World Access regarding its common stock to be issued to stockholders of STAR and shareholders of WORLDxCHANGE in connection with the mergers. 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. This joint proxy statement/prospectus is dated , 2000 and is first being mailed to stockholders on or about , 2000. 10 TABLE OF CONTENTS PAGE ---- SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS............. 1 RISK FACTORS................................................ 38 Risk factors concerning the mergers....................... 38 Risk factors concerning World Access, STAR and WORLDxCHANGE........................................... 41 Risk factors concerning World Access common stock......... 51 Forward-looking statements................................ 52 THE WORLD ACCESS SPECIAL MEETING............................ 53 THE STAR SPECIAL MEETING.................................... 57 PROPOSAL 1 -- THE MERGER BETWEEN WORLD ACCESS AND STAR...... 59 Background of the STAR merger............................. 59 World Access' reasons for the STAR merger................. 60 Recommendation of the World Access board of directors..... 61 STAR's reasons for the STAR merger........................ 61 Recommendation of the STAR board of directors............. 62 Opinion of World Access' financial advisor regarding the STAR merger............................................ 62 Opinion of STAR's financial advisor regarding the STAR merger................................................. 68 Consideration to be received in the STAR merger........... 75 Closing; effective time of the STAR merger................ 76 Certain material federal income tax consequences of the STAR merger............................................ 76 Exchange of STAR stock certificates for World Access stock certificates........................................... 81 Restrictions on sales of shares by affiliates of World Access and STAR........................................ 81 Accounting treatment of the STAR merger................... 82 Regulatory filings and approvals required to complete the STAR merger............................................ 82 Rights of dissenting STAR stockholders.................... 83 Interests of certain persons in the STAR merger........... 85 THE STAR MERGER AGREEMENT................................... 86 The STAR merger/effective time............................ 86 The STAR merger consideration............................. 87 Representations and warranties............................ 87 STAR's conduct of business before completion of the STAR merger................................................. 88 No other negotiations involving STAR...................... 88 Treatment of STAR stock options and warrants.............. 90 Management services....................................... 90 Board of directors of World Access........................ 90 Interim financing of STAR................................. 90 Conditions to completion of the STAR merger............... 90 Termination of the STAR merger agreement.................. 92 Payment of termination fee................................ 94 Extension, waiver and amendment of the STAR merger agreement.............................................. 94 RELATED TRANSACTION AGREEMENTS.............................. 95 Edgecomb voting agreement................................. 95 Tawfik voting agreement................................... 95 STAR credit agreements.................................... 96 PROPOSAL 2 -- THE PT-1 SALE................................. 97 Approval of the PT-1 sale................................. 97 Background of the PT-1 sale............................... 98 STAR's reasons for the PT-1 sale.......................... 99 Recommendation of the STAR board of directors............. 100 Consideration to be received in the PT-1 sale............. 101 Certain material federal income tax consequences of the PT-1 sale.............................................. 101 i 11 PAGE ---- Accounting treatment of the PT-1 sale..................... 101 Regulatory filings and approvals required to complete the PT-1 sale.............................................. 101 Rights of dissenting STAR stockholders.................... 102 Interests of certain persons in the PT-1 sale............. 102 THE PT-1 LETTER OF INTENT................................... 102 Negotiation of definitive agreement with PT-1 acquiror.... 102 The PT-1 sale closing date................................ 102 Purchase price............................................ 102 Terms of the definitive agreement with PT-1 acquiror...... 103 Description of the PT-1 assets............................ 103 Assumption of liabilities................................. 103 Conduct of business before completion of the PT-1 sale.... 103 No other negotiations involving the PT-1 sale............. 103 Payment of termination fee................................ 104 Edgecomb voting agreement................................. 104 PROPOSAL 3 -- THE MERGER BETWEEN WORLD ACCESS AND WORLDXCHANGE.............................................. 104 Background of the WORLDxCHANGE merger..................... 104 World Access' reasons for the WORLDxCHANGE merger......... 105 Recommendation of the World Access board of directors..... 106 WORLDxCHANGE's reasons for the WORLDxCHANGE merger........ 106 Opinion of World Access' financial advisor regarding the WORLDxCHANGE merger.................................... 107 Consideration to be received in the WORLDxCHANGE merger... 114 Closing; effective time of the WORLDxCHANGE merger........ 115 Certain material federal income tax consequences of the WORLDxCHANGE merger.................................... 115 Exchange of WORLDxCHANGE stock certificates for World Access stock certificates.............................. 120 Restrictions on sales of shares by affiliates of World Access and WORLDxCHANGE................................ 120 Accounting treatment of the WORLDxCHANGE merger........... 120 Regulatory filings and approvals required to complete the WORLDxCHANGE merger.................................... 120 Rights of dissenting WORLDxCHANGE shareholders............ 121 Interests of certain persons in the WORLDxCHANGE merger... 124 PRINCIPAL SHAREHOLDERS OF WORLDxCHANGE...................... 128 THE WORLDxCHANGE MERGER AGREEMENT........................... 129 The WORLDxCHANGE merger/effective time.................... 129 The WORLDxCHANGE merger consideration..................... 129 Escrow of shares.......................................... 130 Representations and warranties............................ 130 WORLDxCHANGE's conduct of business before completion of the WORLDxCHANGE merger................................ 131 No other negotiations involving WORLDxCHANGE.............. 131 Treatment of WORLDxCHANGE stock options and warrants...... 131 Board of directors and officers of World Access........... 132 Conditions to completion of the WORLDxCHANGE merger....... 132 Termination of the WORLDxCHANGE merger agreement.......... 134 Extension, waiver and amendment of the WORLDxCHANGE merger agreement.............................................. 134 Post-closing indemnification.............................. 135 RELATED TRANSACTION AGREEMENTS.............................. 135 World Access voting agreement............................. 136 WORLDxCHANGE voting agreements............................ 136 Escrow agreement.......................................... 137 World Access -- WORLDxCHANGE services agreement........... 138 Foothill Capital Corporation participation agreement...... 138 COMPARATIVE PER SHARE MARKET PRICE DATA..................... 139 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................................................ 140 ii 12 PAGE ---- COMPARISON OF RIGHTS OF HOLDERS OF WORLD ACCESS COMMON STOCK AND STAR COMMON STOCK..................................... 164 Comparison of authorized and outstanding capital stock.... 164 Classes of common stock................................... 164 Special meeting of stockholders........................... 164 Action by written consent in lieu of a stockholders' meeting................................................ 164 Voting by written ballot.................................. 165 Record date for determining stockholders.................. 165 Nomination of directors................................... 165 Number of directors....................................... 165 Classified board of directors............................. 166 Removal of directors...................................... 166 Board of directors vacancies.............................. 166 Notice of special meeting of the board of directors....... 166 Amendment of certificate of incorporation and bylaws...... 166 Preferred stock........................................... 167 CERTAIN INFORMATION REGARDING STAR.......................... 170 STAR SELECTED CONSOLIDATED FINANCIAL DATA................... 171 CERTAIN INFORMATION REGARDING WORLDxCHANGE.................. 173 Services.................................................. 173 The WORLDxCHANGE network.................................. 174 Termination arrangements.................................. 178 Sales and marketing....................................... 178 Worldwide operations...................................... 180 Employees................................................. 181 Properties................................................ 181 Legal proceedings......................................... 181 WORLDxCHANGE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 183 Overview.................................................. 183 Results of operations..................................... 187 Liquidity and capital resources........................... 190 Market risk............................................... 193 Foreign currency exposure................................. 193 Euro conversion........................................... 194 Seasonality............................................... 194 Recent accounting pronouncements.......................... 194 WORLDxCHANGE SELECTED CONSOLIDATED FINANCIAL DATA........... 196 COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF WORLDxCHANGE AND STOCKHOLDERS OF WORLD ACCESS.............................. 198 Comparison of authorized and outstanding capital stock.... 198 Comparison of rights of common stock...................... 198 Comparison of shareholder rights under Delaware and California law......................................... 199 Preferred stock........................................... 206 MANAGEMENT OF THE COMBINED COMPANIES........................ 210 Executive officers........................................ 210 Board of directors........................................ 210 PROPOSAL 4 -- 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....... 210 iii 13 PAGE ---- PROPOSAL 5 -- AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED DIRECTORS FROM 12 TO 15 AND 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........... 211 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 AND TO CHANGE THE PERFORMANCE CRITERIA UNDER THE PLAN...................................................... 213 PRINCIPAL STOCKHOLDERS OF WORLD ACCESS...................... 215 PROPOSAL 7 -- ELECTION OF WORLD ACCESS DIRECTORS............ 218 Information regarding nominees and directors.............. 219 Meetings and committees of the World Access board......... 221 Director compensation..................................... 221 EXECUTIVE OFFICERS OF WORLD ACCESS.......................... 223 Information regarding executive officers.................. 223 Executive compensation.................................... 223 Executive employment agreements........................... 225 Compensation committee report............................. 228 Compensation committee interlocks and insider participation in compensation decisions................ 229 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..... 230 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 231 EXPERTS..................................................... 231 WORLD ACCESS STOCKHOLDER PROPOSALS.......................... 232 STAR STOCKHOLDER PROPOSALS.................................. 233 OTHER MATTERS THAT MAY COME BEFORE THE WORLD ACCESS SPECIAL MEETING................................................... 233 OTHER MATTERS THAT MAY COME BEFORE THE STAR SPECIAL MEETING................................................... 233 LEGAL MATTERS............................................... 233 WHERE YOU CAN FIND MORE INFORMATION......................... 233 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 234 ANNUAL REPORTS TO STOCKHOLDERS.............................. 234 ANNEX A The STAR Merger Agreement ANNEX B The WORLDxCHANGE Merger Agreement 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 The PT-1 Letter of Intent ANNEX G Delaware General Corporation Law Section 262 ANNEX H California General Corporation Law Sections 1300 through 1312 iv 14 SUMMARY OF THE JOINT PROXY STATEMENT/PROSPECTUS This joint proxy statement/prospectus pertains to the merger of STI Merger Co., a wholly-owned subsidiary of World Access, and STAR Telecommunications, Inc., the merger of 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, as well as the sale by STAR of its wholly-owned subsidiary, PT-1 Communications, Inc., and is being sent to the stockholders of World Access, STAR and WORLDxCHANGE. The joint proxy statement/prospectus also pertains to two proposals regarding amendments to the World Access Amended Certificate of Incorporation, a proposal regarding an amendment to the World Access Directors' Warrant Incentive Plan and the election of the nominees named herein as World Access directors, that only the World Access stockholders will consider and vote upon. World Access is soliciting proxies for its special meeting in lieu of an annual meeting and is asking its stockholders to consider and vote upon all of the proposals described in this joint proxy statement/prospectus, other than the PT-1 sale. STAR is soliciting proxies for its special meeting and is asking its stockholders to consider and vote upon the proposed merger between World Access and STAR and the sale by STAR of PT-1 described in this joint proxy statement/prospectus. WORLDxCHANGE is not soliciting proxies or consents from its shareholders. Rather, World Access is providing this joint proxy statement/prospectus to the WORLDxCHANGE shareholders in connection with the issuance of World Access common stock to such shareholders in the proposed merger between World Access and WORLDxCHANGE. Throughout this joint proxy statement/prospectus, "we" and "us" mean World Access and its subsidiaries after giving effect to the STAR merger and the WORLDxCHANGE merger. QUESTIONS AND ANSWERS FOR WORLD ACCESS AND STAR STOCKHOLDERS 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. To combine the companies, STAR will merge with a subsidiary of World Access, becoming a wholly-owned subsidiary of World Access. After the STAR merger, assuming completion of the proposed combination of World Access with WORLDxCHANGE, which is discussed further below, and assuming that World Access elects to use its stock as the sole consideration in the STAR merger to the extent possible, the stockholders of World Access will own approximately 63.0%, the former stockholders of STAR will own approximately 17.0%, and the former shareholders of WORLDxCHANGE will own approximately 20.0% in voting power of the combined companies. If the STAR merger is completed but the WORLDxCHANGE merger is not completed, the former stockholders of STAR will own approximately 22.0% of the combined companies. Q: WHAT WILL STAR STOCKHOLDERS RECEIVE IN THE STAR MERGER? A: World Access has the option to pay STAR stockholders one of two forms of consideration when the STAR merger is completed. STAR stockholders who are entitled to and exercise dissenters' rights of appraisal under Delaware law will not receive either form of merger consideration. If World Access selects the first form of consideration, each STAR stockholder will be entitled to receive, for each share of STAR common stock, 0.3905 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. The exact exchange ratio is determined by solving for "X" in the following equation: X = 7.81 + Z ------------ 20 "Z" equals the net cash proceeds in excess of $150.0 million received by STAR at the time of the completion of the sale of PT-1, divided by 62,856,702 (the number of issued and outstanding shares 1 15 of STAR common stock, plus the number of shares underlying outstanding STAR stock options and warrants as of February 11, 2000). World Access will not issue fractional shares. World Access will issue cash in lieu of fractional shares based on the average closing sale price of World Access common stock over a ten-day period ending at the close of trading on the date of the completion of the STAR merger. EXAMPLE: Assume that (i) you, a STAR stockholder, own 100 shares of STAR common stock, (ii) prior to the completion of the STAR merger, STAR sells PT-1 for net cash proceeds of $200.0 million, and (iii) the average closing sale price of World Access common stock over a ten-day period ending at the close of trading on the date of the completion of the STAR merger is $25.00. In this case, the exchange ratio would be increased to 0.4305 ((7.81 + 0.8)/20). Therefore, you would be entitled to receive 43 shares of World Access common stock (100 x 0.4305) and a check for $1.25. Instead of only issuing shares of World Access common stock to the STAR stockholders in the STAR merger, World Access may issue, for each share of STAR common stock, a number of shares of World Access common stock equal to 60% of the exchange ratio and an amount in cash equal to 40% of the sum of $7.81 plus "Z." As is the case with the first form of consideration, World Access will not issue fractional shares. World Access will issue cash in lieu of fractional shares based on the average closing sale price of World Access common stock over a ten-day period ending at the close of trading on the date of the completion of the STAR merger. EXAMPLE: Using the same assumptions described above and further assuming that World Access elects to issue shares of World Access common stock and cash upon completion of the STAR merger, you would be entitled to receive 25 shares of World Access common stock (0.2583 x 100) and a check for $365.15. This check would represent cash in lieu of fractional shares (0.83 x $25) and the cash portion of the merger consideration ((40% of 7.81 + 0.8) x 100). 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 does not receive net cash proceeds of at least $150.0 million from the PT-1 sale, then World Access does not have to complete the STAR merger. STAR has entered into a letter of intent with PT-1 acquiror for the PT-1 sale and STAR anticipates that it will enter into a definitive agreement with PT-1 acquiror. In the event that STAR does not reach a definitive agreement with PT-1 acquiror, STAR will sell PT-1 to such other buyer and on such other terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. Q: WHAT HAPPENS IF THE STAR STOCKHOLDERS APPROVE THE PT-1 SALE FOR A SALES PRICE OF AT LEAST $ ? A: If the STAR stockholders approve the PT-1 sale for a sales price of at least $ , the minimum requirements set forth in this joint proxy statement/prospectus have been met and negotiations have been successfully completed with PT-1 acquiror, STAR will sell PT-1 to PT-1 acquiror. In the event that STAR is unable to negotiate a definitive agreement with PT-1 acquiror, STAR will attempt to sell PT-1 for a sales price of at least $ to such other buyer and on such other terms as the STAR board of directors shall subsequently approve. The consummation of any PT-1 sale would be subject to STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a 2 16 definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. Except as requested in the accompanying joint proxy statement/prospectus, STAR will not solicit any further stockholder vote for the PT-1 sale. Accordingly, STAR stockholders will not have the opportunity to vote on a definitive PT-1 sale agreement. Q: WHAT IS THE WORLDXCHANGE MERGER? A: World Access has also agreed to a merger between another of its wholly-owned subsidiaries and WORLDxCHANGE. The WORLDxCHANGE merger is described in this joint proxy statement/ prospectus. The STAR merger does not depend on the completion of the WORLDxCHANGE merger, and the WORLDxCHANGE merger does not depend on the completion of the STAR 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. You should be aware that if the WORLDxCHANGE merger is completed, the business and operations of WORLDxCHANGE will be vested in WORLDxCHANGE Communications, Inc., which will be a wholly-owned subsidiary of World Access, and WORLDxCHANGE shareholders will become stockholders of World Access. This joint proxy statement/prospectus is also being sent to shareholders of WORLDxCHANGE. Unless stated otherwise, information provided in this joint proxy statement/prospectus assumes completion of the WORLDxCHANGE merger. Where appropriate, we have indicated where information pertaining to World Access and STAR does not give effect to the merger with WORLDxCHANGE. Q: DOES THE BOARD OF DIRECTORS OF WORLD ACCESS RECOMMEND VOTING IN FAVOR OF THE STAR MERGER? A: Yes. After careful consideration, World Access' board of directors recommends that its stockholders vote in favor of the STAR merger agreement and the issuance of shares of World Access common stock to the stockholders of STAR in the merger. Q: DOES THE BOARD OF DIRECTORS OF STAR RECOMMEND VOTING IN FAVOR OF THE STAR MERGER AND THE PT-1 SALE? A: Yes. After careful consideration, STAR's board of directors recommends that its stockholders vote in favor of the STAR merger agreement, the proposed STAR merger and the proposed PT-1 sale to PT-1 acquiror or such other buyer, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor as to the fairness from a financial point of view of the consideration to be received in the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE STAR MERGER AND THE PT-1 SALE? A: Yes. In evaluating the STAR merger and the PT-1 sale, you should carefully consider the factors discussed in the section entitled "Risk Factors" on page 38. 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 may 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 to be voted on at the meeting with regard to which you are entitled to vote. 3 17 Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE? A: If you are a World Access stockholder and want to change your vote, send the secretary of World Access a later-dated, signed proxy card before the World Access 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. World Access stockholders who have signed voting agreements described herein may not revoke the proxies given by them in the voting agreements. If you are a STAR stockholder and want to change your vote, send the secretary of STAR a later-dated, signed proxy card before the STAR meeting or attend the meeting in person. You may also revoke your proxy by sending written notice to the secretary of STAR before the meeting. STAR stockholders who have signed voting or conversion agreements described herein may not revoke the proxies given by them in the voting or conversion agreements. 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. After the STAR merger is completed, World Access will send STAR stockholders written instructions for exchanging their STAR stock certificates for the applicable STAR merger consideration. Q: WHEN DO YOU EXPECT THE STAR MERGER AND THE PT-1 SALE TO BE COMPLETED? A: World Access and STAR are working toward completing the STAR merger, and STAR is working to complete the PT-1 sale, as quickly as possible. World Access and STAR hope to complete the STAR merger, and STAR hopes to complete the PT-1 sale, in the third calendar quarter of 2000. Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE STAR MERGER OR THE PT-1 SALE? A: STAR stockholders will not recognize gain or loss for federal income tax purposes if the STAR merger is completed, except that STAR stockholders will recognize gain or loss 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 such recognized gain may be taxed as ordinary income. STAR stockholders will not recognize gain or loss for federal income tax purposes from the PT-1 sale if PT-1 is sold for cash. STAR stockholders are urged to consult their own tax advisors to determine their particular tax consequences. Q: AM I ENTITLED TO APPRAISAL RIGHTS? A: If you are a STAR stockholder who will receive a combination of World Access common stock and cash (other than cash paid in lieu of fractional shares) pursuant to the terms of the STAR merger agreement and do not vote for the adoption of the STAR merger agreement, you may have the right under Delaware law to dissent from the STAR merger and request an appraisal of the fair value of your STAR common stock. In order to preserve this right, you must follow the procedures discussed on page 83 of this joint proxy statement/prospectus. STAR stockholders are not entitled to appraisal rights in connection with the PT-1 sale. If you are a World Access stockholder, you are not entitled to appraisal rights under Delaware law. 4 18 Q: WHERE CAN I FIND OUT MORE INFORMATION ABOUT WORLD ACCESS AND STAR? A: You may obtain additional information about World Access and STAR from documents filed with the Securities and Exchange Commission at the SEC's website (http://www.sec.gov). Additionally, you may read and copy this information at the following SEC offices: - Judiciary Plaza, 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20549 - New York Regional Office Seven World Trade Center Suite 1300 New York, New York 10048 - Chicago Regional Office Northwest Atrium Center Suite 1400 Chicago, Illinois 60661 QUESTIONS AND ANSWERS FOR WORLD ACCESS AND WORLDXCHANGE STOCKHOLDERS 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 merge with a subsidiary of World Access, with such subsidiary continuing as a wholly-owned subsidiary of World Access. After the WORLDxCHANGE merger, assuming completion of the proposed combination of World Access with STAR, which is discussed above, the stockholders of World Access will own approximately 63.0%, the former shareholders of WORLDxCHANGE will own approximately 20.0%, and the former stockholders of STAR will own approximately 17.0% in voting power of the combined companies. If the WORLDxCHANGE merger is completed but the STAR merger is not completed, the former shareholders of WORLDxCHANGE will own approximately 24.0% in voting power of the combined companies. 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. World Access will not issue fractional shares. World Access will issue cash in lieu of fractional shares based on the average closing sale price of World Access common stock over a 10-trading day period ending at the close of trading on the second trading day prior to the date of the completion of the WORLDxCHANGE merger. EXAMPLE: If you, a WORLDxCHANGE shareholder, own 100 shares of WORLDxCHANGE common stock, then after the completion of the WORLDxCHANGE merger you will receive 65 shares of World Access common stock (100 x 0.6583) and a check for $20.75 (0.83 x $25.00). 5 19 World Access' stock price has been volatile, and economic and market circumstances are subject to change. As an example, 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 - ----- ----- ---- May 2000 (through May 22, 2000)............................. $17 $11 9/16 April 2000.................................................. $20 $14 1/8 March 2000.................................................. $26 7/8 $19 February 2000............................................... $24 3/8 $17 3/8 January 2000................................................ $20 11/16 $17 1/4 December 1999............................................... $22 $15 5/16 November 1999............................................... $17 1/8 $12 3/8 October 1999................................................ $13 1/8 $11 September 1999.............................................. $13 3/16 $10 5/16 August 1999................................................. $14 15/16 $11 7/8 July 1999................................................... $15 15/16 $13 5/8 Q: WHAT ARE THE STAR MERGER AND THE PT-1 SALE? A: This joint proxy statement/prospectus contains information regarding an additional merger, the STAR merger, and the sale by STAR of its wholly-owned subsidiary, PT-1. The completion of the WORLDxCHANGE merger does not depend on the completion of the STAR merger or the PT-1 sale, and the completion of the STAR merger or the PT-1 sale does not depend on the completion of the WORLDxCHANGE 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. DOES THE BOARD OF DIRECTORS OF WORLD ACCESS RECOMMEND VOTING IN FAVOR OF THE WORLDXCHANGE MERGER? A: Yes. After careful consideration, World Access' board of directors recommends that its stockholders vote in favor of the approval and adoption of the WORLDxCHANGE merger agreement and the transactions contemplated thereby. 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. World Access stockholders who have signed voting agreements may not revoke the proxies given by them in the voting agreement. 6 20 Q: SHOULD I SEND IN MY WORLDXCHANGE STOCK CERTIFICATES NOW? A: No. After the WORLDxCHANGE merger is completed, World Access will send WORLDxCHANGE shareholders written instructions for exchanging their WORLDxCHANGE stock certificates for World Access stock certificates. 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. World Access and WORLDxCHANGE hope to complete the merger in the third calendar quarter of 2000. Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE WORLDXCHANGE MERGER? A: WORLDxCHANGE shareholders will not recognize gain or loss for federal income tax purposes if the WORLDxCHANGE merger is completed, except that WORLDxCHANGE shareholders will recognize gain or loss 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 such stock as part of the WORLDxCHANGE merger. WORLDxCHANGE shareholders are urged to consult their own tax advisors to determine their particular tax consequences. Q: AM I ENTITLED TO APPRAISAL OR DISSENTERS' RIGHTS? A: If you are a WORLDxCHANGE shareholder, you may be entitled to dissenters' rights under California law. In order to preserve this right, you must follow the procedures discussed on page 121 of this joint proxy statement/prospectus. If you are a World Access stockholder, you are not entitled to appraisal rights under Delaware law. Q: WHERE CAN I FIND OUT MORE INFORMATION ABOUT WORLD ACCESS? You may obtain additional information about World Access from documents filed with the Securities and Exchange Commission at the SEC's website (http://www.sec.gov). Additionally, you may read and copy this information at the following SEC offices: - Judiciary Plaza, 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20549 - New York Regional Office Seven World Trade Center Suite 1300 New York, New York 10048 - Chicago Regional Office Northwest Atrium Center 500 West Madison Street Suite 1400 Chicago, Illinois 60661 7 21 THE COMPANIES World Access, Inc. 945 E. Paces Ferry Road Suite 2200 Atlanta, Georgia 30326 (404) 231-2025 www.waxs.com World Access is focused on being a leading provider of bundled voice, data and Internet services to key regions of the world. It 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, asynchronous transfer mode and multimedia applications. Located strategically throughout the United States and 13 European countries, the World Access network backbone consists of gateway and tandem switches, linked by an extensive fiber network encompassing tens of millions of circuit miles. STAR Telecommunications, Inc. 223 East De La Guerra Street Santa Barbara, California 93101 (805) 899-1962 www.startel.com STAR provides global telecommunications services to consumers, long distance carriers, multinational corporations and Internet service providers worldwide. STAR provides international and national long distance services, international private line, prepaid calling cards, dial-around services and international toll free services. WORLDxCHANGE Communications 9999 Willow Creek Road San Diego, California 92131 (858) 530-8116 www.worldxchange.com 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 are connected with a network of owned and leased undersea and land-based fiber optic cables, providing more than 550,000 customers each month with affordable communications services worldwide. 8 22 SUMMARY OF THE STAR MERGER THE STAR MERGER In the STAR merger, STAR will merge with and into a wholly-owned subsidiary of World Access and, as a result, STAR will become a wholly-owned subsidiary of World Access. The STAR merger agreement is attached to this joint proxy statement/prospectus as Annex A. World Access and STAR encourage you to read the STAR merger agreement carefully. The STAR merger agreement is more fully described on page 86. World Access and STAR believe the STAR merger will permit us to realize several benefits, including: - potential cost savings and synergies from financial and operating efficiencies and other synergies that would potentially result from integrating the systems and operations of both companies; - creation of a diversified geographic and product market position for the combined companies which could potentially become a leading provider of global telecommunications services with a state-of-the-art pan-European network; - combining operations to take advantage of potential growth in bundled voice, data and Internet services to key international markets; and - strengthening international network presence and wholesale customers. There are potential risks to the STAR merger, including: - profitability may not be achieved, and World Access and STAR will incur significant merger-related expenses; - increased cash flow may be necessary to fund capital expenditures and meet our obligations on outstanding indebtedness; - market share may decrease, and we may face pricing pressures if we are not able to compete successfully with other telecommunications firms; and - government regulatory policies may increase pricing pressures, delay payments, change foreign currency values and decrease demand for our services and products. The potential benefits to the STAR merger may not be achieved. CONDITIONS TO COMPLETION OF THE STAR MERGER World Access' and STAR's respective obligations to complete the STAR merger are subject to the satisfaction or waiver of closing conditions. The conditions that must be satisfied or waived before either World Access or STAR is obligated to complete the STAR merger include the following, subject to exceptions and qualifications: - the STAR merger agreement and the STAR merger must be approved by the requisite vote of the stockholders of World Access and STAR; and - the registration statement with respect to the shares of World Access common stock to be issued in the STAR merger must be declared effective by the Securities and Exchange Commission. The conditions that must be satisfied or waived before World Access is obligated to complete the STAR merger include the following, subject to exceptions and qualifications: - holders of fewer than 1% of the shares of STAR common stock shall have exercised dissenters' rights of appraisal under Delaware law; - the representations and warranties of STAR must be true and correct; 9 23 - STAR must comply with its agreements in the STAR merger agreement; - all consents and approvals required of STAR to complete the STAR merger must be obtained; - no material adverse effect may occur with respect to STAR; - World Access must receive from STAR's legal counsel a legal opinion reasonably satisfactory to World Access; - no laws may be adopted and no injunctions or orders may be in effect that prevent the STAR merger or which would otherwise have a material adverse effect on World Access; - STAR must complete the sale of PT-1 for net cash proceeds of at least $150.0 million pursuant to an agreement reasonably satisfactory to World Access; and - STAR must provide evidence satisfactory to World Access that all obligations of STAR relating to the China-U.S. Cable Network were fully satisfied by the reclamation of STAR's capacity in the network and that STAR has no further obligations or liabilities with respect to the network. The conditions that must be satisfied or waived before STAR is obligated to complete the STAR merger include the following, subject to exceptions and qualifications: - the representations and warranties of World Access must be true and correct; - World Access must comply with its agreements in the STAR merger agreement; - all consents and approvals required of World Access to complete the STAR merger must be obtained; - no material adverse effect may occur with respect to World Access; - STAR must receive from World Access' legal counsel a legal opinion reasonably satisfactory to STAR; - no laws may be adopted and no injunctions or orders may be in effect that prevent the STAR merger or which would otherwise have a material adverse effect on World Access; and - World Access must have made its required deposit of cash and stock certificates with the exchange agent pursuant to the STAR merger agreement. If either World Access or STAR waives any conditions, World Access and STAR will each consider the facts and circumstances at that time and make a determination as to whether a resolicitation of proxies from stockholders is appropriate. The completion of the STAR merger is not conditioned upon the completion of the WORLDxCHANGE merger. VOTE REQUIRED FOR APPROVAL The holders of a majority of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock and Series D 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 on an as-converted to common stock basis. In this joint proxy statement/ prospectus, we refer to the World Access common stock, the Series A preferred stock, the Series C preferred stock and the Series D 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. 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 are entitled to cast one vote per share owned as of [ ], 2000, the STAR record date. 10 24 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. STAR stockholders holding [ %] of the outstanding common stock of STAR as of the STAR record date have agreed to vote in favor of the STAR merger. Directors and officers of STAR collectively beneficially owned approximately [ %] of the outstanding common stock of STAR as of the STAR record date. TERMINATION OF THE STAR MERGER AGREEMENT The STAR merger agreement may be terminated under limited circumstances at any time before the completion of the STAR merger. The circumstances, subject to exceptions and qualifications, include: - by mutual written consent of World Access and STAR; - by World Access or STAR, in the event of an uncured breach by the other party of any of its covenants or agreements in the STAR merger agreement; - by World Access or STAR, in the event of an uncured breach by the other party of any of its representations or warranties in the STAR merger agreement; - by World Access or STAR, if the STAR merger is not completed on or before September 30, 2000; - by World Access or STAR if a final, nonappealable court order prohibiting the STAR merger is issued or if a court fails to issue a court order which is necessary to complete the STAR merger, and the failure to issue the order is final and nonappealable; - by World Access or STAR, if the stockholders of World Access or STAR fail to adopt the STAR merger agreement by the requisite vote at meetings duly called; - by World Access, if the STAR board of directors (i) withdraws or modifies its recommendation that the STAR stockholders approve and adopt the STAR merger agreement and the STAR merger or (ii) approves or recommends an alternative proposal which the STAR board of directors concludes would result in a more favorable transaction, from a financial point of view, to the STAR stockholders than the STAR merger; - by STAR, at any time prior to the STAR stockholders' vote upon three business days' prior notice to World Access, if the STAR board of directors determines that an alternative proposal to acquire a majority of the stock or assets of STAR or in which the continuing STAR directors would not constitute a majority of the directors of the surviving entity would result in a more favorable transaction, from a financial point of view, to the STAR stockholders than the STAR merger; - by World Access, if either STAR or any of its material subsidiaries is the subject of (i) a voluntary or involuntary bankruptcy proceeding, (ii) the appointment of a liquidator, receiver or similar official or (iii) liquidation proceedings or the winding up of affairs; or - by World Access if there is an event of default under an anticipated credit agreement between World Access and STAR. TERMINATION FEE If the STAR merger agreement is terminated for certain reasons, STAR will be required to 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 terminated by STAR because the STAR board of directors determines that an alternative proposal to acquire a majority of the stock or assets of STAR or in which the continuing STAR directors would not constitute a majority of the directors of the 11 25 surviving entity would result in a more favorable transaction, from a financial point of view, to the STAR stockholders than the STAR merger; - if the STAR merger agreement is terminated by World Access because the STAR board of directors fails to recommend that the STAR stockholders approve the STAR merger or qualifies its recommendation in a manner adverse to World Access; - if the STAR merger agreement is terminated by World Access because the STAR board of directors approves or recommends an alternative proposal which the board of directors concludes would result in a more favorable transaction, from a financial point of view, to the STAR stockholders than the STAR merger; or - if the STAR merger agreement is terminated by World Access or STAR because the stockholders of STAR have not adopted the STAR merger agreement by the requisite vote, and STAR, within one year following the termination, enters into a definitive agreement with respect to a business combination of the type described in the STAR merger agreement. NO OTHER NEGOTIATIONS INVOLVING STAR STAR agreed that until completion of the STAR merger or unless World Access consents in writing, STAR will not directly or indirectly take any of the following actions: - solicit, initiate, encourage or knowingly facilitate any inquiries regarding the acquisition of, or the making of a proposal to acquire, a material portion of the assets or stock of STAR or involving a business combination with STAR; - participate in any discussions or negotiations regarding a proposal to acquire a material portion of the assets or stock of STAR or involving a business combination with STAR; - disclose any confidential information with respect to a proposal to acquire a material portion of the assets or stock of STAR or involving a business combination with STAR; or - knowingly facilitate any effort or attempt to make, implement or accept a proposal to acquire a material portion of the assets or stock of STAR or involving a business combination with STAR. Notwithstanding the restrictions above, STAR may, in response to an unsolicited, bona fide written proposal to acquire a material portion of the assets or stock of STAR or for a business combination with STAR, (i) recommend approval by its stockholders of such proposal or withdraw, modify or qualify in a manner adverse to World Access its recommendation that the STAR stockholders approve the STAR merger or (ii) furnish information and engage in discussions regarding such proposal, provided that: - the STAR special meeting has not occurred; - with respect to recommending approval of such a proposal or changing the recommendation to the STAR stockholders regarding the approval of the STAR merger, the STAR board of directors concludes that such a proposal involving the acquisition of a majority of the assets or stock of STAR or in which the continuing STAR directors would not constitute a majority of the directors of the surviving entity would result in a more favorable transaction, from a financial point of view, to the STAR stockholders than the STAR merger and terminates the STAR merger agreement and pays the $14.0 million termination fee described above; - with respect to furnishing information or engaging in discussions regarding a proposal to acquire a majority of the assets or stock of STAR or in which the continuing STAR directors would not constitute a majority of the directors of the surviving entity, the STAR board of directors concludes that such proposal could reasonably be expected to result in a more favorable transaction, from a financial point of view, to the STAR stockholders than the STAR merger; - prior to providing information to the third party making a proposal to acquire a material portion of the assets or stock of STAR or for a business combination with STAR, STAR enters into a 12 26 confidentiality agreement with such third party having terms at least as stringent as those contained in the confidentiality agreement between World Access and STAR; and - prior to providing information or entering into discussions with a third party, STAR notifies World Access of the third party inquiries, proposals or offers, including the identity of the third party and the material terms of the inquiries, proposals or offers. MANAGEMENT SERVICES World Access and STAR intend to enter into an agreement pursuant to which World Access will provide management services to STAR pending the completion of the STAR merger. STAR VOTING AGREEMENTS STAR stockholders Christopher E. Edgecomb and Samer Tawfik entered into voting and stock transfer restriction agreements with World Access. The agreements require these STAR stockholders to vote all shares of STAR common stock beneficially owned by them in favor of the approval and adoption of the STAR merger agreement and approval of the STAR merger. Mr. Edgecomb and Mr. Tawfik also agreed to restrictions on the pre-closing transfer of their shares of STAR common stock and post-closing transfer of shares of World Access common stock received by them in the STAR merger. Subject to restrictions, Mr. Edgecomb was given the right to have shares of World Access common stock issued to him in the STAR merger registered with the Securities and Exchange Commission. Mr. Edgecomb and Mr. Tawfik collectively held approximately [ %] of the voting power of STAR capital stock as of the STAR record date. OPINIONS OF WORLD ACCESS' AND STAR'S FINANCIAL ADVISORS In deciding to approve the STAR 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 STAR merger agreement. 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. The full text of the written opinions of the financial advisors are attached to this joint proxy statement/prospectus as Annex C and Annex E, respectively, and should be read carefully in their entireties for a description of the assumptions made, matters considered and limitations on the review undertaken. The opinion of Donaldson, Lufkin, & Jenrette Securities Corporation is directed to the World Access board, and the opinion of Deutsche Bank Securities, Inc. is directed to the STAR board and was given prior to the announcement of the WORLDxCHANGE merger agreement. These opinions do not constitute a recommendation as to how to vote to any stockholders with respect to any matter relating to the STAR merger. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE STAR MERGER Neither World Access, STI Merger Co. or STAR as the corporate parties, nor STAR stockholders will recognize gain or loss for federal income tax purposes as a result of participating in the STAR merger, except for: - cash received by STAR stockholders instead of fractional shares; - cash received by dissenting STAR stockholders who exercise appraisal rights; and - cash received by STAR stockholders if World Access elects to pay cash as part of the STAR merger consideration, in which case STAR stockholders will recognize their gain realized for federal income tax purposes, but only up to the amount of cash received, and any such recognized gain may be taxed as ordinary income. World Access has received a legal opinion to this effect. 13 27 ACCOUNTING TREATMENT OF THE STAR MERGER We intend to account for the STAR merger as a purchase for financial accounting purposes in accordance with United States generally accepted accounting principles. INTERESTS OF CERTAIN PERSONS IN THE STAR MERGER When considering the recommendations of World Access' and STAR's boards of directors, you should be aware that certain World Access and STAR directors, officers and stockholders have interests in the STAR merger that are different from, or are in addition to, all other stockholders of World Access and STAR. These interests include: - STAR's non-executive stock option committee determined that upon a change in control, all currently outstanding and future options held by Kelly Enos, Chief Financial Officer of STAR, and David Vaun Crumly, Executive Vice President of STAR, that have not vested, will become fully exercisable upon a change in control. The STAR merger constitutes a change in control under the agreement. - STAR has entered into an employment agreement with Mr. Crumly whereby upon the occurrence of a sale transaction, Mr. Crumly is entitled to receive a bonus equal to $1.5 million or a percentage of the monthly gross sales of accounts relating to customers introduced to STAR by Mr. Crumly. - World Access and Christopher Edgecomb have entered into a voting and stock transfer restriction agreement pursuant to which World Access granted to Mr. Edgecomb registration rights that entitle Mr. Edgecomb to include the shares of World Access common stock he receives in the STAR merger in any registration of capital stock for the account of World Access or any selling stockholder. - In the STAR merger agreement, World Access agreed to elect Christopher Edgecomb, or another person designated by STAR and agreed to by World Access, to the board of directors of World Access. ANTITRUST AND DOMESTIC AND FOREIGN REGULATORY APPROVAL REQUIRED TO COMPLETE THE STAR MERGER The STAR merger is subject to antitrust laws. World Access, STAR and other related parties have made the required filings with the Department of Justice, the Federal Trade Commission and the German Cartel Office. The Department of Justice and the Federal Trade Commission granted an early termination of the waiting period, effective March 16, 2000. No further action under the U.S. antitrust laws is required, as long as the STAR merger is completed prior to March 16, 2001. On May 18, 2000, the German Cartel office approved the STAR merger. The Department of Justice, the Federal Trade Commission or the German Cartel Office, as well as a foreign regulatory agency or government, state or private person, may challenge the STAR merger at any time before or after its completion. The STAR merger is also subject to state and federal telecommunications regulatory approvals. World Access and STAR have filed applications or notices, as required, in 48 states and at the FCC. The FCC has approved the STAR merger. RIGHTS OF DISSENTING STAR STOCKHOLDERS If pursuant to the terms of the STAR merger agreement, shares of STAR common stock are converted, at the election of World Access, into the right to receive both shares of World Access common stock and cash, other than cash in lieu of fractional shares, STAR stockholders will have the right to demand appraisal for their shares of STAR common stock. 14 28 If the STAR merger is approved by the required vote of STAR stockholders and is not abandoned or terminated and if the STAR stockholders will receive cash other than cash in lieu of fractional shares in the STAR merger, the holders of STAR common stock who did not vote in favor of or consent to the STAR merger may be entitled to exercise appraisal rights pursuant to Section 262 of the Delaware General Corporation Law, a copy of which is attached hereto as Annex G. In order to exercise appraisal rights, STAR stockholders must take certain steps, including, among others: - continuously holding the STAR common stock from the time of making a written demand for appraisal through the effective time of the STAR merger; - voting against the proposal to approve and adopt the STAR merger agreement; - delivering a written demand for appraisal to STAR before the taking of the vote on the STAR merger; and - filing a petition in the Court of Chancery of the State of Delaware demanding a determination of the fair value of the STAR common stock within 120 days after the date of the completion of the STAR merger. Fair value would be determined by the Court of Chancery of the State of Delaware exclusive of any element of value arising from the STAR merger. Failure to take any of the above actions required under Section 262 will result in a loss of such statutory appraisal rights. RESTRICTIONS ON THE ABILITY TO SELL WORLD ACCESS STOCK All shares of World Access common stock received by STAR stockholders in connection with the STAR merger will be freely transferable unless the holder is considered an affiliate of World Access or STAR under the Securities Act of 1933. 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. This summary may not contain all of the information that is important to you. You should read carefully this entire document and the other documents we refer to for a more complete understanding of the STAR merger. In particular, you should 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. 15 29 SUMMARY OF THE PT-1 SALE THE PT-1 SALE As a condition to World Access' obligation to complete the STAR merger, STAR is required to sell its wholly-owned subsidiary, PT-1 Communications, Inc., for net cash proceeds of at least $150.0 million. STAR has entered into a letter of intent with a third party, PT-1 acquiror, for the sale of certain assets of PT-1 and the assumption of certain liabilities for $150.0 million, subject to adjustment based on the net worth of the assets of PT-1 on the closing date. There can be no guarantee that the terms of a definitive agreement between STAR and PT-1 acquiror, or any other buyer, will contain the terms set forth in the PT-1 letter of intent. Further, as of the date of this joint proxy statement/prospectus, there can be no guarantee that completion of the sale of PT-1 to PT-1 acquiror, or any other buyer, will satisfy the condition precedent to World Access' obligation to complete the STAR merger. STAR is seeking stockholder approval to proceed with the PT-1 sale to PT-1 acquiror, or in the event that STAR does not reach a definitive agreement with PT-1 acquiror, to such other buyer and on such other terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in the accompanying joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. STAR has entered into the PT-1 letter of intent with PT-1 acquiror for the PT-1 sale and STAR anticipates that it will enter into a definitive agreement with PT-1 acquiror. This joint proxy statement/prospectus describes the PT-1 letter of intent in detail. Except as requested in the accompanying joint proxy statement/prospectus, STAR will not solicit any further stockholder vote for the PT-1 sale. Accordingly, STAR stockholders will not have the opportunity to vote on the definitive PT-1 sale agreement. The PT-1 letter of intent is attached to this joint proxy statement/prospectus as Annex F. STAR encourages the STAR stockholders to read the PT-1 letter of intent carefully. The PT-1 letter of intent is more fully described on page 102. NEGOTIATION OF DEFINITIVE AGREEMENT WITH PT-1 ACQUIROR STAR and PT-1 acquiror have agreed to proceed diligently and in good faith to negotiate, execute and deliver a definitive agreement in connection with the sale of PT-1 to PT-1 acquiror. The terms of the definitive agreement are subject to negotiation and may differ substantially from the terms of the PT-1 letter of intent. In the event that STAR and PT-1 acquiror are unable to reach a definitive agreement, STAR will proceed with the PT-1 sale to such other buyer and on such other terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. TERMS OF THE DEFINITIVE AGREEMENT WITH PT-1 ACQUIROR STAR is currently negotiating a definitive agreement with PT-1 acquiror based on the terms of the PT-1 letter of intent. In addition, negotiation of the final PT-1 sale agreement is subject to satisfactory completion of a due diligence review of PT-1 by PT-1 acquiror. Pursuant to the PT-1 letter of intent, PT-1 acquiror has agreed to pay STAR $150.0 million in cash for certain assets of PT-1, provided that the purchase price may be adjusted upward or downward to the extent that the net value of the purchased assets, less liabilities assumed by PT-1 acquiror, as set forth on the balance sheet to be delivered as soon as practicable following the closing, is greater than or less than $37,223,490. PT-1 acquiror will only assume PT-1's (i) accounts payable and accrued expenses, (ii) accrued taxes payable, (iii) short-term debt, (iv) deferred revenue and (v) long-term debt. 16 30 The PT-1 letter of intent provides that the definitive agreement will contain, among other things, representations and warranties, covenants, conditions and indemnification provisions appropriate for such agreements. The PT-1 letter of intent further provides that: - the representations and warranties of STAR will survive the close of the PT-1 sale for two years (other than those in respect of tax matters, which will survive the close of the PT-1 sale until the expiration of the applicable statute of limitations); - STAR and PT-1 acquiror will proceed diligently and in good faith to file all documents necessary to satisfy any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; - STAR will obtain all material third-party consents to the transactions contemplated by the PT-1 letter of intent, provided such condition may be waived by PT-1 acquiror in its sole discretion; - STAR shall use reasonable efforts to identify, with PT-1 acquiror, key employees and to cause certain of STAR's key executives to enter into employment agreements and non-competition agreements with PT-1 acquiror; and - STAR shall cause PT-1 to conduct the business and operations of PT-1 in the ordinary course consistent with past practice. THE PT-1 SALE CLOSING DATE STAR and PT-1 acquiror have agreed to proceed diligently and in good faith to complete the close of the PT-1 sale by the earlier of (i) the close of the STAR merger or (ii) June 30, 2000. VOTE REQUIRED FOR APPROVAL The holders of a majority of the outstanding shares of STAR common stock must approve the PT-1 sale. STAR stockholders are entitled to cast one vote per share owned as of [ ], 2000, the STAR record date. Christopher E. Edgecomb, a STAR stockholder holding [ %] of the outstanding common stock of STAR, has agreed to vote in favor of the PT-1 sale. Directors and officers of STAR collectively beneficially owned approximately [ %] of the outstanding common stock of STAR as of the STAR record date. TERMINATION FEE Pursuant to the PT-1 letter of intent, if the PT-1 sale agreement is terminated for certain reasons, STAR will be required to pay PT-1 acquiror a termination fee of $5.85 million. STAR will be required to pay the termination fee if STAR fails or refuses to consummate the PT-1 sale for any reason other than: - the failure to obtain necessary regulatory approval for the PT-1 sale; - the failure of a majority of the outstanding shares of STAR common stock to approve the PT-1 sale, provided STAR does not sell PT-1 to a third party within twelve months of the stockholder vote; - PT-1 acquiror's breach of the material terms and conditions of the definitive PT-1 sale agreement; or - the mutual written consent of STAR and PT-1 acquiror. 17 31 NO OTHER NEGOTIATIONS INVOLVING PT-1 STAR has agreed not to: - solicit, discuss or encourage the making of any inquiry, offer or proposal which constitutes or is reasonably likely to lead to an acquisition proposal; or - accept or entertain an offer by any person other than PT-1 acquiror, or enter into discussions with, or provide information to any person, other than PT-1 acquiror, concerning an acquisition proposal. STAR has agreed that it will keep PT-1 acquiror informed of any acquisition proposal. STAR VOTING AGREEMENT The PT-1 letter of intent requires Mr. Edgecomb, a STAR stockholder, to enter into a voting agreement with PT-1 acquiror. The agreement will require Mr. Edgecomb to vote all shares of STAR common stock beneficially owned by him in favor of the approval of the PT-1 sale. Mr. Edgecomb held approximately [ %] of the outstanding capital stock of STAR as of the STAR record date. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PT-1 SALE If STAR completes the PT-1 sale with PT-1 acquiror, or with another buyer on terms like those set forth in the PT-1 letter of intent, for cash, PT-1 will recognize substantial gain from the sale, which will only be partially offset by STAR's net operating loss carryovers and STAR will have income tax liability from the sale of PT-1's assets of between $6-$12 million. ACCOUNTING TREATMENT OF THE PT-1 SALE If STAR completes the sale of PT-1's assets to PT-1 acquiror, or with another buyer on terms like those set forth in the PT-1 letter of intent, for cash, STAR intends to account for the PT-1 sale as a sale of assets in accordance with United States generally accepted accounting principles. INTERESTS OF CERTAIN PERSONS IN THE PT-1 SALE When considering the recommendation of STAR's board of directors, you should be aware that certain STAR directors, officers and stockholders have interests in the STAR merger, of which the PT-1 sale is a condition precedent, that are different from, or are in addition to, all other stockholders of STAR. These interests are described on page 85. Kaufman Brothers, STAR's financial advisor in connection with the PT-1 sale, has been engaged to issue a fairness opinion to STAR's board of directors in connection with sale and is entitled to certain fees and expense reimbursements regardless of whether the PT-1 sale is consummated. ANTITRUST AND OTHER REGULATORY APPROVAL REQUIRED TO COMPLETE THE PT-1 SALE The PT-1 sale is subject to antitrust laws. STAR and PT-1 acquiror or such other buyer, will make the required filings with the Department of Justice and the Federal Trade Commission. However, the companies will not be permitted to complete the PT-1 sale until the applicable waiting periods have expired or terminated. The Department of Justice or the Federal Trade Commission, as well as a state or private person, may challenge the PT-1 sale at any time before or after its completion. 18 32 RIGHTS OF DISSENTING STAR STOCKHOLDERS If STAR completes the PT-1 sale to PT-1 acquiror, STAR stockholders will not be entitled to appraisal rights under Delaware law with respect to the PT-1 sale. This summary may not contain all of the information that is important to you. You should read carefully this entire document and the other documents we refer to for a more complete understanding of the PT-1 sale. In particular, you should read the documents attached to this joint proxy statement/ prospectus, including the PT-1 letter of intent, which is attached as Annex F. 19 33 SUMMARY OF THE WORLDXCHANGE MERGER THE WORLDXCHANGE MERGER In the WORLDxCHANGE merger, WORLDxCHANGE will merge into a wholly-owned subsidiary of World Access, with the surviving company continuing as a wholly-owned subsidiary of World Access. 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 therein relating to the possible payment by World Access to the WORLDxCHANGE shareholders of contingent shares after the completion of the WORLDxCHANGE merger upon the satisfaction of the conditions for such payment contained in the WORLDxCHANGE merger agreement and to make the necessary conforming changes. The WORLDxCHANGE merger agreement and the amendment to the WORLDxCHANGE merger agreement are attached to this joint proxy statement/prospectus as Annex B. The original WORLDxCHANGE merger agreement as amended is referred to in this joint proxy statement/prospectus as the WORLDxCHANGE merger agreement. World Access encourages you to read the WORLDxCHANGE merger agreement carefully. The WORLDxCHANGE merger agreement is more fully described on page 129. World Access believes the WORLDxCHANGE merger will provide several potential benefits, including: - strengthening international presence through adding WORLDxCHANGE's global communications network and presence in Europe and the Pacific Rim to World Access' operations; - providing a stronger telecommunications company during the consolidation trend in the international telecommunications services industry; and - combining growing retail operations and adding diversified revenues. There are potential risks to the WORLDxCHANGE merger, including: - profitability may not be achieved, and World Access and WORLDxCHANGE will incur significant merger-related expenses; - increased cash flow will be necessary to fund capital expenditures and meet our obligations on outstanding indebtedness; - market share may decrease, and we may face pricing pressures if we are not able to compete successfully with other telecommunications firms; and - government regulatory policies may increase pricing pressures, delay payments, change foreign currency values and decrease demand for our services and products. The potential benefits from the WORLDxCHANGE merger may not be achieved. CONDITIONS TO COMPLETION OF THE WORLDXCHANGE MERGER World Access' and WORLDxCHANGE's respective obligations to complete the WORLDxCHANGE merger are subject to the satisfaction or waiver of closing conditions. 20 34 The conditions that must be satisfied or waived before either World Access or WORLDxCHANGE is obligated to complete the WORLDxCHANGE merger include the following, subject to exceptions and qualifications: - the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, must expire or be terminated; - the WORLDxCHANGE merger agreement and the WORLDxCHANGE merger must be approved by the requisite vote or consent of the stockholders of World Access and shareholders of WORLDxCHANGE; - the registration statement with respect to the shares of World Access common stock to be issued in the WORLDxCHANGE merger must be declared effective by the Securities and Exchange Commission; and - World Access and WORLDxCHANGE must enter into the escrow agreement setting forth the terms and conditions under which the shares of World Access common stock issued in the WORLDxCHANGE merger to be placed in escrow will be held and released; The conditions that must be satisfied or waived before World Access is obligated to complete the WORLDxCHANGE merger include the following, subject to exceptions and qualifications: - fewer than 1% of the shares of WORLDxCHANGE common stock shall have exercised dissenters' rights under California law; - the representations and warranties of WORLDxCHANGE must be true and correct; - WORLDxCHANGE must have complied with its agreements in the WORLDxCHANGE merger agreement; - all consents and approvals required of WORLDxCHANGE to complete the WORLDxCHANGE merger must be obtained; - no material adverse effect shall have occurred with respect to the business, financial condition or results of operations of WORLDxCHANGE; - World Access must receive from WORLDxCHANGE's legal counsel a legal opinion with respect to the corporate existence of WORLDxCHANGE, the corporate power and authority of WORLDxCHANGE to perform and execute the WORLDxCHANGE merger agreement, and the effectiveness of the WORLDxCHANGE merger; - no laws, injunctions or orders preventing the WORLDxCHANGE merger or which would otherwise have a material adverse effect on World Access may be in effect; - the average World Access closing sale price for the ten consecutive trading days ending on the second day prior to the completion of the WORLDxCHANGE merger must not be below $15.00; 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. The conditions that must be satisfied or waived before WORLDxCHANGE is obligated to complete the WORLDxCHANGE merger include the following, subject to exceptions and qualifications: - the representations and warranties of World Access must be true and correct; - World Access must have complied with its agreements in the WORLDxCHANGE merger agreement; 21 35 - all consents and approvals required of World Access to complete the WORLDxCHANGE merger must be obtained; - WORLDxCHANGE must receive from World Access' legal counsel a legal opinion with respect to the corporate existence of World Access and WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., the corporate power and authority of World Access and WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co. to perform and execute the WORLDxCHANGE merger agreement, the effectiveness of the WORLDxCHANGE merger and the issuance of shares of World Access common stock pursuant to the WORLDxCHANGE merger agreement; and - no laws, injunctions or orders preventing the WORLDxCHANGE merger or which would otherwise have a material adverse effect on World Access may be in effect. The completion of the WORLDxCHANGE merger is not conditioned upon the completion of the STAR merger. VOTE OR CONSENT REQUIRED FOR APPROVAL The holders of a majority of the outstanding shares of World Access common stock, Series A preferred stock, Series C preferred stock and Series D 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. TERMINATION OF THE WORLDXCHANGE MERGER AGREEMENT The WORLDxCHANGE merger agreement may be terminated under limited circumstances at any time before the completion of the WORLDxCHANGE merger, subject to exceptions and qualifications. The circumstances include: - by mutual written consent of World Access and WORLDxCHANGE; - by World Access or WORLDxCHANGE, in the event of an uncured breach by the other party of any of its covenants or agreements in the WORLDxCHANGE merger agreement; - by World Access or WORLDxCHANGE, in the event of an uncured breach by the other party of any of its representations or warranties in the WORLDxCHANGE merger agreement; - by World Access or WORLDxCHANGE, if the WORLDxCHANGE merger is not completed on or before October 31, 2000; - by World Access or WORLDxCHANGE if a final court order prohibiting the WORLDxCHANGE merger is issued and is not appealable or if a governmental entity fails to issue an order which is necessary to fulfill a party's obligation to complete the WORLDxCHANGE merger, and the failure to issue such order is final and nonappealable; or 22 36 - by World Access or WORLDxCHANGE, if the stockholders of World Access or WORLDxCHANGE fail to adopt the WORLDxCHANGE merger agreement by the requisite vote or consent. NO OTHER NEGOTIATIONS INVOLVING WORLDXCHANGE WORLDxCHANGE has agreed that until completion of the WORLDxCHANGE merger or unless World Access consents in writing, WORLDxCHANGE will not directly or indirectly take any of the following actions: - solicit, initiate, encourage or knowingly facilitate any inquiries or the making, implementation or acceptance of a proposal regarding the acquisition of a material portion of the stock or assets of WORLDxCHANGE or a business combination involving WORLDxCHANGE; - participate in any discussions or negotiations regarding a proposal to acquire a material portion of the stock or assets of WORLDxCHANGE or a business combination involving WORLDxCHANGE; or - disclose any confidential information with respect to a proposal to acquire a material portion of the stock or assets of WORLDxCHANGE or for a business combination involving WORLDxCHANGE. POST-CLOSING INDEMNIFICATION Following the completion of the merger, WORLDxCHANGE must indemnify World Access against any losses incurred by World Access in connection with, subject to qualifications and exceptions, breaches by WORLDxCHANGE of covenants and representations and warranties set forth in the WORLDxCHANGE merger agreement. WORLDxCHANGE must also indemnify World Access for monetary penalties related to a matter before the California Public Utilities Commission which are imposed in connection with wrongful acts or omissions of WORLDxCHANGE occurring or arising from the date of the order imposing the monetary penalties until prior to completion of the WORLDxCHANGE merger. In order to secure these indemnification obligations, 2,453,385 shares of World Access common stock to be issued in the WORLDxCHANGE merger will be placed in escrow for at least one year following the completion of the WORLDxCHANGE merger. These shares constitute World Access' exclusive source of recovery for indemnifiable losses. WORLD ACCESS VOTING AGREEMENT 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 entered into voting and stock transfer restriction agreements with WORLDxCHANGE, pursuant to which these World Access stockholders have agreed to vote all shares of World Access capital stock beneficially owned by them in favor of the approval and adoption of the WORLDxCHANGE merger agreement and the transactions contemplated thereby. In addition, these stockholders have agreed, subject to limited exceptions, not to transfer or sell their shares of World Access common stock prior 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 VOTING AGREEMENTS 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 entered into voting and stock transfer restriction agreements with World Access. The agreements require these WORLDxCHANGE shareholders to vote all shares of WORLDxCHANGE capital stock beneficially owned by them in favor of 23 37 the approval and adoption of the WORLDxCHANGE merger agreement and the transactions contemplated thereby. 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. FOOTHILL CAPITAL CORPORATION PARTICIPATION AGREEMENT World Access has agreed to provide up to $45.0 million to Foothill Capital Corporation to be advanced by Foothill to WORLDxCHANGE and certain subsidiaries of WORLDxCHANGE. In the event of an acceleration by Foothill of the maturity of the loan or the failure of WORLDxCHANGE to repay its obligations at the stated maturity, all amounts collected by Foothill from collateral liquidation will be applied first to amounts owed to Foothill, and then to World Access. OPINION OF WORLD ACCESS' FINANCIAL ADVISORS 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. The full text of the written opinion of World Access' financial advisor is attached to this joint proxy statement/prospectus as Annex D and should be read carefully in its entirety for a description of the assumptions made, matters considered and limitations on the review undertaken. The opinion of Donaldson, Lufkin & Jenrette Securities Corporation is directed to the Word Access board. This opinion does not constitute a recommendation as to how to vote to any stockholders with respect to any matter relating to the WORLDxCHANGE merger. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE WORLDXCHANGE MERGER Neither World Access, WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., nor WORLDxCHANGE as the corporate parties, nor WORLDxCHANGE shareholders will recognize gain or loss for federal income tax purposes as a result of participating in the WORLDxCHANGE merger, except for: - cash received by WORLDxCHANGE shareholders instead of fractional shares; - cash received by WORLDxCHANGE shareholders who exercise dissenters' rights; and - the portion of the World Access common stock WORLDxCHANGE shareholders received in payment of accrued and unpaid dividends on their WORLDxCHANGE preferred stock, but only if the IRS takes the position that their receipt of such stock is not part of the reorganization for federal income tax purposes. ACCOUNTING TREATMENT OF THE WORLDXCHANGE MERGER World Access intends to account for the WORLDxCHANGE merger as a purchase for financial accounting purposes in accordance with U.S. generally accepted accounting principles. 24 38 INTERESTS OF CERTAIN PERSONS IN THE WORLDXCHANGE MERGER When considering the recommendations of World Access' and WORLDxCHANGE's boards of directors, you should be aware that certain 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. These interests include: - Under the terms of the WORLDxCHANGE merger agreement, World Access has agreed to cause one designee of WORLDxCHANGE to be elected to the World Access board of directors. 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 record date for determining the WORLDxCHANGE shareholders entitled to approve the WORLDxCHANGE merger, executive officers and directors of WORLDxCHANGE and Gold & Appel Transfer S.A. and Atocha, L.P. collectively beneficially owned a total of shares of WORLDxCHANGE common stock (not including any shares subject to outstanding options or warrants beneficially owned by these individuals or entities). Under the WORLDxCHANGE merger agreement, these shares will be converted in the WORLDxCHANGE merger into a total of shares of World Access common stock with an aggregate value of $ (assuming a per share value of World Access common stock equal to $20.38). In addition, as of the record date for determining the WORLDxCHANGE shareholders entitled to approve the WORLDxCHANGE merger, these individuals and entities collectively owned options and warrants to purchase a total of shares of WORLDxCHANGE common stock at exercise prices ranging from $ to $ per share. Under the WORLDxCHANGE merger agreement, these options and warrants will be converted into the right to acquire shares of World Access common stock in accordance with the WORLDxCHANGE merger agreement. - Each of Roger Abbott, Chief Executive Officer and director of WORLDxCHANGE, Edward Soren, Executive Vice President and director of WORLDxCHANGE, Gold & Appel Transfer S.A. and Atocha L.P. has agreed in his or its voting and stock transfer restriction agreement with World Access not to sell or otherwise transfer the World Access shares received by him or it in the WORLDxCHANGE merger until six months after the completion of the WORLDxCHANGE merger. However, Mr. Soren's agreement permits Mr. Soren immediately to sell up to 750,000 shares of World Access common stock to be received by Mr. Soren in the WORLDxCHANGE merger without restriction. In addition, Mr. Abbott's agreement permits Mr. Abbott immediately to sell such number of shares of World Access common stock to be received by Mr. Abbott in the WORLDxCHANGE merger as would provide Mr. Abbott with gross proceeds of up to $30.0 million. - Under Mr. Abbott's employment agreement with WORLDxCHANGE, if, in connection with a change of control of WORLDxCHANGE or otherwise, Mr. Abbott's employment with WORLDxCHANGE is terminated other than for cause, death or disability, or if Mr. Abbott's employment is constructively terminated, Mr. Abbott will be entitled to the payment of any earned but unpaid salary and/or bonus under the agreement and a lump sum cash payment in an amount equal to the amount he would have earned under the agreement from the date of termination through July 31, 2002 (currently $50,000 per month) plus the cost for Mr. Abbott to obtain benefits equivalent to those in effect at the time of the termination through July 31, 2002. The WORLDxCHANGE merger is a change of control under Mr. Abbott's employment agreement and the employment agreements discussed below. - Patrick Aelvoet, WORLDxCHANGE's Chief Financial Officer, has an employment agreement with WORLDxCHANGE that provides for the payment of a $50,000 severance payment to Mr. Aelvoet if, in connection with a change of control of WORLDxCHANGE or otherwise, 25 39 WORLDxCHANGE terminates Mr. Aelvoet's employment without cause and without at least 90 days' advance notice of such termination. In addition, Mr. Aelvoet's employment agreement provides for the payment of a $25,000 bonus to Mr. Aelvoet if the WORLDxCHANGE merger is completed prior to May 30, 2000, regardless of whether Mr. Aelvoet's employment is terminated following the WORLDxCHANGE merger. - Pursuant to three separate stock option agreements with WORLDxCHANGE, Mr. Aelvoet has options to purchase an aggregate of 150,000 shares at prices ranging from $9.00 per share to $11.00 per share. Under the WORLDxCHANGE merger agreement, all of these options will, to the extent not exercised by Mr. Aelvoet as of immediately prior to the WORLDxCHANGE merger, be converted into the right to acquire shares of World Access common stock in accordance with the merger agreement. Under Mr. Aelvoet's option agreements, if his employment with WORLDxCHANGE is involuntarily terminated within 12 months following a change of control of WORLDxCHANGE, his unvested options would become immediately fully vested and remain exercisable until the earlier of one year from the date of such termination or ten years from the applicable grant date. - Eric G. Lipoff, WORLDxCHANGE's Vice President and General Counsel, has an employment agreement with WORLDxCHANGE that provides that, if in connection with a change of control of WORLDxCHANGE or otherwise, WORLDxCHANGE terminates Mr. Lipoff's employment without cause or there is otherwise an involuntary termination of Mr. Lipoff's employment, Mr. Lipoff will be entitled to the payment of any earned but unpaid salary and/or bonus under the agreement and the amount of compensation that he would have earned under the agreement from the date of such termination through December 31, 2002 (currently $16,666 per month) plus the cost for Mr. Lipoff to obtain benefits equivalent to those in effect at the time of the termination through December 31, 2002. - Mr. Lipoff has an option to purchase a total of 150,000 shares of WORLDxCHANGE common stock at $10.00 per share. Under the WORLDxCHANGE merger agreement, this option will be converted into the right to acquire shares of World Access common stock in accordance with the WORLDxCHANGE merger agreement. Pursuant to Mr. Lipoff's option agreement, this option will fully vest on December 31, 2002, except that the options will immediately fully vest if Mr. Lipoff's employment with WORLDxCHANGE is terminated without cause or there is otherwise an involuntary termination of Mr. Lipoff's employment at any time prior to December 31, 2002. Options the vesting of which is so accelerated would remain exercisable until 90 days from the date Mr. Lipoff's employment is so terminated. - Effective January 3, 2000, each of Sen. Paul Laxalt and Dann Angeloff, who are directors of WORLDxCHANGE, received an option to purchase 12,500 shares of WORLDxCHANGE common stock at $10.00 per share. Under the WORLDxCHANGE merger agreement, these options will, to the extent not exercised by Sen. Laxalt and Mr. Angeloff, as applicable, as of the effective time of the WORLDxCHANGE merger, be converted into the right to acquire shares of World Access common stock in accordance with the WORLDxCHANGE merger agreement. The option agreements with respect to these options provide for the immediate vesting in full of these options upon a change of control of WORLDxCHANGE. If the vesting of these options is so accelerated, they would remain exercisable until the earlier of the day before the first anniversary of the termination of the optionee as a WORLDxCHANGE director following such change of control or ten years from the option grant date. ANTITRUST AND DOMESTIC AND FOREIGN REGULATORY APPROVALS REQUIRED TO COMPLETE THE WORLDXCHANGE MERGER The WORLDxCHANGE merger is subject to antitrust laws. World Access, WORLDxCHANGE and other related parties have made the required filings with the Department of Justice, the Federal Trade Commission, the German Cartel Office and Australian and New Zealand foreign investment review 26 40 boards. However, the companies are not permitted to complete the WORLDxCHANGE merger until the applicable waiting periods have expired or terminated. The Department of Justice and the Federal Trade Commission granted an early termination of the waiting period, effective April 6, 2000. No further action under the U.S. antitrust laws is required, as long as the WORLDxCHANGE merger is completed prior to April 6, 2001. The Department of Justice, the Federal Trade Commission, the German Cartel Office, and the Australian and New Zealand foreign investment review boards, as well as other foreign regulatory agencies or governments, state or private persons, may challenge the WORLDxCHANGE merger at any time before or after its completion. The WORLDxCHANGE merger is also subject to state and federal telecommunications regulatory approvals. World Access and WORLDxCHANGE have filed applications or notices, as required, in 48 states and at the FCC. The FCC has approved the WORLDxCHANGE merger. RIGHTS OF DISSENTING WORLDXCHANGE SHAREHOLDERS The WORLDxCHANGE shareholders may be entitled to exercise dissenters' rights pursuant to Chapter 13 of the California Corporations Code, a copy of which is attached hereto as Annex H. 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 WORLDxCHANGE record date; - the shares of WORLDxCHANGE stock must not have been voted in favor of the WORLDxCHANGE merger; - the holder of such 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 such shares of WORLDxCHANGE stock must submit share certificates for endorsement. 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 such agreement. 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/or whether the shares qualify as dissenting shares. Dissenting shares lose their status as dissenting shares and the holders of dissenting shares cease to be dissenting shareholders and cease to be entitled to require WORLDxCHANGE to purchase their shares if: - the WORLDxCHANGE merger is abandoned; - 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 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 such shareholder's demand for purchase of his, her or its shares. 27 41 RESTRICTIONS ON THE ABILITY TO SELL WORLD ACCESS STOCK All shares of World Access common stock received by WORLDxCHANGE shareholders in connection with the WORLDxCHANGE merger will be freely transferable unless the holder is considered an affiliate of World Access or WORLDxCHANGE under the Securities Act of 1933. 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. This summary may not contain all of the information that is important to you. You should read carefully this entire document and the other documents we refer to for a more complete understanding of the WORLDxCHANGE merger. In particular, you should 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. 28 42 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 three month periods ended March 31, 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 THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------- ----------------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- -------- -------- ---------- ---------- ---------- (UNAUDITED) STATEMENT OF CONTINUING OPERATIONS DATA(1): Carrier service revenue.......... $ -- $ -- $ -- $ 10,787 $ 501,081 $ 85,098 $ 255,541 Gross profit..................... -- -- -- 650 52,776 4,944 31,686 Depreciation and amortization.... 30 71 115 416 13,541 2,237 17,759 Restructuring charge............. -- -- -- -- 37,800 -- -- Operating loss................... (880) (1,011) (1,550) (4,383) (26,998) (1,062) (9,849) Loss from continuing operations..................... (1,292) (588) (460) (5,437) (27,098) (2,456) (17,783) Loss from continuing operations per share...................... $ (0.14) $ (0.05) $ (0.03) $ (0.25) (0.78) (0.07) (0.33) Weighted average shares outstanding.................... 9,083 13,044 17,242 22,073 37,423 36,089 55,189 BALANCE SHEET DATA: Cash and equivalents............. $ 1,887 $22,480 $118,065 $ 55,176 $ 147,432 $ 41,112 $ 145,347 Short-term investments........... -- -- -- -- -- -- 43,922 Restricted cash.................. -- -- -- -- 47,201 -- 32,042 Working capital.................. 17,884 52,149 206,769 350,816 289,844 127,687 343,236 Total assets..................... 23,604 52,512 207,294 544,649 1,629,804 605,974 2,048,685 Long-term debt................... 3,750 -- 115,264 137,523 408,338 135,631 413,989 Total liabilities................ 9,270 138 115,539 184,066 732,505 240,333 819,814 Stockholders' equity............. 14,334 52,374 91,755 360,583 897,299 365,641 1,228,871 OTHER FINANCIAL DATA: EBITDA from continuing operations before restructuring charge(2)...................... $ (850) $ (940) $ (1,435) $ (3,967) $ 24,343 $ 1,175 $ 7,910 Capital expenditures............. 280 1,176 3,591 12,216 7,198 1,895 8,997 - --------------- (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; and FaciliCom -- December 1999. (2) EBITDA from continuing operations consists of earnings (loss) before net interest expense (income), income taxes, foreign exchange gains or losses, depreciation and amortization. EBITDA should not be considered as a substitute for operating earnings, net income (loss), cash flow or other combined statement of operations or cash flow data computed in accordance with generally accepted accounting principles or as a measure of our results of operations or liquidity. EBITDA is widely used as a measure of a company's operating performance and its ability to service its indebtedness because it 29 43 assists in comparing performance on a consistent basis across companies, which can vary significantly. The following table reconciles our loss from continuing operations to EBITDA from continuing operations and EBITDA from continuing operations before restructuring charge: THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------- ------------------ 1995 1996 1997 1998 1999 1999 2000 ------- ----- ------- ------- -------- ------- -------- (UNAUDITED) Loss from continuing operations............ $(1,292) $(588) $ (460) $(5,437) $(27,098) $(2,456) $(17,783) Net interest expense (income).............. 412 (85) (838) 4,355 9,606 2,156 11,926 Income taxes benefit.... -- (338) (252) (3,301) (10,126) (762) (3,460) Foreign exchange (gain) loss.................. -- -- -- -- 620 -- (532) Depreciation and amortization.......... 30 71 115 416 13,541 2,237 17,759 ------- ----- ------- ------- -------- ------- -------- EBITDA from continuing operations............ (850) (940) (1,435) (3,967) (13,457) 1,175 7,910 Restructuring charge.... -- -- -- -- 37,800 -- -- ------- ----- ------- ------- -------- ------- -------- EBITDA from continuing operations before restructuring charge................ $ (850) $(940) $(1,435) $(3,967) $ 24,343 $ 1,175 $ 7,910 ======= ===== ======= ======= ======== ======= ======== STAR SELECTED HISTORICAL FINANCIAL INFORMATION The selected financial information for each of the five years ended December 31, 1999 set forth below has been derived from and should be read in conjunction with the audited financial statements of STAR. The financial information for the three month periods ended March 31, 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 such unaudited periods. THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- ---------- -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues................. $66,964 $283,450 $434,086 $619,220 $1,061,774 $228,209 $255,105 Operating expenses: Cost of services....... 50,300 244,153 374,504 523,621 925,206 192,914 225,840 Selling, general and administrative...... 13,356 41,804 48,906 66,140 160,067 31,465 33,329 Depreciation and amortization........ 952 2,343 5,650 15,054 44,236 8,730 13,050 Loss on impairment of goodwill............ -- -- -- 2,604 -- -- -- Merger expense......... -- -- 286 1,026 1,878 1,442 -- ------- -------- -------- -------- ---------- -------- -------- Total operating expenses............ 64,608 288,300 429,346 608,445 1,131,387 234,551 272,219 ------- -------- -------- -------- ---------- -------- -------- Income (loss) from operations.......... 2,356 (4,850) 4,740 10,775 (69,613) (6,342) (17,114) 30 44 THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- ---------- -------- -------- (UNAUDITED) Other income (expenses): Interest income........ 65 138 464 4,469 2,192 729 189 Interest expense....... (214) (1,270) (2,617) (3,386) (9,895) (1,213) (2,924) Legal settlements and expense............. -- (100) (1,653) -- -- -- -- Other.................. (97) 186 208 (304) 1,373 (2,021) 10,696 ------- -------- -------- -------- ---------- -------- -------- Income (loss) before provision for income taxes............... 2,110 (5,896) 1,142 11,554 (75,943) (8,847) (9,153) Provision (benefit) for income taxes........... 66 577 2,905 9,923 (12,096) (1,295) (2,629) ------- -------- -------- -------- ---------- -------- -------- Net income (loss)........ $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847) $ (7,552) $ (6,524) ======= ======== ======== ======== ========== ======== ======== 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) $ (0.14) $ (0.11) ======= ======== ======== ======== ========== ======== ======== 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 52,628 58,601 Diluted................ 19,916 24,076 31,101 42,434 57,036 52,628 58,601 31 45 AS OF DECEMBER 31, AS OF MARCH 31, -------------------------------------------------------- ------------------------ 1995 1996 1997 1998 1999 1999 2000 ------- -------- --------- ---------- ---------- ---------- ----------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit).......... $(1,065) $(10,913) $ 4,692 $ 46,698 $ (197,921) $ (85,773) $ (160,745) Total assets......... 37,169 76,250 130,382 374,651 807,754 638,674 741,884 Total long-term liabilities, net of current portion.... 2,980 8,834 14,800 33,048 96,693 38,691 84,060 Accumulated deficit.. (6,294) (12,077) (13,737) (12,106) (75,953) (19,657) (82,477) Stockholders' equity............. 6,614 9,986 40,615 195,591 278,054 336,207 270,068 OTHER CONSOLIDATED FINANCIAL AND OPERATING DATA: Capital expenditures(3).... $ 2,922 $ 14,810 $ 26,584 $ 147,236 $ 150,588 $ 32,021 $ 10,387 North American wholesale billed minutes of use(4).. 38,106 479,681 1,034,187 1,657,523 2,129,296 517,325 481,107 North American wholesale revenue per billed minute of use(5).......... $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084 $ 0.2468 $ 0.1682 - --------------- (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 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) Includes assets financed with capital leases, notes and vendor financing arrangements. (4) 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 f/k/a United Digital Network, Inc., a subsidiary of STAR, for all years presented. (5) 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. 32 46 The following table reconciles STAR's income (loss) from continuing operations to EBITDA from continuing operations (in thousands): AS OF DECEMBER 31, AS OF MARCH 31, ----------------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------- ------- ------- -------- -------- -------- (UNAUDITED) Income (loss) from continuing operations.................. $2,044 $(6,473) $(1,763) $ 1,631 $(63,847) $ (7,552) $ (6,524) Net interest expense (income).................... 149 1,132 2,153 (1,083) 7,703 484 2,735 Income tax expense (benefit)................... 66 577 2,905 9,923 (12,096) (1,295) (2,629) Other......................... 97 (86) 1,445 304 (1,373) 2,021 (10,696) Depreciation and amortization................ 952 2,343 5,650 15,054 44,236 8,730 13,050 ------ ------- ------- ------- -------- -------- -------- EBITDA from continuing operations.................. $3,308 $(2,507) $10,390 $25,829 $(25,377) $ 2,388 $ (4,064) ====== ======= ======= ======= ======== ======== ======== 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. SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues.................................... $331,660 $398,867 $421,580 $190,758 $291,600 Cost of services............................ 235,027 287,312 328,334 150,839 230,207 -------- -------- -------- -------- -------- Gross profit................................ 96,633 111,555 93,246 39,919 61,393 Selling, general and administrative......... 113,459 114,897 124,112 57,135 84,585 Depreciation and amortization............... 8,677 12,332 17,705 7,679 21,825 -------- -------- -------- -------- -------- Operating loss.............................. (25,503) (15,674) (48,571) (24,895) (45,017) Interest expense............................ 8,682 11,947 16,883 7,802 13,528 Other expense, net.......................... 3,366 1,378 648 397 727 Minority interest........................... (473) (1,546) (2,251) (1,071) -- -------- -------- -------- -------- -------- Net loss.................................... $(37,078) $(27,453) $(63,851) $(32,023) $(59,272) ======== ======== ======== ======== ======== AS OF SEPTEMBER 30, MARCH 31, ----------------------------------------------- --------- 1995 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------- --------- BALANCE SHEET DATA: Cash and cash equivalents............... 1,400 3,400 4,326 20,917 38,030 9,553 Working capital (deficit)............... (15,100) (35,400) (50,428) (37,035) (37,173) (268,677) Total assets............................ 55,200 62,800 103,745 120,129 235,002 422,512 Short-term debt and capital lease obligations........................... 13,500 15,700 9,456 20,272 20,381 174,142 Long-term debt, net of current portion............................... 24,900 24,700 49,204 99,313 129,719 71,434 Minority interest....................... -- 300 8,815 7,269 -- -- Total shareholders' deficit............. (8,600) (32,000) (68,880) (89,593) (35,053) (51,789) 33 47 SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- (UNAUDITED) OTHER DATA: EBITDA(1)................................... $(16,826) $ (3,342) $(30,866) $(17,216) $(23,192) Net cash provided by (used in) operating activities................................ (7,206) (31,735) (31,549) 2,210 (24,344) Capital expenditures........................ 19,404 22,411 81,024 21,003 16,343 GEOGRAPHIC DATA: Revenues: North America............................. $291,633 $321,763 $337,457 $147,398 $175,778 Pacific Rim............................... 24,437 58,382 55,619 29,621 25,829 Europe.................................... 15,590 18,722 28,504 13,739 89,993 -------- -------- -------- -------- -------- Total............................. $331,660 $398,867 $421,580 $190,758 $291,600 ======== ======== ======== ======== ======== - --------------- (1) EBITDA represents operating loss plus depreciation and amortization expense. WORLDxCHANGE has included information concerning EBITDA herein because such information is commonly used in the telecommunications industry as one measure of an issuer's operating performance and historical ability to service debt. EBITDA is not determined in accordance with generally accepted accounting principles, is not indicative of cash provided by operating activities, is not necessarily comparable to similarly titled measures of other companies, 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. The following table reconciles our net loss to EBITDA: SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ------------------------------ ------------------- 1997 1998 1999 1999 2000 -------- -------- -------- -------- -------- Net loss.................................... $(37,078) $(27,453) $(63,851) $(32,023) $(59,272) Net interest expense........................ 8,682 11,947 16,883 7,802 13,528 Other expense, net.......................... 3,366 1,378 648 397 727 Minority interest........................... (473) (1,546) (2,251) (1,071) -- Depreciation and amortization............... 8,677 12,332 17,705 7,679 21,825 -------- -------- -------- -------- -------- EBITDA...................................... $(16,826) $ (3,342) $(30,866) $(17,216) $(23,192) ======== ======== ======== ======== ======== UNAUDITED SELECTED PRO FORMA FINANCIAL INFORMATION The unaudited selected pro forma balance sheet of World Access as of March 31, 2000 set forth below gives effect to the merger of STI Merger Co., a wholly-owned subsidiary of World Access, and STAR, the merger of 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, as well as the sale by STAR of its wholly-owned subsidiary, PT-1, to PT-1 acquiror. The unaudited selected pro forma statement of operations data of World Access for the three months ended March 31, 2000 set forth below gives effect to the mergers reflected above and certain 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, LDI, STAR and WORLDxCHANGE, which, in the case of WORLDxCHANGE, are included in this document and, in the case of World Access, FaciliCom, Comm/Net, LDI and STAR, are incorporated herein by reference. 34 48 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 therein 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." YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1999 MARCH 31, 2000 ----------------- ------------------ UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS DATA: Carrier service revenues.................................... $2,199,507 $526,524 Operating expenses: Cost of carrier services.................................... 1,877,598 452,847 Selling, general and administrative......................... 434,388 84,471 Depreciation and amortization............................... 193,583 53,637 Provision for doubtful accounts............................. 13,980 9,848 Merger expense.............................................. 1,867 -- Restructuring and other special charges..................... 44,187 -- ---------- -------- Total operating expenses.......................... 2,565,603 600,803 ---------- -------- Operating loss.................................... (366,096) (74,279) Interest and other income................................... 14,052 16,991 Interest and other expense.................................. (89,787) (24,339) Foreign exchange loss....................................... (2,369) 438 ---------- -------- Loss from continuing operations before income taxes and minority interests.................... (444,200) (81,189) Provision (benefit) for income taxes........................ (17,843) (4,665) ---------- -------- Loss from continuing operations before minority interest.......................................... (426,357) (76,524) Minority interest........................................... 1,614 -- ---------- -------- Loss from continuing operations................... (424,743) (76,524) Preferred stock dividends................................... (2,461) (632) ---------- -------- Loss from continuing operations available to common stockholders............................... $ (427,204) $(77,156) ========== ======== Loss per common share from continuing operations: Basic.................................................. $ (4.13) $ (0.72) ========== ======== Diluted................................................ $ (4.13) $ (0.72) ========== ======== Weighted average shares outstanding: Basic.................................................. 103,353 107,908 ========== ======== Diluted................................................ 103,353 107,908 ========== ======== 35 49 AT MARCH 31, 2000 --------------- UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA: Current Assets Cash and equivalents........................................ $ 269,190 Short-term investments...................................... 45,232 Restricted cash............................................. 30,847 Accounts receivable......................................... 454,215 Prepaid expenses and other current assets................... 75,462 Net assets held for sale.................................... 238,405 ---------- Total Current Assets.............................. 1,113,351 Property and equipment, net................................. 612,423 Goodwill and other intangibles, net......................... 2,011,741 Other assets................................................ 77,267 ---------- Total Assets...................................... $3,814,782 ========== Current Liabilities Short-term debt............................................. $ 288,812 Accounts payable............................................ 542,779 Other accrued liabilities................................... 282,608 ---------- Total Current Liabilities......................... 1,114,199 Long-term debt.............................................. 523,990 Other long-term liabilities................................. 46,018 ---------- Total Liabilities................................. 1,684,207 ---------- Stockholders' Equity (Deficit) Preferred stock............................................. 6 Common stock................................................ 1,124 Additional paid in capital.................................. 2,326,679 Deferred compensation....................................... (2,883) Accumulated other comprehensive loss........................ (4,368) Accumulated deficit......................................... (189,983) ---------- Total Stockholders' Equity (Deficit).............. 2,130,575 ---------- Total Liabilities and Stockholders' Equity........ $3,814,782 ========== 36 50 COMPARATIVE PER SHARE DATA (UNAUDITED) Set forth below are historical income (loss) per share from continuing operations and book value per common share data of World Access, STAR and WORLDxCHANGE and the income (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 CommNet in May 1999, the acquisition of FaciliCom in December 1999. No common stock dividends were paid by World Access during the periods presented below. THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1999 MARCH 31, 2000 ----------------- -------------- World Access -- Historical: Loss per share from continuing operations: Basic.................................................. $(0.78) $(0.33) Diluted................................................ (0.78) (0.33) Book value per common share(1)............................ 17.41 20.81 World Access -- Pro Forma: Loss per share from continuing operations(2): Basic.................................................. $(4.13) $(0.72) Diluted................................................ (4.13) (0.72) Book value per common share(3)............................ 19.06 THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1999 MARCH 31, 2000 ----------------- -------------- STAR -- Historical: Net loss per share(2): Basic.................................................. $(1.12) $(0.11) Diluted................................................ (1.12) (0.11) Book value per common share(1)............................ 4.75 4.61 SIX MONTHS YEAR ENDED ENDED SEPTEMBER 30, 1999 MARCH 31, 2000 ------------------ -------------- WORLDxCHANGE -- Historical: Net loss per share(2): Basic.................................................. $(1.91) $(1.64) Diluted................................................ (1.91) (1.64) Book value per common share(1)............................ (0.95) (1.40) - --------------- (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 income (loss) per share from continuing operations is presented on a basic and diluted basis computed as pro forma income (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. 37 51 RISK FACTORS THE STAR MERGER, INCLUDING THE PT-1 SALE, AND THE WORLDXCHANGE MERGER INVOLVE A HIGH DEGREE OF RISK. UPON COMPLETION OF THE STAR MERGER AND THE WORLDXCHANGE MERGER, THE STAR STOCKHOLDERS AND WORLDXCHANGE SHAREHOLDERS WHO DO NOT PERFECT DISSENTERS' RIGHTS WILL RECEIVE WORLD ACCESS COMMON STOCK. AN INVESTMENT IN WORLD ACCESS COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. 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 CONCERNING THE MERGERS WE MAY NOT ACHIEVE ANTICIPATED BENEFITS FROM INTEGRATION OF OPERATIONS. The mergers require the integration in a timely manner of three companies that previously operated independently. We will have to combine our workforces and integrate our offices. We may require some employees to relocate as part of this process. We expect that we will, as a result of our increased size and requirements, be able to consolidate our purchasing and obtain more favorable prices from suppliers. However, our ability to do so may be limited by changes in the purchasing power or practices of our competitors and other market dynamics. No assurance can be given that we will be able to integrate our operations without encountering difficulties or experiencing the loss of key employees or that the cost savings and synergies expected from integration will be realized. The consolidation of operations will require substantial attention from management. The diversion of management's attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our revenues, levels of expenses and operating results and damage our relationship with our key customers and employees. WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY. On a pro forma basis, after giving effect to the mergers and certain other transactions, World Access would have had a loss from continuing operations for the three months ended March 31, 2000 of $0.72 per diluted share as compared to the $0.56 loss per diluted share from continuing operations for the same period on a stand alone basis. Despite anticipated benefits of the mergers, we may not achieve profitability. WORLD ACCESS, STAR AND WORLDXCHANGE WILL INCUR SIGNIFICANT MERGER-RELATED CHARGES. We will incur significant consolidation and integration expenses. In addition, World Access, STAR and WORLDxCHANGE will incur merger-related expenses of approximately $6.0 million, including investment banking, legal and accounting fees and financial printing and other related charges. The foregoing amounts are preliminary, and the actual amounts may be higher or lower. Moreover, we may incur additional unanticipated expenses in connection with the integration of our businesses. WE MAY NOT SUCCESSFULLY INTEGRATE THE NETWORKS OF STAR AND WORLDXCHANGE INTO THE WORLD ACCESS NETWORK. The integration of the networks of STAR and WORLDxCHANGE into the World Access network will be a complex, time consuming and expensive process that may disrupt our business if not completed in a timely and efficient manner. Extended network downtime could have a material adverse effect on our revenues and our relationships with our customers. No assurance can be given that we will be able to successfully integrate the networks of STAR and WORLDxCHANGE into the World Access network. OUR INCREASED FINANCIAL LEVERAGE WILL SUBJECT US TO SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS. Immediately subsequent to the consummation of the mergers, we will have a higher degree of financial leverage than prior to the mergers. At March 31, 2000, World Access had $414.0 million of long-term debt and a total debt to equity ratio of approximately 39.8%, STAR had approximately $43.1 million of long-term debt and approximately $270.1 stockholders' equity and WORLDxCHANGE had $71.4 38 52 million of long-term debt and negative stockholders' equity. Based on World Access' pro forma balance sheet at March 31, 2000, as a result of the consummation of the mergers and certain other transactions, we would have had long-term debt of $524.0 million and a total debt to equity ratio of 38.1%. Our combined indebtedness could have serious negative consequences. For example, it could: - limit our ability to obtain additional financing for working capital, capital expenditures or other purposes or to obtain such financing on favorable terms; - require us to dedicate a substantial portion of our cash flow from operations to service payments on our debt, which will reduce the funds that would otherwise be available for operations and future business opportunities; - make it difficult for us to meet our debt service requirements or force us to modify our operations if there is a substantial decrease in operating income and cash flows or an increase in expenses; - limit our flexibility to react to changes in our businesses and the industry in which we operate and make us more vulnerable to downturns and competitive pressures in our businesses; and - require us to redeem a substantial portion of our outstanding debt securities upon the sale of certain portions of the World Access Equipment Group. There is no assurance that we will be able to meet the obligations on our outstanding indebtedness. World Access anticipates that its 2000 pro forma debt service payments will be approximately $415.0 million exclusive of any obligation to redeem our outstanding debt securities. If we are unable to generate sufficient cash flow or to otherwise obtain funds necessary to meet our obligations, or if we do not comply with the various covenants under our indebtedness, we will be in default under the terms of that debt. If we default, the holders of indebtedness can accelerate the maturity of the indebtedness that is owed to them, and this could cause defaults under our other indebtedness. DECREASED CASH FLOW MAY LIMIT OUR ABILITY TO CONTINUE TO MAKE CAPITAL EXPENDITURES FOR THE ACQUISITION AND DEVELOPMENT OF OUR INTERNATIONAL TELECOMMUNICATIONS NETWORK. We believe that we must continue to enhance and expand our network and build out our telecommunications network infrastructure in order to maintain our competitive position and continue to meet the increasing demands for service quality, capacity and competitive pricing. We will need to raise additional capital from equity or debt sources if our cash flow from operations is insufficient to meet our capital expenditure and working capital requirements. If our available cash flow substantially decreases as a result of lower telecommunications prices or for other reasons, we may have limited ability to continue to make capital expenditures for the acquisition and development of our international telecommunications network. If cash flow from operations is not sufficient to satisfy our capital expenditure requirements, there can be no assurance that additional debt or equity financing or other sources of capital will be available to meet our requirements. VOTING INTERESTS OF CURRENT WORLD ACCESS STOCKHOLDERS WILL BE SUBSTANTIALLY DILUTED. Following the completion of the mergers, the current World Access stockholders (i) will own shares representing approximately 63.0% of our total voting power and (ii) will own 65.0% of the total number of outstanding shares of our common stock on a fully diluted basis. 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. If only the STAR merger is completed, assuming that World Access elects to use its stock as consideration in the STAR merger to the maximum extent possible, the current World Access stockholders (i) will own shares representing approximately 78.0% of the total voting power of World Access after completion of the STAR merger and (ii) will own 80.0% of the total number of outstanding shares of World Access common stock on a fully diluted basis after completion of STAR merger. If only the WORLDxCHANGE merger is completed, the current World Access stockholders (i) will own shares representing approximately 76.0% of the total voting power of World Access after 39 53 completion of the WORLDxCHANGE merger and (ii) will own 77.0% of the total number of outstanding shares of World Access common stock on a fully diluted basis after completion of the WORLDxCHANGE merger. SALES OF LARGE AMOUNTS OF OUR SHARES FOLLOWING THE MERGERS COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK. The market price of our common stock could fall significantly if stockholders sell large amounts of stock in the public market following the mergers. These sales, or the possibility that these sales may occur, could make our stockholders unable to realize the value of the merger consideration received, as measured prior to completion of the mergers, and may make it more difficult for us to sell equity or equity-related securities in the future. After the mergers, all of the shares of our stock issued in the mergers will be eligible for immediate sale except shares held by affiliates of the companies that will be subject to limitations on the volume of sales under federal securities laws. In addition, some of our stockholders will have the right to demand registration of their shares for resale after the mergers. BENEFITS OF THE STAR MERGER OR THE WORLDXCHANGE MERGER WILL NOT BE AVAILABLE TO WORLD ACCESS STOCKHOLDERS IF EITHER OF THESE MERGERS IS NOT COMPLETED. None of the benefits identified by World Access and STAR as reasons for the STAR merger will be realized by World Access stockholders if the STAR merger is not completed. Likewise, none of the benefits identified by World Access and WORLDxCHANGE as reasons for the WORLDxCHANGE merger will be realized by World Access stockholders if the WORLDxCHANGE merger is not completed. Nevertheless, neither merger is conditioned on the completion of the other merger. IF THE PT-1 SALE IS NOT COMPLETED PRIOR TO THE CLOSING OF THE STAR MERGER, OR IF STAR DOES NOT RECEIVE NET CASH PROCEEDS OF AT LEAST $150.0 MILLION FROM THE PT-1 SALE, THE STAR MERGER MAY NOT CLOSE. On March 29, 2000, STAR entered into a letter of intent with a third party, PT-1 acquiror, for the sale of all of the assets of PT-1. Pursuant to the terms of the PT-1 letter of intent, PT-1 acquiror will pay $150.0 million in cash for the assets of PT-1, less certain liabilities and subject to a purchase price adjustment based on the results of a final audit to be conducted after the close of the PT-1 sale. While STAR expects that it will successfully complete the PT-1 sale, there can be no assurance that STAR will complete the PT-1 sale or that STAR will find another purchaser for PT-1. Further, there can be no assurance that STAR will complete the PT-1 sale to PT-1 acquiror, or to any other purchaser, for net cash proceeds of at least $150.0 million, as required by the STAR merger agreement. If STAR does not successfully complete the PT-1 sale to PT-1 acquiror, STAR will attempt to sell PT-1 to an alternative buyer subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. Pursuant to the terms of the STAR merger agreement, if STAR fails to sell PT-1 for net cash proceeds of at least $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 may need to obtain additional capital. STAR is not certain that it will be able to raise additional capital on favorable terms or at all. While STAR believes it will complete the PT-1 sale to PT-1 acquiror, the completion of the PT-1 sale is subject to certain conditions, including, among others: (i) negotiation of a definitive PT-1 sale agreement, (ii) the expiration of the waiting period applicable to the PT-1 sale under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the receipt of all material third party 40 54 consents and approvals required of PT-1 to complete the PT-1 sale. Accordingly, there can be no assurance that all such conditions will be satisfied. In addition, the PT-1 letter of intent provides that the PT-1 sale will be subject to termination under certain circumstances, including, among others: (i) by the nonbreaching party in the event of a breach of any material terms or conditions contained in the PT-1 sale agreement, (ii) if the necessary regulatory approvals are not obtained or (iii) if the PT-1 sale agreement is not approved by STAR's stockholders. STAR cannot guarantee that the PT-1 sale will be consummated with PT-1 acquiror or any other buyer. If STAR does not enter into a definitive PT-1 sale agreement with PT-1 acquiror and STAR does not enter into an alternative definitive agreement for the sale of PT-1, World Access does not have to complete the STAR merger. If a definitive PT-1 sale agreement is negotiated with PT-1 acquiror and subsequently terminated, STAR may face significant costs associated with the failed PT-1 sale, including a termination fee of $5.85 million. In addition, the completion of the PT-1 sale to PT-1 acquiror for cash proceeds of at least $150.0 million is dependent, in part, on the results of a final audit to be conducted after the close of the PT-1 sale. There can be no assurance that the net value of the assets of PT-1 will be greater than or equal to the value of the assets as originally presented to PT-1 acquiror, which may result in cash proceeds of less than $150.0 million for the PT-1 sale. If STAR fails to complete the PT-1 sale prior to the close of the STAR merger or to sell the assets of PT-1 for net cash proceeds of greater than $150.0 million, the STAR merger may not close. RISK FACTORS CONCERNING WORLD ACCESS, STAR AND WORLDXCHANGE OUR INABILITY TO INTEGRATE ACQUIRED COMPANIES COULD RESULT IN SUBSTANTIAL COSTS AND MAY DAMAGE OUR RELATIONSHIPS WITH OUR KEY CUSTOMERS AND EMPLOYEES. An element of our growth strategy is to acquire companies that complement or expand our existing business. If we are unable to successfully integrate acquired businesses, we may not be able to realize anticipated cost efficiencies, operational and other benefits in a timely manner, and we may incur substantial costs and delays or other operational, technical or financial problems. In addition, the failure to successfully integrate acquisitions may divert management's attention from our existing business and may damage our relationships with our key customers and employees. FUTURE ACQUISITIONS MAY SIGNIFICANTLY DECREASE OUR STOCKHOLDERS' PERCENTAGE OWNERSHIP, REDUCE OUR PROFITABILITY AND HINDER OUR ABILITY TO RAISE CAPITAL. We may issue securities in future acquisitions that could significantly reduce our stockholders' equity ownership and reduce our earnings on a per share basis. We also may incur additional debt and amortization expense related to goodwill and other intangible assets acquired in future acquisitions. This additional debt and amortization expense may reduce significantly our profitability and hinder our ability to raise capital in the future. WE MAY BE UNABLE TO MANAGE EFFECTIVELY OUR RAPID GROWTH, WHICH MAY MATERIALLY ADVERSELY AFFECT THE QUALITY OF OUR PRODUCTS AND SERVICES AND OUR ABILITY TO RETAIN KEY PERSONNEL. Our rapid growth from recent acquisitions and the expansion of our operations has placed significant demands on our resources. In addition, we expect that our 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 we are unable to manage our growth effectively, the quality of our products and services and our ability to retain key personnel could be adversely affected. To successfully manage our growth, we must 41 55 continue to improve our operational, financial and management information systems and to motivate and effectively manage our employees. WE MAY SUSTAIN MATERIAL LIABILITY AS A RESULT OF STOCKHOLDER SUITS AGAINST US. 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. We may have to pay substantial damages if the plaintiffs are successful in their actions. RESTRICTIONS UNDER OUR CREDIT FACILITY MAY REQUIRE US TO MAKE BUSINESS DECISIONS THAT ARE ADVERSE TO OUR LONG TERM INTERESTS AND THE INTERESTS OF OUR STOCKHOLDERS. Restrictions under our $100.0 million revolving line of credit facility may require us to make business decisions that are adverse to our long term interests and to the interests of the holders of our common stock. For example, we generally must obtain the lenders' consent and sometimes prepay a portion of the outstanding debt under the credit facility before we can issue securities, enter into acquisitions for cash or securities, dispose of our assets or incur additional debt. We also must maintain certain operating ratios and achieve specified financial thresholds. Upon a default under our credit facility, the lenders may require us to immediately repay the entire amount outstanding under the credit facility. If we cannot repay these borrowings, we may need to seek the protection of the federal bankruptcy laws to continue operating our business, and possibly sell our assets, which would have a material adverse effect on our business and our relationships with customers, suppliers and employees. Even if we were able to repay all amounts owed under the credit facility, our business, financial condition and results of operations would be materially adversely affected due to the resulting loss in liquidity. In addition, in the event of a default under the credit facility that we do not cure, the lenders could foreclose on the collateral securing our obligations, which would result in the lenders owning and having effective control over our operations and possibly in the sale of our assets, which would have a material adverse effect on our business and our relationships with customers, suppliers and employees. IF STAR'S LENDERS ACCELERATE PAYMENT OF THE AMOUNTS STAR OWES THEM, STAR COULD BECOME INSOLVENT OR BE FORCED TO FILE FOR BANKRUPTCY. STAR is subject to certain restrictions under its financing arrangements, including its financing arrangements with WorldCom Network Services, Inc. and RFC Capital Corporation and its anticipated financing arrangement with World Access. 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 accelerate payment on any of STAR's debt, it could force STAR to file for bankruptcy or reorganize its business. Under STAR's financing arrangements with WorldCom and its anticipated financing arrangement with World Access, if STAR commits a breach of the terms of the STAR merger agreement which results in World Access having the right to terminate the STAR merger agreement, World Access and WorldCom can accelerate payment of the outstanding balance. STAR's anticipated financing arrangement with World Access will provide for a predetermined initial advance with additional advances to be made solely in World Access' discretion. There can be no assurance that STAR will not breach any restrictions under its financing arrangements, that it will not breach the terms of the STAR merger agreement or that if STAR enters into a financing arrangement with World Access, that World Access will agree to make additional advances to STAR. STAR cannot predict what actions its lenders will take if it is out of compliance with any restrictions under any of its financing arrangements or under the STAR merger agreement. 42 56 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. There can be no assurance that WORLDxCHANGE will not breach any of its financing arrangements. 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 UNLESS THE WORLDXCHANGE MERGER IS COMPLETED BEFORE OCTOBER 1, 2000, WORLDXCHANGE WILL NEED TO RAISE ADDITIONAL CAPITAL TO PAY, OR WILL NEED TO RESTRUCTURE, ITS DEBT OBLIGATIONS, WHICH CANNOT BE ASSURED. The amount of WORLDxCHANGE's outstanding debt is large compared to its cash flow. As of March 31, 2000 WORLDxCHANGE had: - Total consolidated debt of approximately $204.5 million; and - Stockholders' deficit of approximately $51.8 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. No assurance can be given that additional capital will be raised or that such obligations can or will be restructured. STAR MAY NOT HAVE SUFFICIENT CASH FLOW FROM ITS BUSINESS TO PAY ITS DEBT. The amount of STAR's outstanding debt is large compared to its cash flow and the net book value of its assets. STAR has substantial repayment obligations under its outstanding debt. As of March 31, 2000, STAR had: - Total consolidated debt of approximately $184.3 million, including $82.0 million outstanding pursuant to its financing arrangement with RFC and including its financing arrangement with WorldCom which was entered into on April 12, 2000; and - Stockholders' equity of approximately $270.1 million. 43 57 The following chart shows the aggregate 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 accelerate payment of the amounts due under its financing arrangements. Also, because the interest rates under some of its financing 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 may not generate enough cash from its operations to meet these obligations. STAR has entered into a letter of intent with PT-1 acquiror to sell the assets of PT-1 for cash proceeds of $150.0 million less certain liabilities and subject to a purchase price adjustment. In the event that STAR does not reach a definitive agreement with PT-1 acquiror, STAR will attempt to sell PT-1 to another buyer subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. STAR expects that the proceeds it receives from the sale of PT-1 will provide it with sufficient capital to continue its operations and service its debt. However, there can be no assurance that the PT-1 sale to PT-1 acquiror will close, that STAR will find an alternative buyer for PT-1 or that the proceeds STAR receives from the PT-1 sale will be sufficient. AS A HOLDING COMPANY, OUR LIQUIDITY COULD BE ADVERSELY AFFECTED IF OUR SUBSIDIARIES ARE UNABLE TO DISTRIBUTE MONEY TO US. As a holding company without significant income from operations, we are dependent upon the income from our operating subsidiaries to meet our operating expenses. If our operating subsidiaries are unable to pay dividends or otherwise distribute amounts to us sufficient to cover our operating expenses, then we may be subject to liquidity problems, even if, on a consolidated basis, our operating subsidiaries are profitable. WE MAY LOSE MARKET SHARE AND FACE PRICING PRESSURES IF WE ARE NOT ABLE TO COMPETE SUCCESSFULLY WITH OTHER TELECOMMUNICATIONS FIRMS. The segments of the telecommunications industry in which we operate are intensely competitive. We believe that competition will continue to increase, placing downward pressure on prices, thus adversely affecting our gross margins. Many of the companies with whom we compete have significantly more extensive engineering, manufacturing, marketing, financial and technical resources than we have. We are uncertain whether we can continue to compete successfully or retain market share. IF WE FAIL TO ADEQUATELY RESPOND TO TECHNOLOGICAL CHANGES IN THE TELECOMMUNICATIONS INDUSTRY, WE MAY LOSE MARKET SHARE. The telecommunications industry is in a period of rapid technological evolution, marked by the introduction of competitive product and service offerings, such as the utilization of the Internet for international voice and data communications. We may fail to adequately respond to the technological changes in the telecommunications industry and thus lose market share. Technological developments by 44 58 our competitors may challenge our competitive position or increase the amount of expenditures that will be required for us to respond to a rapidly changing technological environment. IF WE CANNOT ATTRACT AND RETAIN QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL, WE MAY FAIL TO SUCCESSFULLY OPERATE OUR BUSINESS. We are highly dependent on the services of several key executive officers and technical employees, particularly John D. Phillips, World Access' Chief Executive Officer, and Walter J. Burmeister, World Access' President. In addition, we will need to hire additional skilled personnel to support the continued growth of our business. The market for skilled personnel, especially those with the technical abilities we require, is currently very competitive, and we must compete with much larger companies with significantly greater resources to attract and retain these persons. If we are unable to retain the services of Mr. Phillips, Mr. Burmeister, and other key management and technical personnel or to attract such personnel in the future, we may not be able to successfully operate our business. GOVERNMENT REGULATORY POLICIES AND INDUSTRY CONSOLIDATION IN EUROPE MAY DECREASE PROFIT MARGINS AND INCREASE PRICING PRESSURES IN OUR INDUSTRY AND DECREASE DEMAND FOR OUR SERVICES AND PRODUCTS. We 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 our services and products that support these services. Lower prices may affect the cost effectiveness of our deployment of public network services. User uncertainty regarding future policies may also decrease demand for our telecommunications products and services. OUR 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. Non-U.S. sales represented approximately 4.8% of World Access' total sales in the year ended December 31, 1999, approximately 11.7% of STAR's total sales in the year ended December 31, 1999 and approximately 25.5% of WORLDxCHANGE's total sales in the year ended December 31, 1999. After the mergers, we intend to increase our international sales. Our 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; - difficulty in accounts receivable collection; - potentially adverse tax consequences of international tax laws; - dependence on foreign partners; and - fluctuations in foreign currency values. WE MAY FACE LIABILITY UNDER THE FOREIGN CORRUPT PRACTICES ACT. Our international operations are subject to the Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. We may face liability under the Foreign Corrupt Practices Act as a result of past or future actions taken without our knowledge by our agents, strategic partners and other intermediaries. 45 59 WE MAY NOT BE ABLE TO LEASE TRANSMISSION FACILITIES AT HISTORICAL RATES. Our future profitability will be based in part upon our 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. As a result of the mergers, we will be able to utilize World Access' network facilities, STAR's network facilities and WORLDxCHANGE's network facilities. However, our experience in providing data transmission services to date has been limited and, consequently, we can provide no assurance that we will be successful in the data transmission business. Our ability to successfully enter the data transmission business will depend upon, among other things, our ability to: - select new equipment and software and integrate these into our network; - hire and train qualified personnel; and - enhance our billing, back-office and information systems to accommodate data transmission services and customer acceptance of our service offerings. If we are not successful, there may be a material adverse effect on our business, financial condition and operations. Also, a substantial portion our transmission capacity is obtained on a variable, per minute and short-term basis, subjecting us to the possibility of unanticipated price increases and service cancellations. Since we 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, our gross margins are subject to significant fluctuations. Competitive pricing pressures for these facilities may also negatively impact us in the longer term. In providing these services, we will be dependent upon vendors for assistance in the planning and deployment of our data product offerings, as well as ongoing training and support. In Europe, there are a number of different protocols for data transmission. Our network will need to be able to handle all of these protocols, which will pose technical difficulties. DELAYS AND INCONSISTENCIES IN IMPLEMENTATION OF THE WORLD TRADE ORGANIZATION AGREEMENT AND OTHER COMPETITIVE DIRECTIVES MAY ADVERSELY AFFECT OUR BUSINESS 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. Our ability to expand our operations internationally will be limited if any signatory country to the World Trade Organization Agreement fails to implement its obligations on a timely basis. These factors and other obstacles which could develop in connection with the deregulation of telecommunications services could have a material adverse effect on our operations by slowing down our rate of expansion. The national governments of the European Union member states in which we currently operate, and in which we may operate in the future, were required to pass legislation to liberalize the telecommunications markets within their countries to implement European Commission directives. Most of the member states have now implemented the required legislation. In certain cases this has been done on an inconsistent, and sometimes unclear, basis. In addition, 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. 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. These factors and other obstacles which 46 60 could develop in connection with deregulation of telecommunications services could have a material adverse effect on our operations by slowing down the rate of our expansion. WE CANNOT ASSURE YOU THAT OUR PLANNED ENTRY INTO THE INTERNET AND DATA BUSINESS IN EUROPE WILL BE SUCCESSFUL. The market for Internet connectivity and related services is extremely competitive. Our primary competitors will include other Internet service providers, or ISPs, that have a significant national or international presence. Many of these carriers have substantially greater resources, capital and operational experience than we do. We also expect we will experience increased competition from traditional telecommunications carriers that expand into the market for Internet services. In addition, we will require substantial additional capital to make investments in our Internet operations, and we may not be able to obtain that capital on favorable terms or at all. Even if we are able to establish and expand our Internet business, we will face numerous risks that may adversely affect the operations of our Internet business. These risks include: - competition in the market for Internet services; - our limited operating history as an ISP; - our ability to adapt and react to rapid changes in technology related to our Internet business; - uncertainty relating to the continuation of the adoption of the Internet as a medium of commerce and communications; - vulnerability to unauthorized access, computer viruses and other disruptive problems; - adverse regulatory developments; - potential liability for information disseminated over our network; and - difficulties managing the growth of our Internet business, including the need to enter into agreements with other providers of infrastructure capacity and equipment and to acquire other ISPs and Internet-related businesses on acceptable terms. AS WE EXPAND OUR FOCUS ON RETAIL CUSTOMERS AND EMERGING CARRIERS, OUR LEVEL OF UNCOLLECTIBLE DEBT MAY INCREASE. As a wholesale provider of international long distance services, we will depend upon traffic from other long distance providers, and upon the collection of receivables from these customers. If we experience difficulties in the collection of our accounts receivable from our major customers, our cash flow may be substantially reduced. In addition, we may expend considerable resources to collect receivables from customers who fail to make timely payments. In our experience, a large percentage of the revenues generated by retail customers and from emerging carriers is uncollectible. Therefore, if the percentage of our revenues derived from retail operations and from sales to emerging carriers increases, our level of uncollectible debt is likely to increase. WORLD ACCESS' CERTIFICATE OF INCORPORATION AND BYLAWS COULD MAKE IT LESS LIKELY THAT ITS STOCKHOLDERS RECEIVE A PREMIUM FOR THEIR SHARES IN AN UNSOLICITED TAKEOVER ATTEMPT. If World Access stockholders do not approve Proposals 4 and 5 in this joint proxy statement/ prospectus, some provisions of World Access' amended certificate of incorporation and its bylaws could discourage unsolicited acquisition proposals or delay or prevent a change in control resulting in its stockholders receiving a lower premium for their shares in any such attempt or in our market price per share and the voting and other rights of its stockholders being adversely affected. Currently, those provisions include a classified board of directors, a prohibition on written consents in lieu of meetings of 47 61 the stockholders and the authorization to issue up to 150,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, with the board having the authority to designate the rights, preferences and limitations of the preferred stock. TERMINATION OF WORLD ACCESS' CARRIER SERVICE AGREEMENT WITH WORLDCOM NETWORK SERVICES COULD MATERIALLY ADVERSELY AFFECT OUR REVENUES. World Access entered into a Carrier Service Agreement with WorldCom Network Services, Inc., a wholly-owned subsidiary of MCI WorldCom, under which WorldCom Network Services purchases international long distance services from us on a wholesale basis. WorldCom Network Services presently provides a significant portion of our service revenues. Termination of the service agreement, or any reduction in the services provided, could materially decrease our revenues. WorldCom Network Services is obligated to purchase from World Access at least $25.0 million a month of such services, provided the services are of acceptable quality and the rates quoted are at least equal to the rates WorldCom Network Services 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. Revenues attributable to the Service Agreement for 1999 comprised approximately 53.4% of total 1999 revenues of World Access for this period. TECHNICAL DIFFICULTIES WITH OR FAILURES IN OUR TELECOMMUNICATIONS NETWORK COULD RESULT IN DISSATISFIED CUSTOMERS AND LOST REVENUE. Technical difficulties with or failures in our telecommunications network could result in dissatisfied customers and lost revenue. For example, a failure in a portion of our network could prevent us from delivering telephone calls initiated by our customers. Additionally, technical difficulties with the network could cause the loss of call detail record information, which is the basis for our ability to process and substantiate customer billings. Components of our networks have failed in the past which have had a material adverse effect on our operating results. There can be no assurance that similar or other failures will not occur in the future. THE GROWTH OF OUR TELECOMMUNICATIONS NETWORK WILL BE COSTLY, AND WE MAY NOT BE ABLE TO INCREASE OUR NETWORK CAPACITY AT A RATE THAT IS COMMENSURATE WITH THE DEMANDS OF OUR CUSTOMER BASE. We are currently in the process of expanding our network, and as we expand our network and the volume of our network traffic, our 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 our operating margins may decrease. If our traffic volume were to decrease, or fail to increase to the extent expected or necessary to make efficient use of our network, our costs as a percentage of revenues would increase significantly, which could have a material adverse effect on our business, financial condition or results of operations. In addition, our business depends in part on our ability to obtain transmission facilities on a cost-effective basis. We may not be able to obtain sufficient transmission facilities or access to undersea fiber optic cable on economically viable terms. Our failure to obtain telecommunications facilities that are sufficient to support our network traffic in a manner that ensures the reliability and quality of our telecommunications services could have a material adverse effect on our business, financial condition or results of operations. Undersea fiber optic cables typically take several years to plan and construct, and carriers generally make investments well in advance, based on a forecast of anticipated traffic. Therefore, our operations are subject to the risk that we will not adequately anticipate the amount of traffic over our network and may not procure sufficient cable capacity or network equipment in order to ensure the cost-effective transmission of customer traffic. We do not control the construction of these facilities and must obtain access to these facilities through partial ownership positions. If ownership positions are not available, we must obtain access to these facilities through lease arrangements on negotiated terms that may vary with industry and market conditions. 48 62 FOREIGN GOVERNMENTS MAY ATTEMPT TO PREVENT US FROM CONDUCTING OUR BUSINESS. 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 our competitors or companies, such as national telephone companies, upon which we and our foreign partners may depend for required interconnections to local telephone networks and other services. Accordingly, government actions in the future could have a material adverse effect on our operations. In highly regulated countries in which we are not dealing directly with the dominant local exchange carrier, the dominant carrier may have the ability to route service to our foreign partner and, if this occurs, we may not receive the revenues from the services and have limited or no recourse. In countries where competition is not yet fully established and we are dealing with an alternative operator, foreign laws may prohibit or impede new operators from offering services in these markets. We currently plan to expand our foreign operations as these markets increasingly permit competition. The nature, extent and timing of our 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 us with practical opportunities to compete in the near future, or at all, and we may not be able to take advantage of any such liberalization in a timely manner. RECENT FEDERAL COMMUNICATIONS COMMISSION ACTIONS MAY ADVERSELY AFFECT US BY INCREASING COMPETITION, WHICH MAY INCREASE PRICING PRESSURES AND DECREASE DEMAND FOR OUR SERVICES. Recent FCC 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 FCC'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 our margins and decrease demand for our services. FCC INTERVENTION REGARDING THE SETTLEMENT RATES CHARGED BY FOREIGN CARRIERS MAY DISRUPT OUR TRANSMISSION ARRANGEMENTS TO CERTAIN COUNTRIES. The FCC 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 FCC's benchmarks order was recently upheld by the U.S. Court of Appeals for the District of Columbia circuit. The FCC's action may reduce our settlement costs, although the costs of other U.S. international carriers also may be reduced in a similar fashion. The FCC 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 FCC intervention could disrupt our transmission arrangements to certain countries or require us to modify our existing arrangements. A RECENT FCC ORDER MAY ADVERSELY AFFECT OUR ABILITY TO COMPETITIVELY PRICE OUR SERVICE OFFERINGS. The Telecommunications Act of 1996 permits the FCC to forbear enforcement of the tariff provisions in such act, which apply to all interstate and international carriers, and the U.S. Court of Appeals for the District of Columbia Circuit recently upheld an FCC order directing all domestic interstate carriers to de- tariff their offerings. The FCC's order only applies to domestic services. However, the FCC may forbear its current tariff rules for U.S. international carriers such as us, or order these carriers to de-tariff their services. Any such FCC action would likely afford non-dominant international carriers greater flexibility in pricing service offerings, which would increase our competition. The FCC routinely reviews the contribution rate for various levels of regulatory fees, including the rate for fees levied to support universal 49 63 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 FCC. OUR FAILURE TO COMPLY WITH STATE REGULATIONS COULD RESULT IN PENALTIES, INCLUDING REVOCATION OF ONE OF OUR CERTIFICATES OF AUTHORITY. Various state laws and regulations impose prior certification, notification, registration, tariff and/or other requirements on our intrastate long distance telecommunications operations and our subsidiaries. The vast majority of states require that we and our subsidiaries apply for certification to provide intrastate telecommunications services. In most jurisdictions, we also must file and obtain prior regulatory approval of tariffs for intrastate services. State regulatory authorities can generally condition, modify or revoke certificates of authority or impose fines and other penalties for failure to comply with state laws and regulations. REGULATION OF CUSTOMERS MAY MATERIALLY ADVERSELY AFFECT OUR REVENUES BY DECREASING THE VOLUME OF TRAFFIC WE RECEIVE FROM MAJOR CUSTOMERS. Our customers are also subject to actions taken by domestic or foreign regulatory authorities that may affect the ability of customers to deliver traffic to us. Regulatory sanctions have been imposed on certain of our customers in the past. Future regulatory actions could materially adversely affect the volume of traffic received from a major customer, which could materially decrease our revenues. DELAYS AND COSTS INCURRED IN ACHIEVING COMPLIANCE WITH GOVERNMENT REGULATIONS AND EVOLVING INDUSTRY STANDARDS FOR OUR PRODUCTS COULD ADVERSELY AFFECT OUR REVENUES. Our products' failure to comply with the various existing and evolving regulations and industry standards or the delays and costs incurred in achieving compliance with these regulations and standards could materially decrease our revenues, increase our costs and reduce our profitability. Our 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 FCC, as well as with standards established by Bell Communications Research. Internationally, our products and services must comply with standards established by telecommunications authorities in various countries, as well as with recommendations of the International Telecommunications Union. OUR BUSINESS IS DEPENDENT UPON THE INTEGRITY AND EXPANSION OF OUR NETWORK AND TELECOMMUNICATIONS FACILITIES, WHICH PUTS OUR OPERATIONS AT RISK TO OUTSIDE FORCES BEYOND OUR CONTROL. Any system or network failure that interrupts our operations could have a material adverse effect on our business, financial condition or results of operations. Our operations are dependent on our ability to successfully expand our network and integrate new and emerging technologies and equipment into our network, which are likely to increase the risk of system failure and to cause strain upon the networks. Our operations also depend on our ability to protect our 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. We cannot be certain that our 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 have a material adverse effect on our relationships with our customers and our business, operating results and financial condition. 50 64 RISK FACTORS CONCERNING WORLD ACCESS COMMON STOCK THE PRICE OF WORLD ACCESS COMMON STOCK HAS BEEN VOLATILE AND COULD CONTINUE TO FLUCTUATE SUBSTANTIALLY. World Access common stock is traded on the Nasdaq National Market. The market price of World Access common stock has been volatile and could fluctuate substantially based on a variety of factors, including the following: - announcements of new products or technological innovations by us or others; - variations in our results of operations; - individual sales of large amounts of shares; - the gain or loss of significant customers; - the timing of acquisitions of businesses or technology licenses; - the issuance by World Access of significant amounts of common stock in connection with acquisitions or otherwise; - legislative or regulatory changes; - general trends in the industry; - market conditions; and - analysts' estimates and other events in our industry. In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market price for many technology companies and that have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of World Access common stock. SIGNIFICANT VARIANCE IN OUR QUARTERLY OPERATING RESULTS COULD ADVERSELY AFFECT THE PRICE OF WORLD ACCESS COMMON STOCK. In future quarters, our results of operations may fail to meet the expectations of market analysts and investors, which may adversely affect the price of our common stock. World Access quarterly operating results have varied significantly in the past and are expected to do so in the future. World Access' revenues, costs and expenses have fluctuated significantly in the past and are likely to continue to fluctuate significantly in the future as a result of numerous factors. Our 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; - the loss of economically beneficial routing options for the termination of our traffic; and - technical difficulties with or failures of portions of our network that impact our ability to provide service to or bill our customers. Our 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 our traffic; - increases in bad debt expense and reserves; - the timing of capital expenditures, and other costs associated with acquiring or obtaining other rights to switching and other transmission facilities; - changes in our sales incentive plans; and 51 65 - costs associated with changes in staffing levels of sales, marketing, technical support and administrative personnel. In addition, our operating results can vary due to factors such as: - changes in routing due to variations in the quality of vendor transmission capability; - our loss of favorable routing options; - the amount of, and the accounting policy for, return traffic under operating agreements; - actions by domestic or foreign regulatory entities; - the level, timing and pace of our expansion in international and retail markets; and - general domestic and international economic and political conditions. Further, we obtain a substantial portion of our transmission capacity on a variable, per minute and short-term basis; therefore, we may experience unanticipated price increases and service cancellations. Since we do not generally have long-term arrangements for the purchase or resale of long distance services, and since rates fluctuate significantly over short periods of time, our gross margins may also fluctuate significantly over short periods of time. In response to competitive pressures or new product and service introductions, we may take certain pricing or marketing actions that could materially adversely affect our quarterly operating results. We base our expense levels, in part, on our expectations of future sales. If future sales levels are below expectations, then we may be unable to adjust spending sufficiently in a timely manner to compensate for the unexpected sales shortfall. Accordingly, we believe that you should not rely upon period-to-period comparisons of our operating results as an indication of our future performance. In addition, the operating results of any quarterly period are not indicative of results that you should expect for a full fiscal year. 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. 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 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 these 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. Any forward-looking statement speaks only as of the date of this joint proxy statement/prospectus or the documents incorporated by reference, and none of World Access, STAR, or WORLDxCHANGE undertakes any obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. 52 66 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. Matters to be considered. At the World Access special meeting, stockholders of record of World Access as of the close of business on the World Access record date will be asked to consider and vote upon the following proposals: - Proposal 1. To approve and adopt the STAR merger agreement and the transactions contemplated thereby. Under the STAR merger agreement, (i) each outstanding share of STAR common stock will be converted into the right to receive, at the election of World Access, (a) 0.3905 shares of World Access common stock, subject to adjustment, also referred to as the exchange ratio, or (b) that number of shares of World Access common stock equal to 60% of the exchange ratio and 40% of the sum of 7.81 plus the net cash proceeds in excess of $150.0 million received by STAR upon the sale of its subsidiary, PT-1 Communications, Inc., divided by 62,856,702; and (ii) STAR will become a wholly-owned subsidiary of World Access; - Proposal 3. To approve and adopt the WORLDxCHANGE merger agreement and the transactions contemplated thereby. Under the WORLDxCHANGE merger agreement, (i) each outstanding share of WORLDxCHANGE common stock (including shares of preferred stock deemed to be automatically converted into common stock) will be converted into the right to receive 0.6583 shares of World Access common stock; and (ii) WORLDxCHANGE will become a wholly-owned subsidiary of World Access; - Proposal 4. To approve an amendment to Article IV of World Access' amended certificate of incorporation to increase the number of shares of common stock that World Access is authorized to issue from 150,000,000 shares to 290,000,000 shares; - Proposal 5. To approve an amendment to Article IX of World Access' amended certificate of incorporation to increase the number of authorized directors from 12 to 15 and to end the division of World Access' board of directors into three classes so that all directors will serve terms of one year or until their successors are duly elected and qualified or until their earlier resignation or removal; - Proposal 6. To approve an amendment to World Access' Directors' Warrant Incentive Plan to increase the number of warrants issuable under the Directors' Warrant Incentive Plan from 600,000 warrants to 1,200,000 warrants and to modify the performance criteria of World Access common stock under the plan; - Proposal 7. To elect as directors the two nominees named herein to serve (i) 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 (ii) 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; and - to transact such other business as may properly come before the World Access special meeting or any adjournments or postponements thereof. The stockholders of record of the World Access Series C preferred stock will not be entitled to consider and vote upon Proposal 7. 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 4 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. 53 67 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 thereby 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 thereby. 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 to increase the number of shares of common stock World Access has the authority to issue, increase the maximum number of authorized World Access directors and eliminate the classification of the World Access board of directors. The board also recommends a vote for the amendment to the World Access Directors' Warrant Incentive Plan to increase the number of warrants issuable under the Directors' Warrant Incentive Plan from 600,000 to 1,200,000 and for the nominees for director described in this joint proxy statement/prospectus. World Access record date. The board of directors of World Access has fixed , 2000 as the record date for determination of holders of World Access voting stock entitled to notice of, and to vote at, the World Access special meeting. Stockholders entitled to vote. As of the close of business on the 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 has 50,000 shares of Series A preferred stock issued and outstanding. Each share of Series A 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. The Series A preferred stock is entitled to vote on the approval and adoption of the proposals to be considered at the special meeting on an as converted basis with the World Access common stock voting together as a single class. Therefore, the holders of the Series A preferred stock may vote with the holders of World Access common stock on the proposals described herein as if they held 4,347,826 shares of World Access common stock. World Access also has 350,259.875 shares of Series C preferred stock issued and outstanding. Each share of Series C 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. Except with respect to the election of directors, the Series C preferred stock is entitled to vote on the approval and adoption of the proposals to be considered at the special meeting on an as converted basis with the World Access common stock voting together as a single class. Therefore, the holders of the Series C preferred stock may vote with the holders of World Access common stock on the proposals described herein (except with respect to the election of directors) as if they held 17,186,451 shares of World Access common stock. World Access also has 184,000 shares of Series D preferred stock issued and outstanding. Each share of Series D 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. The Series D preferred stock is entitled to vote on the approval and adoption of the proposals to be considered at the special meeting on an as converted basis with the World Access common stock voting together as a single class. Therefore, the holders of the Series D preferred stock may vote with the holders of World Access common stock on the proposals described herein as if they held 10,222,222 shares of World Access common stock. 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 thereof. 54 68 Quorum; vote required. Each holder of record of World Access common stock on the World Access record date is entitled to cast one vote for each share of World Access common stock held thereby. 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 election of the nominees for director will require the affirmative vote of a 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. Pursuant to the World Access amended certificate of incorporation, the stockholders of record of the World Access Series C preferred stock will not be entitled to consider and vote upon the election of the nominees for director. The approval and adoption of the STAR merger agreement and the transactions contemplated thereby and the WORLDxCHANGE merger agreement and the transactions contemplated thereby, the approval of the amendment to the World Access Directors' Warrant Incentive Plan to increase the number of warrants issuable under the Directors' Warrant Incentive Plan and the approval of the amendment to the World Access amended certificate of incorporation to increase the number of shares of common stock World Access is authorized to issue will require the affirmative vote of a majority in voting power of the shares of World Access voting stock entitled to vote and voting as a single class. The approval of the amendment to the World Access amended certificate of incorporation to increase the number of shares of common stock World Access is authorized to issue will also require the affirmative vote of a majority of the shares of World Access common stock entitled to vote and voting as a single class. The approval of the amendment to the World Access amended certificate of incorporation to increase the maximum number of authorized directors and to eliminate the classification of the World Access board of directors will require the affirmative vote of at least 75% in voting power of the shares of World Access voting stock entitled to vote 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) and the Series D 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. Security ownership by certain 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 such meeting and not duly and timely revoked, will be voted at such meeting in accordance with the instructions indicated on such proxies. If no instructions are indicated, such 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 thereof, including, among other things, consideration of a motion to 55 69 adjourn or postpone such 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 such matters in accordance with their best judgment; provided, however, that 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 (although 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 in connection therewith. 56 70 THE STAR SPECIAL MEETING Date, time and place of the STAR special meeting. , 2000 [DATE] [TIME] [STREET ADDRESS] [CITY, STATE, ZIP] Matters to be considered. At the STAR special meeting, stockholders of record of STAR as of the close of business on , 2000, the STAR record date, will be asked to consider and vote upon the following proposals: - Proposal 1. To approve and adopt the STAR merger agreement and the transactions contemplated by the STAR merger agreement; - Proposal 2. To consider a resolution authorizing the PT-1 sale subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor as to the fairness from a financial point of view of the consideration to be received in the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR; and - To transact any other business that is properly brought before the STAR special meeting, or any adjournment or postponement of the STAR special meeting. STAR board of directors' recommendations. The board of directors of STAR approved the STAR merger agreement, the transactions contemplated by the STAR merger agreement and the PT-1 sale, including either the sale of PT-1 to PT-1 acquiror pursuant to the terms of PT-1 letter of intent or to such other buyer and on such terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR, and recommends that the stockholders of STAR vote FOR the approval and adoption of the STAR merger agreement, FOR the approval of the PT-1 sale and FOR the approval of the transactions contemplated by the STAR merger agreement and the PT-1 sale. STAR record date. The board of directors of STAR has fixed , 2000 as the record date for determination of holders of STAR common stock entitled to notice of and to vote at the STAR special meeting. Stockholders entitled to vote. As of the close of business on the 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 holders of record of STAR common stock as of the close of business on the STAR record date are entitled to notice of and to vote at the special meeting, or any adjournment or postponement of the STAR special meeting. Quorum; vote required. Each holder of record of STAR common stock on the STAR record date is entitled to cast one vote for each share of STAR common stock held thereby. 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, the PT-1 sale and the transactions contemplated by the STAR merger agreement and the PT-1 sale will require the affirmative vote of a majority of the outstanding shares of STAR common stock. 57 71 Shares of STAR common stock that are voted "FOR," "AGAINST" or "WITHHELD" at the STAR 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 STAR common stock present in person or represented by proxy at the STAR special meeting and entitled to vote on the subject matter. Abstentions will be 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 with respect to the particular proposal on which the broker has expressly not voted. Because adoption and approval of the STAR merger agreement, the PT-1 sale, and the transactions contemplated by the STAR merger agreement and the PT-1 sale, 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. Security ownership by certain beneficial owners and management. As of the close of business on the record date, directors and executive officers of STAR and their respective affiliates were deemed to be the beneficial owners of shares of STAR common stock representing approximately % of the outstanding common stock of STAR. Solicitation and revocability of proxies. This joint proxy statement/prospectus is being furnished to holders of STAR common stock in connection with the solicitation of proxies by and on behalf of the board of directors of STAR for use at the STAR special meeting. All shares of STAR common stock that are entitled to vote and are represented at the STAR special meeting, by properly executed proxies received prior to or at such meeting and not duly and timely revoked, will be voted at such 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 STAR merger agreement, the PT-1 sale and the transactions contemplated by the STAR merger agreement and the PT-1 sale. 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, among other things, consideration of a motion to adjourn or postpone the STAR special 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 such matters in accordance with their best judgment; provided, however, that 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 person giving it any time before it is voted. Proxies may be revoked by (i) filing with the Secretary of STAR at or before the taking of the vote at the STAR special meeting a written notice of revocation bearing a later date than the proxy, (ii) duly executing a later-dated proxy relating to the same shares and delivering it to the Secretary of STAR before the taking of the vote at the STAR special meeting, or (iii) attending the STAR special meeting and voting in person (although 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 so as to be delivered 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 borne by World Access. In addition to solicitation by use of the mails, proxies may be solicited by directors, officers and employees of STAR 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 STAR will reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith. 58 72 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 the consideration of the World Access stockholders and the STAR stockholders, voting separately. While we believe that the description covers the material terms of the STAR merger and the related transactions, this summary may not contain all of the information that is important to you. You should carefully read this entire document and the other documents we refer to for a more complete understanding of the STAR merger. 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, significant capital costs were being incurred in connection with the expansion of STAR's business into Germany and the development of its retail long distance operations. During this time period, Goldman Sachs Credit Partners LP, Kaufman Brothers, Lehman Brothers, Morgan Stanley Dean Witter and Deutsche Bank Securities Inc. were retained to pursue a possible high yield bond offering and to provide financial advice on potential transactions with strategic merger partners. STAR ultimately concluded that a high yield bond offering would not be an effective means of raising necessary capital. During this same period, STAR also consulted with each of Goldman Sachs, Kaufman Brothers, 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. Market conditions in the telecommunications business and the capital position of STAR made such contemplated transactions infeasible. STAR received several acquisition proposals in the last quarter of 1999, but each proposal was limited to the acquisition of STAR's German operations. These proposals were not considered attractive by the STAR board of directors as 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 overall 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 as STAR was subject to a prior 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 whereby World Access proposed to 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 infuse cash in the form of a bridge loan upon the signing of a definitive agreement. During the due diligence period contemplated by the letter of intent, World Access discovered that for a variety of reasons, STAR would require significant, near term capital infusion. As a result of this unexpected need by STAR for capital, World Access and STAR representatives met to renegotiate the terms of the merger in light of STAR's capital requirements. On February 2, 2000, the parties agreed to a repricing of the 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 and agreed to provide STAR with significant interim financing. Based on this agreement, the parties issued a joint press release announcing the repricing and proceeded to finalize the 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 59 73 shortage and the unavailability of superior offers, management was instructed to continue negotiations with World Access. On February 8, 2000, the board of directors of World Access met by telephonic conference call 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 again met by telephonic conference call 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, DLJ gave its oral opinion as to the fairness of the consideration to be paid by World Access pursuant to the STAR merger agreement. The board of directors also received summaries of the results of World Access' due diligence investigation of STAR. After the foregoing, the World Access board of directors unanimously approved the STAR merger agreement and the transactions contemplated thereby and unanimously agreed to recommend its adoption to the stockholders of World Access. On February 11, 2000, DLJ forwarded its written opinion regarding the fairness of the consideration to be paid by World Access pursuant to 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 on its obligations with respect to 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 the current financial condition of STAR, the decline in margins in its core business due to increased competition and the significant capital required to accomplish management's program of diversification. The STAR board of directors voted to approve the STAR merger agreement and the transactions contemplated thereby and voted to recommend that the stockholders of STAR vote for the approval and adoption of the STAR merger agreement and the transactions contemplated thereby. In approving the STAR merger, the STAR board of directors considered the potential benefits of the merger, including relevant business, financial, legal and market factors, some of which are discussed below under the heading "STAR's reasons for the STAR merger." WORLD ACCESS' REASONS FOR THE STAR MERGER The World Access board of directors believes that the STAR merger is fair to and in the best interests of World Access and its stockholders. After consideration of relevant business, financial, legal and market factors, the board of directors unanimously approved the STAR merger agreement and the transactions contemplated thereby and voted to recommend that the stockholders of World Access vote FOR the approval and adoption of the STAR merger agreement and the transactions contemplated thereby. In deciding to approve the STAR merger agreement and to recommend approval and adoption of the STAR merger agreement by the World Access stockholders, the World Access board of directors considered a number of factors, including particularly the factors listed below. In view of the number and wide variety of factors considered in connection with its evaluation of the STAR merger, the board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. The World Access board of directors 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 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 60 74 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 thereby based on its consideration of these factors without taking into account the WORLDxCHANGE merger. The board of directors 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. The directors also considered their own knowledge of World Access and STAR and their respective businesses. STAR's extensive facilities-based network. The World Access board of directors considered STAR's strong international network presence, which connects more than 51 countries worldwide and includes 24 international gateway switches, 17 transoceanic cable systems, a North American fiber network connecting 30 cities and ownership in a planned German fiber optic network connecting approximately 23 German cities. Industry trend toward consolidation. The World Access board of directors considered the status of the international telecommunications services industry and the likely trend toward consolidation of service providers. It also considered the importance of market position in the global telecommunications services industry. The World Access board of directors considered the potential significant cost savings to be achieved as a result of the STAR merger in providing global retail telecommunications services at competitive rates. STAR's established customer base. The World Access board of directors considered the compatibility of STAR's established base of wholesale customers with World Access' existing customer base. STAR's customer base includes 14 of the top 40 global carriers, and STAR was the first carrier in the emerging carrier marketplace to be selected by AT&T for overflow capacity. Ability to accelerate plans to become a leading provider of bundled voice, data and internet services to key international markets. The World Access board of directors considered the additional services offered by STAR, which would be made available to current and future customers of World Access. Specifically, the board of directors considered the significant expansion of retail telecommunications services available throughout Europe and the potential positioning of World Access as one of the top long distance carriers in Germany. RECOMMENDATION OF THE WORLD ACCESS BOARD OF DIRECTORS The World Access board of directors has carefully considered the advisability of the STAR merger and believes that the terms of the STAR merger agreement and the transactions contemplated thereby are fair to and in the best interests of the stockholders of World Access. THE BOARD OF DIRECTORS OF WORLD ACCESS HAS UNANIMOUSLY APPROVED THE STAR MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF WORLD ACCESS VOTE FOR THE APPROVAL AND ADOPTION OF THE STAR MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. STAR'S REASONS FOR THE STAR MERGER 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 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 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 relevant business, financial, legal and market factors, some of which are discussed below. 61 75 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 a number of factors, including the following: The potential cost savings and synergies. The STAR board of directors considered the potential cost savings and synergies that would be achieved by the combination of World Access and STAR. Among the benefits from integration that the STAR board of directors considered were the potential financial and operating efficiencies and other synergies that would result from integrating the systems and operations of both companies. In addition, the STAR board of directors considered the enhanced capabilities that the combined management team would provide to STAR's operations. Diversified geographic and product market position. The STAR board of directors considered the complementary geographic network coverage of each company and the enhanced European presence that would be obtained by the integration of STAR's network assets and licenses in Germany with World Access' existing European operations. The board of directors' analysis included the potential positioning of the combined company as a leading provider of global telecommunications services with a state-of-the art pan-European network in 14 Western European countries and ownership positions in 26 international fiber optic cable networks. The financial condition of STAR. The STAR board of directors examined the current financial condition of STAR and considered the potential benefits of a sale transaction to a company with greater financial resources than that of STAR. The STAR board of directors was particularly concerned about the current debt load of STAR and its weak capital position. The STAR board of directors considered the availability of interim financing in connection with the STAR merger and the lack of a superior offer prior to the approval of the STAR merger agreement. The foregoing discussion of the information and factors considered by the STAR board of directors is not intended to be exhaustive. In view of the wide variety of factors considered in connection with its evaluation of the STAR merger agreement and the STAR merger, the STAR board of directors did not find it practical to, nor did it attempt to, quantify, rank or otherwise attempt to assign relative weights to the specific factors considered in reaching its determination. In addition, the STAR board of directors did not undertake to make a specific determination as to whether any particular factor was favorable or unfavorable to the board of directors, or assign any particular weight to any factor, but rather conducted an overall analysis of the factors described above, including thorough discussion with and questioning of STAR's management and 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. RECOMMENDATION OF THE STAR BOARD OF DIRECTORS The STAR board of directors has 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 HAS APPROVED THE STAR MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE STAR MERGER AGREEMENT AND RECOMMENDS THAT THE STOCKHOLDERS OF STAR VOTE FOR THE APPROVAL AND ADOPTION OF THE STAR MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. OPINION OF WORLD ACCESS' FINANCIAL ADVISOR REGARDING THE STAR MERGER The board of directors of World Access engaged Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") to act as its financial advisor in connection with the STAR merger. On February 11, 2000, DLJ 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 62 76 of view. As described above under "World Access' reasons for the STAR merger," DLJ's opinion was only one of many factors taken into consideration by the board of directors of World Access in making its determination to approve the STAR merger agreement. THE FULL TEXT OF DLJ'S OPINION IS INCLUDED AS ANNEX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO READ CAREFULLY DLJ'S OPINION IN ITS ENTIRETY FOR THE DESCRIPTIONS OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN IN ARRIVING AT THE OPINION. DLJ'S OPINION WAS PREPARED FOR AND ADDRESSED TO WORLD ACCESS' BOARD OF DIRECTORS AND ONLY ADDRESSES THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE PAID BY WORLD ACCESS. DLJ'S OPINION DOES NOT: (1) ADDRESS THE MERITS OF THE UNDERLYING DECISION BY WORLD ACCESS TO ENGAGE IN THE STAR MERGER OR OTHER BUSINESS STRATEGIES CONSIDERED BY WORLD ACCESS; (2) CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD VOTE AT THE STOCKHOLDERS' MEETING; OR (3) CONSTITUTE AN OPINION AS TO THE PRICE AT WHICH WORLD ACCESS COMMON STOCK WILL ACTUALLY TRADE AT ANY TIME. The type and amount of consideration was determined in arms-length negotiations between World Access and STAR. No restrictions or limitations were imposed by World Access upon DLJ with respect to the investigations made or the procedures followed by DLJ in rendering its opinion. In arriving at its opinion, DLJ, among other things: - reviewed the draft, dated February 6, 2000, of the STAR merger agreement and assumed that the final form of that agreement would not vary in any respect that would be material to DLJ'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 certain financial projections of each of World Access and STAR that were prepared by World Access' management; and - compared selected 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 DLJ deemed appropriate for purposes of its opinion. In rendering its opinion, DLJ 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. DLJ relied upon the estimates of the management of World Access of the operating synergies achievable as a result of the STAR merger. DLJ 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, DLJ relied upon and assumed net cash proceeds of $150.0 million from the sale of PT-1 by STAR. DLJ expressed no opinion with respect to such forecasts or the assumptions on which they were based, and DLJ 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 DLJ. DLJ 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 advice as to the tax consequences of the STAR merger. DLJ assumed that the STAR merger would be accounted for as a pooling of interests under generally accepted accounting principles and that it would qualify as a tax-free reorganization for U.S. federal income tax purposes. 63 77 The preparation of a fairness opinion is a complex process that is not necessarily susceptible to partial analysis or summary description and involves determinations about the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. DLJ performed each of the analyses summarized below in order to provide a different perspective on the STAR merger and add to the total mix of information available. However, although the separate analyses are summarized below, DLJ believes that its analyses must be considered as a whole. Selecting portions of the analyses or of the summary set forth below, without considering the analyses as a whole, could create an incomplete or misleading view of the processes underlying DLJ's opinion. DLJ 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 and did not attempt to assign specific weights to particular analyses or factors considered. Rather, in arriving at its opinion, DLJ considered the results of each of these analyses together, in their totality and in light of each of the other analyses and made qualitative judgements as to the significance and relevance of all of the factors and analyses considered in arriving at its opinion. In performing its analyses, DLJ made numerous assumptions with respect to industry performance, business and regulatory, financial, economic, monetary, political and market conditions and other matters, many of which are beyond the control of World Access or STAR. In addition, analyses relating to the value of businesses or securities are not appraisals and do not reflect the prices at which the businesses or securities can actually be sold. Stockholders should understand that no company or transaction used in DLJ's analyses as a comparison is directly comparable to World Access or STAR or to the STAR merger. It should also be understood that analyses based upon projections or forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties, none of World Access, STAR or DLJ or any other person assumes responsibility if future results are different from those forecast. See "Risk Factors" elsewhere in this joint proxy statement/prospectus. DLJ's opinion is necessarily based upon economic, market, financial and other conditions as they existed on, and on information available to DLJ as of, the date of its opinion. It should be understood that, although subsequent developments may affect its opinion, DLJ does not have any obligation to update, revise or reaffirm its opinion as a result of changes in such conditions or otherwise. The following is a brief summary of the principal analyses performed by DLJ in connection with DLJ's opinion and included in its presentation to World Access' board of directors. For purposes of the following analyses, DLJ (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 DLJ 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. Included in the discussion below are summaries of some of the statistical information appearing in that discussion presented in a tabular format. While these tables are presented for the purpose of clarity and ease of reference, they are not substitutes for, and must be read along with, all of the information appearing under the captions immediately preceding them as well as all of the information set forth in this document. 1. CONSIDERATION PAID ANALYSIS DLJ reviewed the consideration to be paid by World Access pursuant to the STAR merger agreement. In reviewing the consideration to be paid by World Access, DLJ 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. 64 78 2. COMPARABLE COMPANY ANALYSIS To provide comparative market information, DLJ compared selected historical and projected operating and financial ratios of STAR to the corresponding data and ratios of selected publicly traded companies that operate businesses reasonably similar to STAR. For purposes of these analyses, DLJ compared STAR relative to the following five companies deemed by DLJ to be reasonably comparable to STAR: (i) IDT Corporation; (ii) Pacific Gateway Exchange, Inc.; (iii) PRIMUS Telecommunications Group, Incorporated; (iv) RSL Communications, Ltd.; and (v) Startec Global Communications Corporation. However, no other company utilized in DLJ's analysis of comparable publicly traded companies is identical to World Access or STAR. Accordingly, this analysis necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of each of World Access and STAR and other factors that could affect the public trading values of World Access, STAR or any other comparable company included in this analysis. Historical financial information used with respect to the comparable companies was as of the most recent financial statements publicly available for each company as of February 9, 2000. DLJ examined certain publicly available financial data of the comparable companies including enterprise value (defined as market value of common equity plus book value of total debt and preferred stock less cash) as multiples of the latest publicly available last quarter annualized revenues, estimated 2000 revenues taken from various analysts research reports, gross property, plant and equipment and net property, plant and equipment. DLJ 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 at February 9, 2000. In addition, DLJ compared the enterprise value of STAR to the implied enterprise values obtained by the above mentioned ratios of the comparable companies 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. COMPARABLE COMPANY ANALYSIS ($ IN MILLIONS) COMPARABLE COMPANIES REFERENCE RANGE(1) ----------------- ------------------- 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(2)....... 1.1x 1.9x 0.7x 1.5x 1.0x Enterprise Value/Gross PP&E....................... 1.6x 7.5x 2.5x 4.5x 3.5x Enterprise Value/Net PP&E......................... 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 PP&E...................................... 619.7 2,882.5 943.3 1,718.4 1,336.5 Net PP&E........................................ 619.7 2,786.4 924.5 1,742.9 1,426.0 - --------------- (1) In comparing the ratio of STAR's enterprise value to its last quarter annualized revenues, estimated 2000 revenues, gross property, plant and equipment and net property, plant and equipment to those of the comparable companies at February 9, 2000, DLJ also determined a reference range for the 65 79 comparable companies. The reference range represents a tighter range of the ratios as deemed reasonable by DLJ for comparative purposes. (2) Source of Projections: - IDT Corporation: Lazard Freres research report dated December 6, 1999; - Pacific Gateway Exchange, Inc.: Jefferies research report dated November 17, 1999; - PRIMUS Telecommunications Group, Incorporated: Jefferies research report dated December 1, 1999; - RSL Communications, Inc.: DLJ research report dated December 1, 1999; and - STAR: projections provided by World Access management. 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. 3. ANALYSIS OF SELECTED M&A TRANSACTIONS. DLJ reviewed selected mergers and acquisitions transactions of companies that operate businesses reasonably similar to that of STAR. Of these selected M&A transactions, the following mergers and acquisitions transactions were deemed most relevant by DLJ: - Viatel, Inc.'s acquisition of Destia Communications, Inc. - PRIMUS Telecommunications Group, Incorporated's acquisition of TresCom International, Inc. However, no company, transaction or business utilized in DLJ's analysis of selected M&A transactions is identical to World Access, STAR or the STAR merger. Accordingly, this analysis necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of companies and other factors that could affect the acquisition, public trading or other values of the companies or transactions being analyzed. DLJ performed this analysis in order to compare STAR's ratios of the implied transaction value to its last twelve months revenues, last quarter annualized revenues and net property, plant and equipment to those of the selected mergers and acquisitions transactions. In addition, DLJ compared the transaction value of STAR to the implied transaction values obtained by the above mentioned ratios of the selected mergers and acquisitions transactions and STAR's last twelve months revenues, last quarter annualized revenues and net property, plant and equipment. SELECTED MERGERS AND ACQUISITIONS TRANSACTIONS ($ IN MILLIONS) ALL SELECTED M&A KEY SELECTED M&A TRANSACTIONS TRANSACTIONS* -------------------- ------------------- STAR HIGH LOW HIGH LOW ------ --------- -------- -------- -------- Transaction Value/Last Twelve Months Revenues..................................... 1.1x 16.5x 1.1x 3.3x 1.1x Transaction Value/Last Quarter Annualized Revenues..................................... 1.0x 4.0x 1.2x 2.6x 1.2x Transaction Value/Net PP&E..................... 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 PP&E..................................... 619.7 13,307.0 1,876.5 1,971.8 1,876.5 - --------------- * For purposes of this analysis, DLJ compared STAR's ratios of the implied transaction value to its last twelve months revenues, last quarter annualized revenues and net property, plant and equipment to those 66 80 of the selected mergers and acquisitions transactions deemed most relevant by DLJ. In addition, DLJ compared the transaction value of STAR to the implied transaction values obtained by the above mentioned ratios of the selected mergers and acquisitions transactions deemed most relevant by DLJ and STAR's last twelve months revenues, last quarter annualized revenues and net property, plant and equipment. 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, DLJ 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. DLJ 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. DLJ calculated EBITDA for STAR. EBITDA is earnings before interest, taxes, depreciation and amortization and other items. DLJ calculated the terminal value of STAR at the end of the forecast period, by applying a range of estimated EBITDA multiples selected in DLJ'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 DLJ'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 DLJ'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 is not a complete description of the analyses performed by DLJ, but describes, in summary form, the principal elements of the analyses made by DLJ in arriving at DLJ's opinion. The preparation of a fairness opinion involves determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily summarized. ENGAGEMENT LETTER World Access selected DLJ to render an opinion in connection with the STAR merger based upon DLJ's qualifications, expertise and reputation, including the fact that DLJ, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Pursuant to the terms of an engagement letter dated January 12, 2000, World Access agreed to pay DLJ a fee of $400,000 at the time that DLJ delivered to the World Access board of directors its opinion, 67 81 irrespective of the conclusion reached in the opinion, and to pay DLJ 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 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 STAR, or otherwise. In addition, World Access agreed to reimburse DLJ for all of its out-of-pocket expenses, including the reasonable fees and expenses of counsel incurred by DLJ in connection with its engagement, and to indemnify DLJ for liabilities and expenses arising out of DLJ's engagement, including liabilities under federal securities laws. The terms of the fee arrangement with DLJ, which DLJ and World Access believe are customary in transactions of this nature, were negotiated at arms-length between World Access and DLJ. World Access' board of directors was aware of such arrangement, including the fact that a significant portion of the aggregate fee payable to DLJ is contingent upon consummation of the STAR merger. DLJ provides a full range of financial, advisory and brokerage services and in the course of its normal trading activities may from time to time effect transactions and hold positions in the securities or debt of World Access and/or STAR for its own account and for the accounts of its customers. DLJ has performed investment banking and other services for World Access in the past and has been compensated for such services. DLJ acted as financial advisor to World Access in connection with its acquisition of FaciliCom International, Inc., and acted as solicitation agent in connection with the consent solicitation for FaciliCom's outstanding senior notes. DLJ is currently acting as financial advisor to World Access in connection with the WORLDxCHANGE merger. OPINION OF STAR'S FINANCIAL ADVISOR REGARDING THE STAR MERGER Deutsche Bank Securities Inc. has 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 such 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 WRITTEN OPINION, DATED FEBRUARY 7, 2000, WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY DEUTSCHE BANK IN CONNECTION WITH THE OPINION, IS ATTACHED AS ANNEX E TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF STAR ARE URGED TO READ DEUTSCHE BANK'S OPINION IN ITS ENTIRETY. THE SUMMARY OF DEUTSCHE BANK'S OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF DEUTSCHE BANK'S OPINION. 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 certain publicly available financial information and other information concerning STAR and World Access; - reviewed certain 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 certain financial and certain stock market information for STAR and World Access with similar information for selected companies whose securities are publicly traded; 68 82 - 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 such other studies and analyses and considered such other factors as it deemed appropriate. Deutsche Bank prepared its financial analyses of the STAR merger before the merger agreement with WORLDxCHANGE was announced or the letter of intent for the sale of PT-1 Communications was signed. Deutsche Bank did not consider the WORLDxCHANGE merger or the terms of the proposed sale of PT-1 when analyzing the fairness, from a financial point of view, of the 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 such 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, including analyses and forecasts made available to Deutsche Bank and used in its analysis, including analyses and forecasts of certain cost savings, operating efficiencies, revenue effects and financial synergies expected by STAR and World Access to be achieved as a result of the STAR merger, Deutsche Bank assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of STAR and World Access, as the case may be, as to the matters covered thereby. In rendering its opinion, Deutsche Bank expressed no view as to the reasonableness of such 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 thereof; - 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. 69 83 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 and the results derived from these 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 certain 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, collectively, the "selected comparable 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. Such financial information and valuation measurements included, among other things: - total enterprise value, or TEV; - ratios of TEV to sales for the third quarter of 1999 annualized, or LQA; - ratios of TEV to estimated sales for the year 2000; - ratios of TEV to EBITDA for the LQA; - ratios of TEV to property, plant and equipment, or PP&E, net of depreciation; and - ratios of TEV to gross PP&E. 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. 70 84 For each of the selected comparable companies, Deutsche Bank calculated five trading multiples: TEV to sales of the LQA and for 2000 estimated; TEV to EBITDA of LQA; and TEV to PP&E net of depreciation and to gross PP&E. This analysis indicated the following medians and means: TEV/ TEV/ TEV/ TEV/ TEV/ COMPANY OR GROUP OF COMPANIES LQA SALES 2000E SALES LQA EBITDA NET PP&E GPP&E - ----------------------------- ---------- -------------- -------------- ---------- ------------ 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 3.5x-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(3) 14.9x-24.5x(4) 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 not meaningful for each of Global Telesystems and Energis. (2) The range, median and mean of the GPP&E multiple were based solely on the GPP&E multiple of Global Telesystems because the GPP&E multiple for each of Energis and Teleglobe was not applicable. (3) 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. (4) 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 not meaningful. 71 85 Deutsche Bank calculated (i) the implied TEV of STAR on a stand alone basis; (ii) the implied equity value of STAR on a stand alone basis; and (iii) 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. Deutsche Bank deemed World Access most comparable 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 TEV, 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: TEV AS A MULTIPLE OF ------------------------------------------- LQA REVENUE 2000E REVENUE GROSS PP&E ------------- ------------- ------------- ($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 TEV.................................. 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-$11.96 Deutsche Bank also calculated (i) the implied TEV of World Access on a stand alone basis; (ii) the implied equity value of World Access on a stand alone basis; and (iii) the implied equity value per share of World Access on a stand alone basis, in each case based on a comparable trading multiple range Deutsche Bank deemed appropriate from the multiples of the three categories of Selected Comparable Companies. The implied TEV, implied equity value and implied equity value per share for World Access, in each case based on the multiple ranges Deutsche Bank deemed appropriate, are as follows: TEV AS A MULTIPLE OF -------------------------------- LQA REVENUE 2000E REVENUE --------------- --------------- ($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 TEV........................................... 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 PP&E 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 TEV as a multiple of the gross PP&E. 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 showed that on a pro forma combined basis (excluding (i) the effect of any synergies that may be realized as a result of the STAR merger, and (ii) non-recurring expenses relating to the STAR merger), based on the estimated 2000 figures, STAR and World Access would account for approximately 47.4% and 52.6%, respectively, of the combined company's pro forma total revenues, approximately 52.3% and 47.7%, respectively, of the combined company's gross profit and (8.2%) and 108.2%, respectively, of the combined company's EBITDA. These 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) by former STAR stockholders and by the stockholders of World Access before the STAR merger of 20.6% 72 86 and 79.4%, respectively, and approximately 28.9% and 71.1%, respectively, of the combined company's TEV (based on the closing price of World Access stock 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). 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 (i) the estimated future cash flow that World Access or STAR, as the case may be, will generate for the years 2000 through 2004, plus (ii) the value of World Access or STAR at the end of such period. The TEVs, 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 TEVs, 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 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 TEV................................ $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 Pro forma financial effects analysis. Deutsche Bank analyzed certain pro forma effects of the STAR merger. Based on such 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 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 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 73 87 using the original announcement date of the execution of the letter of intent of December 20, 1999, to 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 Other considerations and analyses. In connection with its opinion Deutsche Bank also considered, among other things, (i) 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, (ii) historical exchange ratios of World Access and STAR based on historical trading prices, (iii) STAR cumulative price histogram, and (iv) 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. The foregoing summary describes analyses and factors 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 and factors considered 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 such 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 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 such analyses. Because such 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 74 88 board of directors. As described above, the opinion and presentation of Deutsche Bank to the STAR board of directors were only two 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 certain related persons to the full extent lawful against certain liabilities, including certain 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 such securities, instruments and obligations. CONSIDERATION TO BE RECEIVED 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 consideration, each outstanding share of STAR common stock will be converted into the right to receive the number of shares of World Access common stock obtained by solving for "X" in the following equation: X = 7.81 + Z -------- 20 "Z" equals the net cash proceeds in excess of $150.0 million received by STAR upon completion of the sale of its subsidiary, PT-1 (i.e., cash proceeds net of all taxes, fees, expenses and costs incurred in connection with such sale), divided by 62,856,702 (initially calculated to be the number of issued and outstanding shares of STAR common stock, plus the number of shares underlying outstanding STAR stock options and warrants as of February 11, 2000). World Access and STAR can give you no assurance that PT-1 can be sold or that it can be sold for net cash proceeds in excess of $150.0 million; therefore, we can give you no assurance that "Z" will be greater than zero. The number of shares of World Access common stock to be issued for each share of STAR common stock is referred to as the exchange ratio. The sale of PT-1 is a condition to World Access' obligation to complete the STAR merger. If, however, such sale is not completed by the date on which the STAR merger is to be completed 75 89 and World Access decides to proceed with the STAR merger, the exchange ratio will be modified by deleting "Z." Further, in such event, a holder of STAR common stock and STAR stock options or warrants will have the right to receive an additional number of shares of World Access common stock upon completion of such sale or exercise of such options or warrants equal to the net cash proceeds from the PT-1 sale in excess of $150.0 million divided by 20. You should note that the decision to waive the sale of PT-1 as a closing condition is a matter within World Access' sole and exclusive discretion, and World Access is under no obligation to waive such condition. - Under the second form of merger consideration, each share of STAR common stock would be converted into the right to receive the number of shares of World Access common stock equal to 60% of the exchange ratio and an amount in cash equal to 40% of the sum of $7.81 plus "Z." No fractional shares of World Access common stock will be issued in connection with the STAR merger. Instead, STAR shareholders will receive cash, without interest, in lieu 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 acquire such number of shares of World Access common stock as is equal to the number of shares of STAR common stock covered under such STAR stock option or warrant multiplied by the exchange ratio. The exercise price will be the exercise price specified in the STAR stock option or warrant multiplied by the exchange ratio. 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. CLOSING; EFFECTIVE TIME OF THE STAR MERGER The closing of the STAR merger will occur on the second business day following the satisfaction or waiver of all conditions to the completion of the STAR merger, or at such other time as World Access and STAR agree. On the date of the closing of the STAR merger, World Access and STAR will file a certificate of merger with the Secretary of State of the State of Delaware, at which time the STAR merger will be effective, unless World Access and STAR agree to and specify a subsequent effective time in the certificate of merger. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE STAR MERGER The following is a summary of certain material federal income tax consequences of the STAR merger. Long Aldridge & Norman LLP, as counsel to World Access, is of the opinion that, except as to matters upon which they have expressly declined to express an opinion, as disclosed herein, to the extent the following discussion summarizes matters of law or legal conclusions, it is accurate in all material respects under the federal income tax laws as now in effect. The following discussion is general in nature and does not purport to be 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: (i) an insurance company; (ii) a tax-exempt organization; (iii) an employee stock ownership plan; (iv) a bank; (v) a broker, dealer or financial institution; (vi) 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; (vii) a holder that has a "functional currency" other than the United States dollar; (viii) a holder subject to the alternative minimum tax; (ix) 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; (x) a holder who acquired shares of STAR common stock 76 90 pursuant to the exercise of options or otherwise as compensation or through a tax-qualified retirement plan; or (xi) 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 (for example, 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 summary assumes that as a STAR stockholder, you hold your STAR common stock as a "capital asset" (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This summary is based on the Code and final, temporary and proposed treasury regulations promulgated thereunder, 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 continuity and validity of this summary. We have not requested a ruling from the IRS with respect to the federal income tax consequences of the STAR merger nor is consummation of the STAR merger conditioned on the receipt by World Access or STAR of such a ruling or an opinion of tax counsel concerning such 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 that the STAR merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code. This opinion is subject to the limitations, qualifications and assumptions referred to herein and in such opinion. In rendering its opinion as to the status of the STAR merger as a "reorganization," and in rendering its opinion with respect to the accuracy of the following discussion, counsel has relied upon, and has assumed the accuracy of, information, factual statements and representations made by World Access and STAR in this joint proxy statement/prospectus and the STAR merger agreement, including those representations to counsel contained in certificates of their officers. Any inaccuracy or change with respect to such information, representations or assumptions, or any past or future actions by World Access or STAR contrary to such information, representations or assumptions could adversely affect the conclusions reached in such opinion and the tax discussion set forth below. The opinion represents such counsel's best judgment as to the tax treatment of the STAR merger, but neither binds the IRS nor precludes it from adopting a contrary position, and no assurance can be given that contrary positions will not be successfully asserted by the IRS or adopted by a court if the issues are litigated. The balance of this 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 Code, and that STAR completes the sale of PT-1 prior to the STAR merger. 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. Under Section 354 of the Code, you will recognize neither gain nor loss upon the exchange of your STAR common stock for World Access common stock (and fractional share interests). 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 such shares as a capital asset as of the time under Delaware corporate law when the STAR merger becomes effective. 77 91 Receipt of World Access stock and cash. If World Access exercises its right to pay you cash as part of the STAR merger consideration, the amount of cash World Access can elect to pay has been limited so that the aggregate amount of such cash payments will not result in the STAR merger failing to constitute a "reorganization" within the meaning of Section 368(a) of the Code. 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 such gain in an amount equal to the lesser of (i) the amount of gain you realize on the exchange for federal income tax purposes (i.e., 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 (ii) 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, such loss cannot be recognized by you. 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 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 as a result of the receipt of cash will be characterized as capital gain unless your receipt of such cash is treated as having the effect of the distribution of a dividend under Section 356 of the Code, in which case the gain will be characterized as ordinary income to the extent of your ratable share of the accumulated and undistributed earnings and profits of STAR. To determine whether any such recognized gain is capital gain or ordinary income, 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 (i) hypothetically receiving solely shares of World Access common stock in exchange for all of its STAR common stock, and (ii) having a portion of its shares of World Access common stock (equal in amount 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, under the redemption tests of Section 302 of the Code, and for this purpose, taking into consideration the stock ownership attribution rules of Section 318 of the Code not only World Access stock directly owned by you, but also World Access stock owned by certain of your family members and other entities in which you have an interest, and any World Access stock you have a right or option to acquire, such hypothetical redemption (i) is "not essentially equivalent to a dividend" with respect to you or (ii) results in a "substantially disproportionate" redemption of your equity interest in World Access. If either of these redemption tests under Section 302(b) of the Code is satisfied, then "exchange" treatment occurs under Section 302(a) of the Code, and such 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. The Section 302 redemption tests and the application of the stock ownership attribution rules are complex and the tax consequences to you will depend upon your particular facts and circumstances as a STAR stockholder. You are urged to consult with your tax advisor with respect to these matters. If none of the redemption tests under Section 302 of the Code is satisfied, when you exchange shares of STAR common stock for a combination of cash and shares of World Access common stock, you will be treated as having received a dividend distribution in that exchange under Section 301 of the Code. The amount of such 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 such amount will be treated as a dividend, and thus ordinary income, to the extent of your allocable portion of the accumulated earnings 78 92 and profits (as determined for federal income tax purposes) of STAR. If the amount of such 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 such 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 such distribution is taxable as a dividend to you as a corporate stockholder, it may qualify for the "dividends received deduction" under Section 243 of the Code; such dividend distribution may, however, also be subject to the "extraordinary dividend" provisions of Section 1059 of the Code. Cash for fractional shares. Irrespective of whether World Access elects to pay cash to STAR stockholders as part of the STAR merger consideration, it will pay cash in lieu of fractional shares. Based on the current published ruling position of the IRS, the cash you receive in lieu of a fractional share interest in World Access common stock will be treated as received in "exchange" for such fractional share interest under Section 302(a) of the Code. 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 such fractional share interest. Such 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 therewith will be treated as having been received in redemption of your STAR common stock, subject to the provisions and limitations of Section 302 of the Code. If, as a result of such redemption, you own no World Access stock either directly or through the application of the stock ownership attribution rules of Section 318 of the Code, then "exchange" treatment occurs under Section 302(a) of the Code. If exchange treatment applies, 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 certain information required by the IRS 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. 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. Under Section 162(m) of the Code, World Access may not be allowed to deduct compensation payable to a STAR employee in connection with the STAR merger to the extent that the aggregate compensation exceeds $1.0 million under certain circumstances. No determination can be made at this time whether Section 162(m) will apply, and therefore, Long Aldridge & Norman LLP has expressed no opinion with respect to this matter. The PT-1 sale. Among other statutory and judicial requirements, in order for the STAR merger to qualify as a "reorganization," STI Merger Co. must acquire "substantially all" of STAR's assets within the meaning of Section 368(a)(2)(D) of the Code. For private letter ruling purposes, the IRS has indicated that the transfer of seventy percent (70%) of the fair market value of the target corporation's gross assets and ninety percent (90%) of the fair market value of the target corporation's net assets will be deemed "substantially all." Judicial decisions have been substantially more lenient, and in addition to the percentage of property transferred, have focused on the nature of the assets retained by the target corporation and the purpose for their retention in making this determination. Under the STAR merger agreement, STAR's completion of the PT-1 sale is a closing condition to World Access' obligation to consummate the STAR merger. 79 93 The IRS has also issued a published ruling holding that a pre-merger sale of fifty percent (50%) of its historic business assets by the acquired corporation for cash did not violate the "substantially all" requirement because all the remaining assets (including the cash proceeds) were transferred to the acquiring corporation. Based on STAR's representations that the IRS private letter ruling requirements regarding the "substantially all" requirement will be met, the IRS published ruling position on pre-merger asset sales by an acquired corporation and other IRS and judicial authority, the "substantially all" requirement should be met in the STAR merger. In this regard, World Access must also satisfy the "continuity of business enterprise" requirement set forth in Section 1.368-1(d) of the treasury regulations in order for the STAR merger to qualify as a "reorganization" under Section 368(a) of the Code. This test is satisfied if STI Merger Co. continues STAR's "historic business" or uses a significant portion of STAR's historic assets in a business. World Access has represented to counsel that STI Merger Co. will satisfy this test, notwithstanding the PT-1 sale. Based on such World Access representations and the other available IRS and judicial authority, the "continuity of business enterprise" requirement should also be met with respect to the STAR merger. Limitation on STAR tax attributes. Under Section 381 of the Code, STI Merger Co. will succeed to the net operating losses ("NOLs"), certain "recognized built-in losses," capital losses, general business credits, minimum tax credits, excess foreign tax credits and certain other tax attributes of STAR. Use of these tax attributes by World Access is subject to specific limitations under Sections 381, 382, 383, 384 of the Code and certain provisions of the treasury regulations governing the filing of a consolidated federal income tax return, such as the "separate return limitation year" (the "SRLY") rules. Under Section 382 of the Code, special limitations apply following an "ownership change" to the use of NOLs and "net unrealized built-in losses" in excess of a threshold amount recognized during the five-year period following an ownership change. 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 NOLs 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 IRS (5.84% for May 2000). The Section 382 limitation for any post-ownership change year will generally be zero unless the loss corporation satisfies the "continuity of business enterprise" requirement (described in the immediately prior paragraph) for the two-year period following the ownership change. 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 consummation of the STAR merger. The World Access consolidated group's ability to utilize the STAR loss subgroup's NOL carryover as of December 31, 1999, and any additional NOL carryover of such loss subgroup arising in STAR's taxable year beginning January 1, 2000 during the period prior to the effective time of the STAR merger, after taking into account the PT-1 sale (collectively, the "pre-change STAR loss subgroup NOLs") against future World Access consolidated federal taxable income will be subject to an annual loss subgroup Section 382 limitation. Successive ownership changes with respect to the STAR loss subgroup or members thereof may result in an additional, lesser (but never in a greater) Section 382 limitation with respect to previously limited NOLs. An additional limitation may apply under which the pre-change STAR loss subgroup tax NOLs can only be used to the extent of the "qualifying SRLY subgroup" members' aggregate, cumulative contribution to World Access consolidated taxable income (the "SRLY limitation"). Because the STAR loss subgroup and its SRLY NOL subgroup should be treated as co-extensive, and the Section 382 ownership change and SRLY event will occur at the same time, the SRLY limitation should be eliminated with respect to the STAR loss subgroup NOLs. However, the STAR subgroup for built-in losses may not be co-extensive with the STAR loss subgroup and its SRLY NOL subgroup and, if not, then if such STAR subgroup built-in losses exceed a specified threshold amount, such built-in losses recognized during the five-year period following the SRLY event may still be subject to limitation under 80 94 the SRLY rules. Notwithstanding the foregoing, it is anticipated that any NOL 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 NOL, and has a consolidated NOL carryover. As such, it constitutes a "loss group." Although it is currently unclear whether the World Access loss group will undergo a Section 382 ownership change as a result of consummating either or both the STAR merger and the WORLDxCHANGE merger, 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 NOL carryover as of December 31, 1999, and certain "recognized built-in losses" against its future consolidated federal taxable income years may already be subject to an annual loss group Section 382 limitation. If consummation 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 such 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 NOLs will be subject to the lowest amount of Section 382 limitation which results from any of such successive ownership changes. If instead, consummation 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. EXCHANGE OF STAR STOCK CERTIFICATES FOR WORLD ACCESS STOCK CERTIFICATES When the STAR merger is completed, World Access' exchange agent will mail to former STAR stockholders a letter of transmittal and instructions for use in surrendering STAR stock certificates in exchange for the applicable STAR merger consideration. When STAR stockholders deliver their STAR stock certificates to the exchange agent along with an executed letter of transmittal and any other required documents, their STAR stock certificates will be canceled and they will receive the number of full shares of World Access common stock to which they are entitled under the STAR merger agreement and a check in an amount equal to the cash consideration to which such stockholder is entitled, if any. STAR stockholders also will receive payment of cash in lieu of any fractional shares of World Access common stock which would have been otherwise issuable to them in the STAR merger. If World Access elects to pay cash as part of the merger consideration, STAR stockholders will also receive the amount of cash to which they are entitled under the STAR merger agreement upon delivery to the exchange agent of their STAR stock certificates, an executed letter of transmittal and any other required documents. 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 shares of World Access common stock to 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 of World Access common stock issued to any person who is an affiliate of either World Access or STAR. Persons who may be deemed to be 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 and directors, as well as their respective principal stockholders. Affiliates may not sell their shares of World Access common stock acquired in the STAR merger except pursuant to (i) an effective registration statement under the Securities Act of 1933 covering the resale of those shares, (ii) Rule 145 under the Securities Act of 1933 or (iii) any other applicable exemption under the Securities Act of 1933. 81 95 ACCOUNTING TREATMENT OF THE STAR MERGER We intend 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, or the HSR, 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, STAR 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 March 16, 2000. No further action under the HSR 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. Accordingly, at any time before or after the completion of the STAR 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 STAR merger. Additionally, at any time before or after the completion of the STAR 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 STAR merger under the antitrust laws will not be made or that, if a challenge is made, it would not be successful. 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 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 STAR merger. If a further investigation is instituted, the STAR merger may not be completed until a further three month period has expired or the STAR merger has been cleared. At any time during the period, the German Cartel Office may act to block the STAR merger or impose conditions upon its completion. There can be no assurance that a challenge to the STAR merger on competition law grounds will not be made or that, if such a challenge is made, it would not be successful in Germany. 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 FCC require prior notice or approval of the STAR merger. Applications or notices, as required, requesting either approval or providing notification of the STAR merger have been filed on behalf of World Access and STAR in 48 states and with the FCC. The governing 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 FCC has approved the STAR merger. 82 96 Other than approvals by state and federal authorities having jurisdiction over telecommunications activities conducted by World Access or STAR, we are not aware of any other material governmental or regulatory approval required for completion of the STAR 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. RIGHTS OF DISSENTING STAR STOCKHOLDERS If, pursuant to the terms of the STAR merger agreement, 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, any holder of STAR common stock who does not wish to accept this consideration has the right to demand the appraisal of and to be paid, in cash, the fair value of the shares of STAR common stock under Section 262 of the General Corporation Law of the State of Delaware. The fair value of the STAR common stock will exclude any element of value arising from the completion or expectation of the STAR merger. The following discussion represents only a summary of the material provisions of Section 262 and is qualified in its entirety by reference to the full text of Section 262, which is reprinted in its entirety as Annex G to this joint proxy statement/prospectus. A person having a beneficial interest in STAR common stock as of the STAR record date held of record in the name of another person, such as a nominee, and who wishes to exercise his or her right to appraisal to the extent such right exist, must act promptly to cause the record holder to follow the steps summarized below and set forth in Annex G properly and in a timely manner to perfect any appraisal rights provided under Section 262. THIS JOINT PROXY STATEMENT/PROSPECTUS SHALL CONSTITUTE THE NOTICE REQUIRED BY SECTION 262. ANY HOLDER OF STAR COMMON STOCK WHO WISHES TO EXERCISE APPRAISAL RIGHTS SHOULD REVIEW THE FOLLOWING DISCUSSION AND ANNEX G CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS UNDER SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE AND WILL RESULT IN SUCH STOCKHOLDER RECEIVING THE CONSIDERATION PROVIDED FOR IN THE STAR MERGER AGREEMENT. Under Section 262, a record holder of STAR common stock who will receive a combination of World Access common stock and cash (other than cash paid in lieu of fractional share) pursuant to the terms of the STAR merger agreement, who makes the demand described below with respect to such shares, who continuously is the record holder of such shares from the time of making a written demand for appraisal through the effective time of the STAR merger, who otherwise complies with the statutory requirements set forth in Section 262, and who neither votes in favor of approval of the STAR merger nor consents thereto in writing will be entitled to have his or her STAR stock appraised by the Court of Chancery of the State of Delaware and to receive payment of the "fair value" of such shares as described below. STAR stockholders considering seeking appraisal should recognize that the fair value of shares could be determined to be more, the same or less than the value of the consideration provided for in the STAR merger agreement. A record holder of STAR common stock wishing to exercise appraisal rights must deliver to STAR at the address below, before the taking of the stockholders' vote on the STAR merger, a written demand for appraisal of his or her STAR common stock. A proxy or vote against the STAR merger agreement will not constitute a demand for appraisal. A written demand is essential. Such written demand must inform STAR of the stockholder's identity and that such stockholder intends thereby to demand appraisal of the stockholder's shares. All written demands for appraisal of STAR common stock should be sent or delivered to STAR at 223 East De La Guerra Street, Santa Barbara, California 93101, Attention: Corporate Secretary. In addition, a record holder of STAR common stock wishing to exercise his or her appraisal rights must hold such shares of record on the record date, on the date the written demand for appraisal rights is made and must hold such shares continuously through the effective time of the STAR merger. Stockholders who hold their STAR common stock in nominee form and who wish to exercise appraisal rights must take all necessary steps in order that a demand for appraisal is made by the record holder of such shares and are urged to consult with their nominee to determine the appropriate procedures for the making of a demand for appraisal by the record holder. 83 97 Within ten days after the effective time of the STAR merger, World Access must send a notice as to the effectiveness of the STAR merger to each person who has satisfied the appropriate provisions of Section 262. Within 120 days after the effective time of the STAR merger, any former holder of STAR stock who has complied with the requirements for exercise of appraisal rights under Section 262 will be entitled, upon written request, to receive from World Access a statement setting forth (i) the aggregate number of shares of STAR stock not voted in favor of the STAR merger agreement and with respect to which demands for appraisal have been received and (ii) the aggregate number of holders of such shares. Any such statement must be mailed within ten days after a written request therefor has been received by World Access or within ten days after expiration of the period for delivery of demand for appraisal, whichever is later. Within 120 days after the effective time of the STAR merger, World Access or any record holder of STAR stock who has complied with the requirements of Section 262 may file a petition in the Court of Chancery of the State of Delaware demanding a determination of the "fair value" of such shares. World Access is not under any obligation to file this petition and does not currently intend to file such petition. Accordingly, it is the obligation of the holders of STAR common stock to initiate all necessary action to perfect their appraisal rights within the time prescribed in Section 262. A record holder of STAR common stock will fail to perfect, or effectively lose, his or her right to appraisal if no petition for appraisal of share of STAR common stock is filed within 120 days after the effective time of the STAR merger. If a petition for an appraisal is timely filed, at a hearing on such petition, the Court of Chancery of the State of Delaware will determine the holders of STAR common stock entitled to appraisal rights and thereafter will appraise the "fair value" of the STAR stock, exclusive of any element of value arising from the completion or expectation of the STAR merger. The Court of Chancery may require the stockholders who have demanded an appraisal for their shares and who had stock represented by certificates to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings. If any stockholder fails to comply with such direction, the Court of Chancery may dismiss the proceedings as to such stockholder. In determining fair value, the Court of Chancery is to take into account all relevant factors. In Weinberger v. UOP Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered, and that "fair price obviously requires consideration of all relevant factors involving the value of a company." The Delaware Supreme Court stated that in making this determination of fair value the court must consider market value, asset value, dividends, earning prospects, the nature of the enterprise and any other factors which could be ascertained as of the date of the merger which throw light on future prospects of the merged corporation. In Weinberger, the Delaware Supreme Court stated that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the Merger and not the product of speculation, may be considered." Section 262, however, provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the Merger." The Court of Chancery will also determine the amount of interest, if any, to be paid upon the amounts to be received by persons whose STAR common stock has been appraised. The costs of the action may be determined by such court and imposed upon the parties as the court deems equitable in the circumstances. Upon application of a stockholder, the Court of Chancery may also order that all or a portion of the expenses incurred by any holder of STAR common stock in connection with an appraisal, including without limitation, reasonable attorneys' fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the STAR common stock entitled to appraisal. If any record holder of STAR common stock who demands appraisal of his or her shares under Section 262 fails to perfect, or effectively withdraws or loses his or her right to appraisal, as provided in the General Corporation Law of the State of Delaware, the STAR common stock of such stockholder will 84 98 be entitled to receive the consideration provided for in the STAR merger agreement. A holder may withdraw his or her demand for appraisal by delivering to World Access a written withdrawal of his or her demand for appraisal and acceptance of the consideration provided for in the STAR merger agreement, except that any such attempt to withdraw made more than 60 days after the effective time of the STAR merger will require the written approval of World Access. Notwithstanding the foregoing, no appraisal proceeding filed in the Court of Chancery shall be dismissed as to any stockholder without the approval of the court. Failure to follow the steps required by Section 262 for perfecting appraisal rights may result in the loss of such rights. Any record holder of STAR common stock who has duly demanded an appraisal in compliance with Section 262 will not, after the effective time of the STAR merger, be entitled to vote the STAR common stock subject to such demand for any purpose or be entitled to the payment of dividends or other distributions on those shares, except dividends or other distributions payable to record holders of shares of STAR common stock as of a date prior to the effective time of the STAR merger. INTERESTS OF CERTAIN PERSONS IN THE STAR MERGER Option plans and change in control arrangements In connection with the recommendation of STAR's board of directors, STAR's stockholders should be aware that certain executive officers and directors have certain 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, upon the grant of stock options, stock appreciation rights, or SARs, stock units or restricted shares, the administrator of the plan, which is a committee of the board of directors, may provide for the acceleration of the stock options, SARs, stock units or restricted shares granted to employees and outside directors in the event of a change in control. Under the plan and the 1996 Outside Director Nonstatutory Stock Option Plan, the definition of a change in control includes a merger or consolidation of STAR, certain changes in the composition of the board of directors or the acquisition of 50% or more of the combined voting power of STAR's outstanding stock. The STAR merger constitutes a change in control under the plan. Pursuant to STAR's 1996 Outside Director Nonstatutory Stock Option Plan, if a change in control has occurred or if the board of directors has in good faith determined that a change in control is about to occur, the board of directors may decide that it is necessary or desirable to accelerate the exercisability of outstanding options granted under the plan and provide an exercise period during which the accelerated options may be exercised. The board of directors also has the discretion to terminate any outstanding options that have been accelerated but not exercised during the exercise period. In the event of a merger of STAR into another corporation in which holders of common stock receive cash for their shares, the board of directors may provide that all outstanding options granted under the plan shall automatically convert into the right to receive cash equal to the difference between the exercise price and the amount paid to holders of common stock pursuant to the merger. The STAR merger constitutes a change in control under the 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, upon a change in control, all currently outstanding and future options held by Kelly Enos that have not vested will become exercisable on a date that is five business days prior to the consummation of the change in control. The STAR merger constitutes a change in control. As of , 2000, Ms. Enos held options to purchase shares that were not exercisable. These options will accelerate upon the STAR merger. On January 3, 2000 STAR's non-executive stock option committee determined that, upon a change in control, all currently outstanding and future options held by David Vaun Crumly that have not vested will 85 99 become exercisable on a date that is five business days prior to the consummation of the change in control. The STAR merger constitutes a change in control. As of , 2000, Mr. Crumly held options to purchase shares that were not exercisable. These options will accelerate upon the STAR merger. Change in control agreement In January 1996, STAR entered into an employment agreement with David Vaun Crumly, whereby Mr. Crumly became Executive Vice President. The agreement provides that in the event of a sale transaction, in lieu of commissions on STAR's accounts, 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 the sale transaction. The percentage is either ten, twenty or thirty percent, depending on the size of the monthly gross sales. A sale transaction is the acquisition of more than 75% of the voting securities of STAR pursuant to a tender offer or exchange approved in advance by the board of directors. 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 may pay up to 50% of the bonus in STAR common stock or the shares of common stock of the acquiring company. The STAR merger constitutes a sale transaction under the agreement. Registration rights under voting agreement of Christopher Edgecomb World Access and Christopher Edgecomb entered into a voting and stock transfer restriction agreement pursuant to which World Access granted to Mr. Edgecomb unlimited "piggyback" registration rights. Subject to certain exceptions and qualifications, these registration rights entitle Mr. Edgecomb 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 bear all expenses of Mr. Edgecomb in any piggyback registration, other than underwriting commissions and fees of Mr. Edgecomb's legal counsel. 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. THE STAR MERGER AGREEMENT This section of the joint proxy statement/prospectus describes the STAR merger agreement. While we believe that the description covers the material terms of the STAR merger agreement, this summary 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, and we urge you to read it carefully. THE STAR MERGER/EFFECTIVE TIME The STAR merger agreement provides that upon completion of the STAR merger, STAR will be merged with and into STI Merger Co., which is a wholly-owned subsidiary of World Access. STI Merger Co. will survive the merger. On the closing date of the STAR merger, World Access and STAR will file a certificate of merger with the Secretary of State of the State of Delaware. At the time of the filing of the certificate of merger, the STAR merger will be effective unless World Access and STAR agree to and specify a subsequent effective time in the certificate of merger. 86 100 THE STAR MERGER CONSIDERATION Upon completion of the STAR merger, each outstanding share of STAR common stock held by STAR or a subsidiary of STAR will no longer be outstanding and will be canceled and retired, and no consideration will be delivered for such shares. Upon completion of the STAR merger, each outstanding share of STAR common stock not held by STAR or a subsidiary of STAR will be automatically canceled and converted into the right to receive, at the election of World Access, one of the following forms of consideration: - the number of shares of World Access common stock obtained by solving for "X" in the following formula which is the exchange ratio: X = 7.81 + Z -------- 20 "Z" equals (i) the net cash proceeds in excess of $150.0 million received by STAR upon the completion of the sale of its subsidiary, PT-1, net of all taxes, fees, expenses and costs incurred in connection with such sale, divided by (ii) 62,856,702 (initially calculated to be the number of issued and outstanding shares of STAR common stock, plus the number of shares underlying outstanding STAR stock options and warrants as of February 11, 2000). World Access and STAR can give you no assurance that PT-1 can be sold or that it can be sold for net cash proceeds in excess of $150.0 million; therefore, we can give you no assurance that "Z" will be greater than zero. The sale of PT-1 is a condition to World Access' obligation to complete the STAR merger. If, however, such sale is not completed by the date on which the STAR merger is to be completed and World Access decides to proceed with the STAR merger, the exchange ratio will be modified by deleting "Z." Further, in such event, a holder of STAR common stock and STAR stock options or warrants will have the right to receive an additional number of shares of World Access common stock upon completion of such sale or exercise of such options or warrants equal to the net cash proceeds from the PT-1 sale in excess of $150.0 million divided by 20. You should note that the decision to waive the sale of PT-1 as a closing condition is a matter within World Access' sole and exclusive discretion, and World Access is under no obligation to waive such condition. - the number of shares of World Access common stock equal to 60% of the exchange ratio and an amount in cash equal to 40% of the sum of $7.81 plus "Z," as defined above. No fractional shares will be issued. Instead, STAR stockholders will receive cash based on the market price of World Access common stock. In addition, shares of STAR common stock for which dissenters' rights of appraisal have been perfected pursuant to the General Corporation Law of the State of Delaware will not be entitled to receive the merger consideration described above. REPRESENTATIONS AND WARRANTIES World Access, STI Merger Co. and STAR each made representations and warranties in the STAR merger agreement regarding aspects of their businesses, financial condition, structure and other facts pertinent to the STAR merger, including: - corporate structure; - capitalization; - consents and approvals necessary to complete the STAR merger; - required filings and reports with the Securities and Exchange Commission; - information to be supplied for inclusion in this joint proxy statement/prospectus; - pending or threatened litigation; 87 101 - permits and licenses necessary for the operation of business; - compliance with applicable laws; - changes in business or the occurrence of certain events since December 31, 1998; - intellectual property; - fairness opinions to be received by financial advisors; - tax matters; and - material contracts. In addition, STAR made representations and warranties regarding employees and employee benefits matters. 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 and its subsidiaries will carry on their respective businesses in the ordinary course in all material respects and will use reasonable efforts to preserve intact their lines of business, maintain their rights and franchises and preserve their 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 and its subsidiaries will conduct their respective businesses in compliance with specific restrictions relating to the following: - the issuance and redemption of securities; - employees and employee benefits and remuneration; - the issuance of dividends or other distributions; - modification of certificates of incorporation or bylaws; - the acquisition of assets or other entities; - the disposition of assets; - capital expenditures or other investments; - the incurrence of indebtedness; - the settlement of litigation; - the entering into of contracts; - accounting policies and procedures; and - actions which would jeopardize the tax treatment of the STAR merger. NO OTHER NEGOTIATIONS INVOLVING STAR Until the STAR merger is completed or the STAR merger agreement is terminated, STAR has agreed that neither it nor its subsidiaries will, and that it will cause its employees, officers, directors, affiliates, agents, and representatives not to, directly or indirectly take any of the following actions without the prior written consent of World Access: - solicit, initiate, encourage or knowingly facilitate (including by way of furnishing information or engaging in discussions or negotiations) any inquiries regarding or the making of an acquisition proposal, as defined below; - 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 or attempt to make, implement or accept an acquisition proposal. 88 102 Notwithstanding the limitations on STAR's actions, STAR may, in response to an unsolicited, bona fide written acquisition proposal, (i) recommend approval by its stockholders of such proposal or withdraw, modify or qualify in a manner adverse to World Access its recommendation that the STAR stockholders approve the STAR merger or (ii) furnish information and engage in discussions regarding such proposal, provided that: - the STAR stockholders meeting has not occurred; - with respect to recommending approval of such acquisition proposal or changing the recommendation to the STAR stockholders regarding the approval of the STAR merger, the STAR board of directors concludes that such acquisition proposal is a superior proposal, as defined below, and terminates the STAR merger agreement and pays the termination fee described below; - with respect to furnishing information or engaging in discussions regarding such acquisition proposal, the STAR board of directors concludes that such proposal could reasonably be expected to result in a superior proposal; - prior to providing information to the third party making an acquisition proposal, STAR enters into a confidentiality agreement with such third party having terms at least as stringent as those contained in the confidentiality agreement between World Access and STAR; and - prior to providing information or entering into discussions with such third party, STAR notifies World Access of such third party inquiries, proposals or offers, including the identity of the third party and the material terms of the inquiries, proposals or offers. STAR has agreed that it will keep World Access informed of the state of acquisition proposals. STAR also agreed that it and its subsidiaries would, and would cause their officers, directors, affiliates, employees, agents and representatives to, discontinue any discussions or negotiations regarding an acquisition proposal in effect on February 11, 2000. An "acquisition proposal" is any proposal or offer regarding: - a business combination or similar action involving STAR; - any purchase or sale of a material portion of the assets 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. A "superior proposal" is a written proposal by a person unaffiliated with STAR which is for: - a business combination or similar action involving STAR as a result of which STAR's stockholders prior to such action no longer own 50% of the voting securities of the surviving entity or the individuals serving on the board of directors of STAR prior to such action do not constitute a majority of the board of directors of the surviving entity; - a sale, lease, exchange, transfer or other disposition (in one or a series of transactions) of at least 50% of the assets of STAR and its subsidiaries, taken as a whole; or - the acquisition of at least 50% of the common stock of STAR through a business combination, exchange offer or otherwise. In addition, to be a "superior proposal," such proposal must be on terms which the STAR board of directors concludes (after consultation with its financial advisors and outside legal counsel), taking into account all legal, financial, regulatory and other aspects of the proposal, would result in a more favorable transaction, from a financial point of view, to the STAR stockholders than the STAR merger and is reasonably capable of being concluded. 89 103 TREATMENT OF STAR STOCK OPTIONS AND WARRANTS Upon completion of the STAR merger, each outstanding option or warrant to purchase STAR common stock will be automatically converted into an option to purchase such number of shares of World Access common stock as is equal to the number of shares of STAR common stock covered under such 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. 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. World Access will file all required registration statements (on Form S-8 or another appropriate form) with respect to each STAR stock option or warrant converted into a World Access stock option, as well as the shares of World Access common stock underlying such option. World Access will keep such registration statements current for so long as such options remaining outstanding. MANAGEMENT SERVICES 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. BOARD OF DIRECTORS OF WORLD ACCESS World Access and STAR have agreed that immediately following the completion of the STAR merger, World Access will cause one STAR designee to be elected to the World Access board of directors. The STAR designee will be Christopher E. Edgecomb, or such other person designated by STAR and agreed to by World Access prior to the completion of the STAR merger. INTERIM FINANCING OF STAR World Access and STAR have agreed that World Access will make available up to $25.0 million in secured financing to STAR and up to $10.0 million in secured financing to STAR's subsidiary, STAR Telecommunications GmbH. This financing will mature at the earlier of one year from February 11, 2000 and 90 days after the termination of the STAR merger agreement. In the event of a breach or default by STAR under the STAR merger agreement, all such financing will become immediately due and payable. CONDITIONS TO COMPLETION OF THE STAR MERGER The respective obligations of World Access and STAR to complete the STAR merger are subject to the satisfaction or waiver of each of the following conditions before completion of the STAR merger: - the waiting period (and any extension thereof) applicable to the STAR merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, must be terminated or must expire; - the STAR merger agreement and the STAR merger must be approved by the requisite vote of the stockholders of World Access and STAR; and - the registration statement with respect to the shares of World Access common stock to be issued in the STAR merger must be declared effective by the Securities and Exchange Commission, and the registration statement must not be subject to a stop order or a threatened proceeding with respect to a stop order. World Access' obligations to complete the STAR merger are subject to the satisfaction or waiver of each of the following additional conditions before completion of the STAR merger: - STAR's representations and warranties must be true and correct as of February 11, 2000 and as of the date of the completion of the STAR merger, except to the extent the representations and 90 104 warranties speak only as of a particular date and except where any failure to be true and correct would not have a material adverse effect (as defined below) on World Access or the surviving corporation; - STAR 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; - all consents and approvals required of STAR to complete the STAR merger, the failure of which to obtain would have a material adverse effect on World Access or the surviving corporation, must be obtained. However, if the failure of World Access to use reasonable efforts to obtain such consents and approvals is the cause of the failure to obtain such consents and approvals, World Access must complete the STAR merger (assuming all other conditions to World Access' obligations are fulfilled or waived); - no material adverse effect with respect to STAR, taken as a whole with its subsidiaries, shall have occurred since February 11, 2000, 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 relating specifically to STAR, or (iii) to the trading price of STAR common stock; - World Access must receive from STAR's legal counsel a legal opinion reasonably satisfactory to World Access with respect to certain matters; - no laws may be adopted or injunctions or orders issued by a court or other governmental entity having the effect of making the STAR merger illegal or prohibiting the completion of the STAR merger or which would otherwise have a material adverse effect on World Access or the surviving corporation. However, World Access must complete the STAR merger (assuming all other conditions to its obligations are fulfilled or waived) if its failure to use reasonable efforts to complete the STAR merger was the cause of, or resulted in, any such order or injunction; - STAR must comply with all procedures and requirements applicable to it under the dissenters' rights section of the General Corporation Law of the State of Delaware, the period for exercising dissenters' rights of appraisal in connection with the STAR merger must expire, and fewer than 1% of the shares of STAR common stock must have exercised dissenters' rights of appraisal; - STAR must complete the sale of PT-1 for net cash proceeds of at least $150.0 million pursuant to an agreement reasonably satisfactory to World Access. However, if such sale has not been completed prior to the closing date of the STAR merger (but STAR has entered into a definitive agreement satisfactory to World Access with respect to such sale) and World Access decides in its sole discretion to waive the sale of PT-1 as a closing condition and proceed with the STAR merger, the parties have agreed as follows: - the formula used to determine the exchange ratio will be modified by deleting "Z"; and - a holder of STAR common stock and STAR stock options or warrants will have the right to receive an additional number of "contingent" shares of World Access common stock (if and when the sale of PT-1 is completed, or in the case of a holder of stock options or warrants, when such stock option or warrant is exercised), equal to the net cash proceeds from the sale in excess of $150.0 million divided by 20; and - STAR must provide evidence satisfactory to World Access that all obligations of STAR relating to the China-U.S. Cable Network were fully satisfied by the reclamation of STAR's capacity in the network and that STAR has no further obligations or liabilities with respect to the network. 91 105 STAR's obligations to complete the STAR merger and the other transactions are subject to the satisfaction or waiver of each of the following additional conditions before completion of the STAR merger: - World Access' representations and warranties must be true and correct as of February 11, 2000 and as of the date of the completion of the STAR merger, except to the extent the representations and warranties speak only as of a particular date and except where any failure to be true and accurate would not have a material adverse effect on World Access; - World Access 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; - all consents and approvals required of World Access to complete the STAR merger, the failure of which to obtain would have a material adverse effect on World Access or the surviving corporation, must be obtained. However, if the failure of STAR to use reasonable efforts to obtain such consents and approvals is the cause of the failure to obtain such consents and approvals, STAR must complete the STAR merger (assuming all other conditions to STAR's obligations are fulfilled or waived); - no material adverse effect with respect to World Access shall have occurred since February 11, 2000, 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 World Access operates and not relating specifically to World Access, or (iii) to the trading price of World Access common stock; - STAR must receive from World Access' legal counsel a legal opinion reasonably satisfactory to STAR; - no laws may be adopted or injunctions or orders issued by a court or other governmental entity having the effect of making the STAR merger illegal or prohibiting the completion of the STAR merger or which would otherwise have a material adverse effect on World Access. However, STAR must complete the STAR merger (assuming all other conditions to its obligations are fulfilled or waived) if its failure to use reasonable efforts to complete the STAR merger was the cause of, or resulted in, any such order or injunction; and - the exchange agent to be appointed pursuant to the STAR merger agreement must certify to STAR that the requisite deposit of cash in lieu of fractional shares and stock certificates to be made by World Access with the escrow agent has been made. A "material adverse effect" means, with respect to any entity, any change, circumstance or effect or any breach of the provisions of the STAR merger agreement that, individually or in the aggregate, is or would reasonably be expected to be materially adverse to the business, financial condition or results of operations of such entity and its subsidiaries, taken as a whole, or the ability of such entity to complete the STAR merger. TERMINATION OF THE STAR MERGER AGREEMENT The STAR merger agreement may be terminated at any time prior to completion of the STAR merger for any of the following reasons: - by written consent of World Access and STAR; - by either World Access or STAR, if the other party fails to comply in any material respect with any of its material covenants or agreements in the STAR merger agreement, which failure to comply is uncured within ten business days following receipt of a notice of breach. However, if any breach is curable by the breaching party through the exercise of reasonable efforts, the non-breaching party may not terminate the STAR merger agreement for so long as the breaching party continues to use reasonable efforts to cure the breach. In addition, no party may terminate the 92 106 STAR merger agreement if such party is then failing to comply in any material respect with any of its covenants or agreements in the STAR merger agreement; - by either World Access or STAR, if the other party has breached any of its representations or warranties, which breach is uncured within ten business days following receipt of a notice of breach. However, if any breach is curable by the breaching party through the exercise of reasonable efforts, the non-breaching party may not terminate the STAR merger agreement for so long as the breaching party continues to use reasonable efforts to cure the breach. In addition, no party may terminate the STAR merger agreement with respect to such breaches which would not have a material adverse effect on World Access or the surviving corporation; - by either World Access or STAR, if the STAR merger is not completed on or before September 30, 2000. However, no party may terminate the STAR merger agreement if the failure of the STAR merger to be completed by such date is caused by the failure of such party to fulfill any of its obligations under the STAR merger agreement and such failure to fulfill any of its obligations constitutes a breach of the STAR merger agreement; - by either World Access or STAR if any governmental entity has issued a final and nonappealable order, decree or ruling permanently enjoining or prohibiting the STAR merger or has failed to issue an order, decree or ruling (which failure to issue is final and nonappealable), which, in either case, is necessary to fulfill a party's obligation to complete the STAR merger. However, no party may terminate the STAR merger agreement if such party's failure to fulfill any obligation under the STAR merger agreement is the cause of such action or inaction by the governmental entity; - by World Access or STAR, if the stockholders of World Access or STAR fail to adopt the STAR merger agreement by the requisite vote, in each case upon the taking of a vote at a duly held meeting; - by World Access, if the STAR board of directors (prior to the STAR stockholders meeting) makes an adverse change in the STAR recommendation, as defined below, or approves or recommends a superior proposal; - by STAR, at any time prior to the STAR stockholders vote, upon three business days' prior notice to World Access, if its board of directors determines that an acquisition proposal is a superior proposal. However, STAR may not terminate the STAR merger agreement unless: - prior to termination, STAR negotiates with World Access regarding a revised proposal by World Access, if negotiations are requested by World Access; - the STAR board of directors determines, during such three-day period and after considering the revised World Access proposal, that the acquisition proposal is a superior proposal; and - STAR pays the termination fee described below; or - by World Access, if: - either STAR or any of its material subsidiaries (i) commences a voluntary case under any applicable bankruptcy, insolvency or similar law or consents to the entry of an order for relief in an involuntary case under any such law, (ii) consents to the appointment of a receiver, liquidator, custodian, trustee or similar official of STAR or a subsidiary of STAR or for all or a material portion of the property or assets of STAR or a subsidiary of STAR or (iii) effects any general assignment of the benefit of creditors; - a governmental entity enters a decree or order for (i) relief of STAR or any of its material subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law, (ii) appointment of a receiver, liquidator, custodian, trustee or similar official of STAR or a subsidiary of STAR or for all or a material portion of the property or assets of STAR or a subsidiary of STAR or (iii) the winding up or liquidation of the affairs of STAR or any of its 93 107 material subsidiaries and, in each case, such decree or order remains unstayed and in effect for 30 consecutive days; or - there is an event of default under the anticipated credit agreements between World Access and STAR. An "adverse change in the STAR recommendation" would occur if STAR withdraws, modifies or materially qualifies, in any manner adverse to World Access, its recommendation that the STAR stockholders adopt the merger agreement, or takes any action or makes any statement in connection with the STAR stockholders meeting materially inconsistent with such recommendation. PAYMENT OF TERMINATION FEE STAR must pay World Access a termination fee of $14.0 million if the STAR merger agreement is terminated under the following circumstances: - if the STAR merger agreement is terminated by STAR because the STAR board of directors determines that an acquisition proposal is a superior proposal, then STAR must pay the termination fee prior to termination of the STAR merger agreement; - 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, then STAR must pay the termination fee within three days following the termination of the STAR merger agreement; or - if the STAR merger agreement is terminated by World Access or STAR because the stockholders of STAR have not adopted the STAR merger agreement by the requisite vote and STAR enters into a definitive agreement with respect to a business combination, as defined below, within 12 months following termination, then STAR must pay the termination fee prior to or at the closing of the business combination. A "business combination" means: - a business combination or similar transaction involving STAR as a result of which (i) STAR's stockholders no longer own 65% of the voting securities of the surviving entity or any person owns at least 20% of the voting securities of the surviving entity or (ii) individuals comprising the STAR board of directors prior to the completion of the transaction do not constitute a majority of the board of directors of the surviving entity; - a sale, lease, exchange, transfer or other disposition (in one or a series of related transactions) of at least 50% of the assets of STAR and its subsidiaries, taken as a whole; or - the acquisition by a person of at least 20% of the common stock of STAR, whether by business combination, exchange offer or otherwise. 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 which requires further approval by the World Access and STAR stockholders in accordance with law or the rules of any relevant stock exchange. 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 and waive compliance with any of the agreements of the other party contained in the STAR merger agreement. 94 108 RELATED TRANSACTION AGREEMENTS This section of the joint proxy statement/prospectus describes agreements related to the STAR merger agreement, including the voting agreements of Christopher E. Edgecomb and Samer Tawfik and the anticipated STAR credit agreements. While we 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. EDGECOMB VOTING AGREEMENT World Access and Christopher E. Edgecomb have entered into a voting and stock transfer restriction agreement, dated February 11, 2000, pursuant to which Mr. Edgecomb agreed, among other things, to vote all of his shares of STAR common stock in favor of the STAR merger and against any action that would impede, delay, postpone, or would reasonably be expected to discourage, the STAR merger, or that would result in a breach of a covenant or a representation or warranty of STAR under the STAR merger agreement. Except in limited circumstances, until the earlier of the completion of the STAR merger and the termination of the voting and stock transfer restriction agreement, Mr. Edgecomb may not: - sell, hypothecate, transfer, pledge, encumber, assign or otherwise dispose of, a "transfer", or enter into any contract or understanding with respect to a transfer of, any of his shares of STAR common stock; - trade or take any position, hedge or otherwise, with respect to his shares of STAR common stock; - enter into any voting arrangement or understanding with respect to such shares; or - take any action that would make his representations or warranties untrue or prevent or impede him from performing any of his obligations. For the longer of six months following the completion of the STAR merger and such time as Mr. Edgecomb is a member of the World Access board of directors, Mr. Edgecomb may not transfer, or enter into any contract or understanding with respect to the transfer of, any of the shares of World Access common stock issued to Mr. Edgecomb pursuant to the STAR merger agreement, or trade or take any position, hedge or otherwise, with respect to such shares of World Access common stock. If, at any time after six months and within 18 months following the completion of the STAR merger, Mr. Edgecomb is otherwise permitted and desires to take any such action, a "proposed action," he must provide notice to World Access. World Access has the first right to assist in the private disposition of the shares specified in the notice of a proposed action to an "accredited investor" or "qualified institutional buyer," as such terms are defined in the Securities Exchange Act of 1934, as amended. However, if World Access is unable to arrange for such private disposition within 30 days, Mr. Edgecomb may complete the proposed action. Subject to limitations, World Access has also agreed to provide Mr. Edgecomb piggyback registration rights with respect to the shares of World Access common stock issued to Mr. Edgecomb in the STAR merger and not publicly saleable by Mr. Edgecomb under the Securities and Exchange Commission's Rule 144. However, in order to exercise these rights, Mr. Edgecomb must request the inclusion in such registration of at least 25% of such shares or shares having a value of at least $2.0 million. Subject to limited exceptions, Mr. Edgecomb also agreed to specific 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 agreed, among other things, to vote all of his shares of STAR common stock in favor of the STAR merger and against any action that would 95 109 impede, delay, postpone, or would reasonably be expected to discourage, the STAR merger, or that would result in a breach of a covenant or a representation or warranty of STAR under the STAR merger agreement. Until the earlier of the completion of the STAR merger and the termination of the voting and stock transfer restriction agreement, Mr. Tawfik may not: - sell, hypothecate, transfer, pledge, encumber, assign or otherwise dispose of, a "transfer," or enter into any contract or understanding with respect to a transfer of, any of his shares of STAR common stock, except that Mr. Tawfik is expressly permitted to transfer up to 2,430,000 shares of his STAR common stock to unaffiliated third parties; - trade or take any position, hedge or otherwise, with respect to his shares of STAR common stock; - enter into any voting arrangement or understanding with respect to such shares; or - take any action that would make his representations or warranties untrue or prevent or impede him from performing any of his obligations. For six months following the completion of the STAR merger, Mr. Tawfik may not transfer, or enter into any contract or understanding with respect to the transfer of, any of the shares of World Access common stock issued to Mr. Tawfik pursuant to the STAR merger agreement, or trade or take any position, hedge or otherwise, with respect to such shares of World Access common stock. If, at any time after six months and within 18 months following the completion of the STAR merger, Mr. Tawfik is otherwise permitted and desires to take any such action, a "proposed action", he must provide notice to World Access. World Access has the first right to assist in the private disposition of the shares specified in the notice of a proposed action to an "accredited investor" or a "qualified institutional buyer," as such terms are defined in the Securities Exchange Act of 1934, as amended. However, if World Access is unable to arrange for such private disposition within 30 days, Mr. Tawfik may complete the proposed action. The voting and stock transfer restriction agreement terminates upon the termination of the STAR merger agreement in accordance with its terms. STAR CREDIT AGREEMENTS World Access anticipates entering into a credit agreement with STAR pursuant to which World Access will make bridge loans to STAR in the aggregate amount of up to $25.0 million. The loan will consist of an initial advance to STAR in an amount to be determined prior to execution of the credit agreement and additional advances, to be made at the election and sole discretion of World Access, in an aggregate amount not to exceed $25.0 million. The loan will be secured by a blanket security interest in all personal property of STAR, PT-1 Communications, Inc., 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 certain of its subsidiaries; and by a pledge of all capital stock owned by PT-1 in certain of its subsidiaries. The loan will bear interest at the rate of LIBOR plus 4% per annum, with all principal and accrued interest being payable on the earlier of (i) one year from the date of the STAR credit agreement or (ii) 90 calendar days after any termination of the STAR merger agreement, or on such other date as the loan shall become due by acceleration. World Access also anticipates entering into a credit agreement with STAR Telecommunications Holding GmbH, a German GmbH, pursuant to which World Access will make certain bridge loans to STAR GmbH in the aggregate maximum amount of $10.0 million. This loan will consist of an initial advance to STAR GmbH in an amount to be determined prior to execution of the credit agreement and of additional advances, to be made at the election and sole discretion of World Access, in an aggregate amount of up to $10.0 million. The loan will be secured by a blanket security interest in all personal property of STAR GmbH, including all accounts, accounts receivable, contract rights, equipment, 96 110 inventory, chattel paper and general intangibles; and by a pledge of all capital stock owned by STAR in STAR GmbH and by a pledge of all capital stock owned by STAR GmbH in STAR Telecommunications Deutschland GmbH and STAR Telecommunications Network GmbH. The loan will bear interest at the rate of LIBOR plus 4% per annum, with all principal and accrued interest being payable on the earlier of (i) one year from the date of the STAR GmbH credit agreement or (ii) 90 calendar days after any termination of the STAR merger agreement, or on such other date as the loan shall become due by acceleration. PROPOSAL 2 THE PT-1 SALE This section of the joint proxy statement/prospectus describes the proposed sale by STAR of its wholly-owned subsidiary, PT-1, to a third party, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. This section of the joint proxy statement/prospectus also describes the terms of a letter of intent between STAR and PT-1 acquiror pursuant to which STAR anticipates entering into a definitive agreement for the sale of PT-1. This proposal is for the consideration of the STAR stockholders. While we believe that the description covers the material terms of the proposed PT-1 sale and the related transactions, this summary may not contain all of the information that is important to you. You should carefully read this entire document and the other documents we refer to for a more complete understanding of the PT-1 sale. APPROVAL OF THE PT-1 SALE As a condition to World Access' obligation to complete the STAR merger, STAR is required to sell its wholly-owned subsidiary, PT-1, for net cash proceeds of at least $150.0 million. As of the date of this joint proxy statement/prospectus, there can be no guarantee that completion of the sale of PT-1 to PT-1 acquiror, or any other buyer, will satisfy this condition. STAR is seeking stockholder approval to proceed with the PT-1 sale to PT-1 acquiror, or in the event that STAR does not reach a definitive agreement with PT-1 acquiror, to such other buyer and on such other terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. STAR has entered into the PT-1 letter of intent with PT-1 acquiror for the sale of certain assets and the assumption of certain liabilities of PT-1 to PT-1 acquiror and STAR anticipates that it will enter into a definitive agreement with PT-1 acquiror. This joint proxy statement/prospectus describes the PT-1 letter of intent in detail. The terms of the definitive agreement are subject to negotiation and may differ substantially from the terms of the PT-1 letter of intent. If a definitive agreement is reached with PT-1 acquiror, STAR will sell certain assets of PT-1 to PT-1 acquiror for cash proceeds of $150.0 million dollars plus the assumption of certain liabilities, subject to adjustment based on the net worth of the assets of PT-1 on the closing date of the PT-1 sale. In the event that STAR does not reach a definitive agreement with PT-1 acquiror, STAR will seek other buyers for PT-1 with the aid of Kaufman Brothers, STAR's financial advisor. In determining the minimum sale price range for PT-1, the STAR board of directors consulted with STAR's management, counsel and financial advisors. In making its determination, the STAR board of directors reviewed and analyzed the historical financial results and future prospects of PT-1's operations and assessed comparable valuations of businesses similar to those of PT-1 to the extent that comparable 97 111 information was available. The STAR board of directors and management estimated potential transaction values using standard industry methodologies as well as subjective factors relating specifically to PT-1 and the reasons for its sale. The industry standard methodologies included analysis of trading multiples of comparable public companies, analysis of valuation multiples of transactions involving comparable companies and discounted cash flow analysis. The estimates contained in such analyses and the valuation ranges resulting from any particular analysis are not necessarily indicative of the actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. The analyses were only one of many factors considered by the STAR board of directors in its evaluation of the sale of PT-1 and should not be viewed as determinative of the view of the STAR board of directors or management with respect to the consideration to be paid for the sale of PT-1. The STAR board of directors considers it essential to give management the flexibility to consummate a sale of PT-1 in a timely manner. In connection with the execution of a definitive purchase agreement with a buyer of PT-1, STAR will request an opinion from Kaufman Brothers as to the fairness, from a financial point of view, to STAR of the consideration to be received by STAR in the sale of PT-1. Except as requested in this joint proxy statement/prospectus, STAR will not solicit any further stockholder vote for the PT-1 sale. Accordingly, STAR stockholders will not have the opportunity to vote on the definitive PT-1 sale agreement. BACKGROUND OF THE PT-1 SALE PT-1 constitutes 90% of the book value of STAR. As a condition to World Access' obligation to complete the STAR merger, STAR is required to sell PT-1 for net cash proceeds of at least $150.0 million. STAR has entered into a letter of intent with PT-1 acquiror to sell to PT-1 acquiror certain assets of PT-1, including the assumption of certain liabilities, for cash proceeds of $150.0 million, subject to adjustment based on the net worth of the assets of PT-1 on the closing date. In the event that STAR does not reach a definitive agreement with PT-1 acquiror pursuant to the terms of the PT-1 letter of intent, STAR will attempt to sell PT-1 to such other buyer and on such other terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. If STAR does not receive net cash proceeds of at least $150.0 million from the PT-1 sale, then World Access does not have to complete the STAR merger. On February 14, 2000, STAR and World Access issued a joint press release announcing the definitive STAR merger agreement and indicating that the sale of certain STAR assets would be required. As a result of the press release, STAR began to receive inquiries from potential purchasers regarding PT-1, including an inquiry from PT-1 acquiror. Following a series of preliminary telephonic discussions between representatives of STAR and representatives of PT-1 acquiror, on February 22, 2000, a representative of STAR met with representatives of PT-1 acquiror at an industry conference in California to discuss the potential acquisition of the PT-1 assets by PT-1 acquiror. On February 29, 2000, STAR engaged Kaufman Brothers, L.P., to act as its exclusive financial and merger advisor and investment banker in connection with the PT-1 sale. Kaufman Brothers reviewed the inquiries from potential acquirors of PT-1 generated by the February 14, 2000 press release and proceeded to familiarize itself with PT-1's operations. STAR received three offers for the sale of some or all of the assets of PT-1 by the end of March, 2000. One proposal was for the separate acquisition of PT-1's dial around business, the second proposal was for PT-1's prepaid calling card operations, and the third offer was made by PT-1 acquiror for the entire operations of PT-1. Working with Kaufman Brothers, STAR 98 112 evaluated each offer carefully and determined that the offers for the individual component businesses of PT-1 were not attractive because STAR believed there was more value in PT-1 as a whole company as evidenced by the fact that the combined value of the two offers for component business of PT-1 was less than the offer STAR had received from PT-1 acquiror for PT-1 as a whole company. STAR was particularly concerned that the combined offers for the separate component businesses of PT-1 would not provide net cash proceeds of at least $150.0 million as required by the STAR merger agreement. On March 8, 2000, STAR met with PT-1 acquiror in New York to discuss further PT-1 acquiror's interest in PT-1. Representatives and financial advisors of STAR and PT-1 acquiror attended the meeting. At the meeting, PT-1 acquiror indicated that it was serious about the acquisition, that it was interested in moving quickly to close the deal and that it wanted STAR to enter into an exclusive arrangement with PT-1 acquiror. STAR was unwilling to commit to an exclusive arrangement at that time, but permitted PT-1 acquiror to begin due diligence. On March 18, 2000, STAR met with PT-1 acquiror in Toronto, Canada, to continue discussions. Following the March 18, 2000 meeting, formal discussions on the letter of intent began. The STAR board of directors held a meeting on March 24, 2000 to discuss the terms of the letter of intent and considered the proposal at length. The STAR board of directors resolved to continue negotiations with PT-1 acquiror and to seek World Access' approval as required by the STAR merger agreement. STAR and PT-1 acquiror executed the letter of intent on March 29, 2000. On May , 2000, the STAR board of directors met to consider the PT-1 sale. At the meeting, the STAR board of directors concluded that the sale of PT-1 to PT-1 acquiror pursuant to the terms of the PT-1 letter of intent, or in the event that STAR did not reach a definitive agreement with PT-1 acquiror, to such other buyer and on such other terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR was fair to and in the best interests of STAR and its stockholders. The STAR board of directors considered numerous factors in reaching its conclusion, including the necessity of completing the sale of PT-1 prior to and in connection with the close of the STAR merger and considered the potential benefits of the PT-1 sale, including relevant business, financial, legal and market factors, some of which are discussed below under the heading "STAR's reasons for the PT-1 sale." The STAR board of directors voted to approve the PT-1 sale and transactions contemplated thereby and voted to recommend that the stockholders of STAR vote FOR the approval of the PT-1 sale on such terms as the STAR board of directors shall determine to be in the best interests of STAR and contingent on the negotiation of a definitive agreement with PT-1 acquiror or such other buyer as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. Except as requested in this joint proxy statement/prospectus, STAR will not solicit any further stockholder vote for the PT-1 sale. Accordingly, STAR stockholders will not have the opportunity to vote on a definitive PT-1 sale agreement. STAR'S REASONS FOR THE PT-1 SALE At the meeting held on May , 2000, the STAR board of directors concluded that the PT-1 sale was fair to and in the best interests of STAR and its stockholders. The board of directors of STAR voted to approve the PT-1 sale to PT-1 acquiror or such other buyer as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best 99 113 interests of STAR and voted to recommend that the stockholders of STAR vote for the approval of the PT-1 sale and such transactions as may be contemplated thereby. After due deliberation, the STAR board of directors concluded that the PT-1 sale to PT-1 acquiror or such other buyer as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR, was fair to and in the best interest of STAR and its stockholders based on a number of factors, including the following: The PT-1 sale is a condition to the close of the STAR merger. The STAR merger agreement requires that STAR sell PT-1 for net cash proceeds of at least $150.0 million. If STAR fails to sell PT-1 for net cash proceeds of at least $150.0 million, then World Access does not have to complete the STAR merger. The STAR board of directors has voted to approve the STAR merger and has determined that the completion of the STAR merger is fair to and in the best interests of STAR and its stockholders. The financial condition of STAR. The STAR board examined the current financial condition of STAR and determined that STAR's cash flow situation required the sale of certain non-core segments of STAR's operations. The PT-1 sale is a condition to the close of the STAR merger and STAR entered into the STAR merger agreement partly to alleviate its cash flow situation. In the event that the STAR merger does not close, and should STAR elect to proceed with the PT-1 sale, STAR expects that the sale of PT-1 will provide needed cash to allow STAR to continue its operations and growth. Improved focus on STAR's core business. Historically, STAR has focused its operations on the wholesale international long distance market. Through acquisitions, including the acquisition of PT-1, STAR expanded its operations into the consumer and commercial retail long distance markets. If the STAR merger does not close, the sale of PT-1 would enable STAR to focus on its wholesale international long distance business and continue to expand its network in order to improve operating margins. The foregoing discussion of the information and factors considered by the STAR board of directors is not intended to be exhaustive. In view of the wide variety of factors considered in connection with its evaluation of the PT-1 sale, the STAR board of directors did not find it practical to, nor did it attempt to, quantify, rank or otherwise attempt to assign relative weights to the specific factors considered in reaching its determination. In addition, the STAR board of directors did not undertake to make a specific determination as to whether any particular factor was favorable or unfavorable to the board of directors' ultimate determination or assign any particular weight to any factor, but rather conducted an overall analysis of the factors described above, including thorough discussion with and questioning of STAR's management and management's analysis of the PT-1 sale 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 STAR and to support its determination. RECOMMENDATION OF THE STAR BOARD OF DIRECTORS The STAR board of directors has carefully considered the advisability of the PT-1 sale and believes that the PT-1 sale and such transactions as may be contemplated thereby are fair to and in the best interests of STAR and its stockholders. THE STAR BOARD OF DIRECTORS HAS APPROVED THE PT-1 SALE AND SUCH TRANSACTIONS AS MAY BE CONTEMPLATED THEREBY AND RECOMMENDS THAT THE STOCKHOLDERS OF STAR VOTE FOR THE APPROVAL OF THE PT-1 SALE AND SUCH TRANSACTIONS AS MAY BE CONTEMPLATED THEREBY. 100 114 CONSIDERATION TO BE RECEIVED IN THE PT-1 SALE STAR has entered into the PT-1 letter of intent with PT-1 acquiror pursuant to which STAR has agreed to sell certain assets of PT-1 to PT-1 acquiror for $150.0 million in cash provided that the purchase price may be adjusted upward or downward to the extent that the net value of the purchased assets, less liabilities assumed by PT-1 acquiror, as set forth on the balance sheet to be delivered as soon as practicable following the closing, is greater than or less than $37,223,490. PT-1 acquiror will only assume PT-1's (i) accounts payable and accrued expenses, (ii) accrued taxes payable, (iii) short-term debt, (iv) deferred revenue and (v) long-term debt. The terms of the definitive agreement are subject to negotiation and may differ substantially from the terms of the PT-1 letter of intent. In the event that STAR is unable to negotiate a definitive agreement with PT-1 acquiror, STAR will proceed with the PT-1 sale to such other buyer and on such other terms as the board of directors of STAR shall subsequently approve, subject to STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of the terms of any definitive sale agreement. Except as requested in the accompanying joint proxy statement/prospectus, STAR will not solicit any further stockholder vote for the PT-1 sale. Accordingly, STAR stockholders will not have the opportunity to vote on a definitive PT-1 sale agreement. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PT-1 SALE If STAR completes the sale of PT-1 to PT-1 acquiror, or another buyer on terms like those set forth in the PT-1 letter of intent, for cash, the PT-1 sale will be a taxable transaction to STAR. STAR expects that the net proceeds of the PT-1 sale will be substantially greater than the adjusted tax basis of the PT-1 assets and that, accordingly, PT-1 will recognize substantial gain from the sale, which will only be partially offset by STAR's net operating loss carryovers. Therefore, STAR will have income tax liability from the sale of PT-1's assets of between $6-$12 million. ACCOUNTING TREATMENT OF THE PT-1 SALE If STAR completes the sale of PT-1's assets to PT-1 acquiror, or another buyer for cash, the PT-1 sale will be accounted for by STAR as a sale of assets in accordance with United States generally accepted accounting principles. STAR expects to record a loss on its financial statements for the difference between the total proceeds from the sale of the PT-1 assets and the net book value of those assets. REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE PT-1 SALE STAR anticipates that the PT-1 sale will be subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR, 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. The HSR requirements will be satisfied if the PT-1 sale is completed within one year from the termination of the waiting period. The Antitrust Division of the Department of Justice or the Federal Trade Commission may challenge the PT-1 sale on antitrust grounds either before or after expiration of the waiting period. Accordingly, at any time before the completion of the PT-1 sale, 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 PT-1 sale. Additionally, at any time before or after the completion of the PT-1 sale, 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 PT-1 sale under the antitrust laws will not be made or that, if a challenge is made, it would not be successful. 101 115 RIGHTS OF DISSENTING STAR STOCKHOLDERS STAR stockholders will not be entitled to dissenters' rights under Delaware law in connection with the PT-1 sale. INTERESTS OF CERTAIN PERSONS IN THE PT-1 SALE When considering the recommendation of the STAR board of directors, you should be aware that certain STAR directors, officers and stockholders have interests in the STAR merger, of which the PT-1 sale is a condition precedent, that are different from, or are in addition to, all other stockholders of STAR. These interests are described on page 85. Kaufman Brothers, STAR's financial advisor, has been engaged to issue a fairness opinion to STAR's board of directors in connection with the PT-1 sale. Upon consummation of the PT-1 sale, Kaufman Brothers will receive a transaction fee equal to 1% of the PT-1 sales price. Regardless of whether the PT-1 sale is consummated, STAR has agreed to reimburse Kaufman Brothers for reasonable fees and disbursements of Kaufman Brothers' counsel and all of Kaufman Brothers' reasonable travel and other out-of-pocket expenses incurred in connection with the PT-1 sale. THE PT-1 LETTER OF INTENT This section of the joint proxy statement/prospectus describes the terms of the PT-1 letter of intent between STAR and PT-1 acquiror. While we believe that the description covers the material terms of the PT-1 letter of intent, this summary may not contain all of the information that is important to you. The PT-1 letter of intent is attached to this joint proxy statement/prospectus as Annex F and we urge you to read it carefully. There can be no guarantee that the terms of a definitive agreement between STAR and PT-1 acquiror or any other buyer will contain the terms set forth below. NEGOTIATION OF DEFINITIVE AGREEMENT WITH PT-1 ACQUIROR STAR and PT-1 acquiror have agreed to proceed diligently and in good faith to negotiate, execute and deliver definitive agreements in connection with the sale of PT-1 to PT-1 acquiror. STAR has agreed to make all reasonable efforts to facilitate PT-1 acquiror in certain aspects of negotiations with World Access related to the PT-1 sale and in identifying and recruiting key officers and employees of STAR and PT-1 for employment by PT-1 acquiror or the entity operating the business of PT-1. In the event that STAR and PT-1 are unable to reach a definitive agreement, STAR will proceed with the PT-1 sale to such other buyer and on such other terms as the STAR board of directors shall subsequently approve, subject to the minimum requirements set forth in this joint proxy statement/prospectus, including STAR's receipt of a sales price of at least $ , obtaining the opinion of STAR's financial advisor in connection with the sale and approval by the STAR board of directors of a definitive sale agreement containing terms that the STAR board of directors determines to be in the best interests of STAR. THE PT-1 SALE CLOSING DATE The parties have agreed to proceed diligently and in good faith to close the PT-1 sale by the earlier of (i) the closing of the STAR merger or (ii) June 30, 2000. PURCHASE PRICE PT-1 acquiror will purchase certain PT-1 assets for $150.0 million in cash, subject to adjustment upward or downward to the extent that the net value of the assets being purchased, less the liabilities being assumed of PT-1 as of the closing date, is greater or less than $37,223,490. PT-1 acquiror will purchase substantially all the assets of PT-1. PT-1 acquiror will only assume PT-1's (i) accounts payable and accrued expenses, (ii) accrued taxes payable, (iii) short-term debt, (iv) deferred revenue and (v) long-term debt. The amount paid by PT-1 acquiror on the closing date will be $150.0 million. After the closing, the amount will be adjusted as indicated above. 102 116 TERMS OF THE DEFINITIVE AGREEMENT WITH PT-1 ACQUIROR STAR is currently negotiating a definitive agreement with PT-1 acquiror based on the terms of the PT-1 letter of intent. The terms of the definitive agreement are subject to negotiation and may differ substantially from the terms of the PT-1 letter of intent. The PT-1 letter of intent provides that the definitive agreement will contain, among other things, representations and warranties, covenants, conditions and indemnification provisions appropriate for such agreements. The PT-1 letter of intent further provides that: - the representations and warranties of STAR will survive the close of the PT-1 sale for two years (other than those in respect of tax matters, which will survive the close of the PT-1 asset sale until the expiration of the applicable statute of limitations); - STAR and PT-1 acquiror will proceed diligently and in good faith to file all documents necessary to satisfy any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; - STAR will obtain all material third-party consents to the transactions contemplated by the PT-1 letter of intent, provided such condition may be waived by PT-1 acquiror in its sole discretion; - STAR shall use reasonable efforts to identify, with PT-1, key employees and to cause certain of STAR's key executives to enter into employment agreements and non-competition agreements with PT-1 acquiror; and - STAR shall cause PT-1 to conduct the business and operations of PT-1 in the ordinary course consistent with past practice. DESCRIPTION OF THE PT-1 ASSETS PT-1 has agreed, on the terms set forth in the PT-1 letter of intent, to sell to PT-1 acquiror all of the assets that relate to and are used in the debit card and dial around businesses of PT-1 and PT-1's subsidiaries. ASSUMPTION OF LIABILITIES Concurrently with its purchase of the assets of PT-1's debit card and dial around telecom businesses, PT-1 acquiror will assume those liabilities itemized on the balance sheet of PT-1 as of the closing date, as (i) accounts payable and accrued expenses, (ii) accrued taxes payable, (iii) short-term debt, (iv) defined revenue and (v) long-term debt. CONDUCT OF BUSINESS BEFORE COMPLETION OF THE PT-1 SALE STAR has agreed to cause PT-1 and its subsidiaries to carry on their respective businesses in the ordinary course and consistent with past practice. NO OTHER NEGOTIATIONS INVOLVING THE PT-1 SALE STAR has agreed not to: - solicit, discuss or encourage any inquiries, offers or proposals which constitute or are reasonably likely to lead to an acquisition proposal; or - accept or entertain an offer by any person, other than PT-1 acquiror, or enter into discussions with, or provide information to any person, other than PT-1 acquiror, concerning an acquisition proposal. PT-1 has agreed that it will keep PT-1 acquiror informed of any acquisition proposal. 103 117 PAYMENT OF TERMINATION FEE Pursuant to the PT-1 letter of intent, if STAR fails or refuses to consummate the PT-1 sale for any reason, other than the following, STAR will be required to pay PT-1 acquiror a termination fee of $5.85 million in cash upon demand: - the failure to obtain the necessary regulatory approvals for the PT-1 sale; - the failure of a majority of STAR's stockholders entitled to vote to approve the transactions contemplated (provided that STAR does not sell the PT-1 assets to another purchaser within twelve months of such failure to approve the asset sale to PT-1 acquiror); - PT-1 acquiror's breach of the material terms of the PT-1 sale agreement; or - upon the mutual written consent of PT-1 acquiror and STAR. EDGECOMB VOTING AGREEMENT The PT-1 letter of intent requires Mr. Edgecomb to enter into a voting agreement with PT-1 acquiror. The agreement will require Mr. Edgecomb, as a STAR stockholder, to vote all shares of STAR common stock beneficially owned by him in favor of the approval of the PT-1 sale. Mr. Edgecomb held approximately [ %] of the outstanding capital stock of STAR as of the STAR record date. PROPOSAL 3 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. 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 certain 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 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. 104 118 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 DLJ 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 transactions contemplated thereby and unanimously agreed to recommend its adoption to the stockholders of World Access. On February 11, 2000, DLJ 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 transactions contemplated thereby. WORLD ACCESS' REASONS FOR THE WORLDXCHANGE MERGER The World Access board of directors believes that the WORLDxCHANGE merger is fair to and in the best interests of World Access and its stockholders. After consideration of relevant business, financial, legal and market factors, the board of directors unanimously approved the WORLDxCHANGE merger agreement and the transactions contemplated thereby and voted to recommend that the stockholders of World Access vote FOR the approval and adoption of the WORLDxCHANGE merger agreement and the transactions contemplated thereby. In deciding to approve the WORLDxCHANGE merger agreement and to recommend approval and adoption of the WORLDxCHANGE merger agreement by the World Access stockholders, the World Access board of directors considered a number of factors, including particularly the factors listed below. In view of the number and wide variety of factors considered in connection with its evaluation of the WORLDxCHANGE merger, the World Access board of directors did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. The World Access board of directors 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 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 transactions contemplated thereby based on its consideration of these factors without taking into account the STAR merger. The board of directors also considered the opinion of DLJ 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. The directors also considered their own knowledge of World Access and WORLDxCHANGE and their respective businesses. WORLDxCHANGE's global communications network. The World Access board of directors considered WORLDxCHANGE's presence in Europe and the Pacific Rim and the potential for entry into additional countries. The board of directors also considered the technical capabilities, cost effectiveness, expansion possibilities and available capacity of WORLDxCHANGE's switches in multiple countries, 105 119 ownership interest in undersea cable systems, IRUs in additional undersea cable systems comprising more than 370 E-1 circuits and seven satellite earth stations in the U.S. and abroad. Industry trend toward consolidation. The World Access board of directors considered the status of the international telecommunications services industry and the likely trend toward consolidation of service providers. The board of directors also considered the importance of market position in the global telecommunications services industry. It considered the potential significant cost savings to be achieved as a result of the WORLDxCHANGE merger in order to provide global retail telecommunications services at competitive rates. WORLDxCHANGE's international presence. The World Access board of directors 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 of directors also considered WORLDxCHANGE's interconnection agreements in Belgium, Chile, France, Germany and Guatemala in light of potential expansion. Growing retail operations and diversified revenues. The World Access board of directors considered WORLDxCHANGE's growing retail operations, which would be made available to World Access in the future. WORLDxCHANGE is currently serving more than 550,000 residential and commercial retail customers each month. Additionally, the World Access board of directors 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. RECOMMENDATION OF THE WORLD ACCESS BOARD OF DIRECTORS 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 THEREBY AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF WORLD ACCESS VOTE FOR THE APPROVAL AND ADOPTION OF THE WORLDXCHANGE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. 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 a number of factors, including: - historical information concerning World Access' and WORLDxCHANGE's respective businesses, financial performance and condition, operations, management and competitive position; 106 120 - WORLDxCHANGE management's assessment of the business and financial prospects of World Access and WORLDxCHANGE as a combined company. In this regard, the WORLDxCHANGE board considered financial market and industry conditions and the potential synergies and opportunities for growth inherent in a combined company. In light of these factors, the WORLDxCHANGE board concluded that the long-term business and financial prospects of a combined company were superior to those of WORLDxCHANGE as an independent company; - the terms and conditions of the WORLDxCHANGE merger agreement, which the WORLDxCHANGE board believes to be fair, and in the best interests of, the WORLDxCHANGE shareholders; - WORLDxCHANGE's prior experience with other potential acquirors or strategic partners; - the ability of WORLDxCHANGE, as an independent company, to meet its near- and longer-term operating cash needs and fund capital expenditures necessary to achieve future growth; - the current and historical market prices and trading information with respect to World Access' common stock; and - the impact of the WORLDxCHANGE merger on WORLDxCHANGE's customers and employees. The WORLDxCHANGE board also considered certain potentially negative factors in assessing the proposed WORLDxCHANGE merger. These factors include: - the risk that the value of World Access' common stock to be received at the closing of the WORLDxCHANGE merger would be less than the value of the World Access common stock reflected in the WORLDxCHANGE merger exchange ratio due to potential declines in the trading price of World Access' shares; - the risk that the WORLDxCHANGE merger will not be completed in a timely manner or at all and the effect of the public announcement on WORLDxCHANGE's ability to attract and retain key employees; and - the risk that a strategic alternative more favorable to the WORLDxCHANGE merger will be presented or become available to WORLDxCHANGE prior to the closing of the WORLDxCHANGE merger, which alternative WORLDxCHANGE would be prohibited from pursuing under the terms of the WORLDxCHANGE merger agreement. The above factors are not intended to represent an exhaustive list of all of the factors considered by the WORLDxCHANGE board. However, they are believed to include all of the material factors considered. In light of the variety of factors considered, the WORLDxCHANGE board did not find it practicable to, and did not, quantify or otherwise assign relative weight to any one or more of the factors it considered in reaching its determination. In addition, individual WORLDxCHANGE directors may have given different weights to different factors. 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 The board of directors of World Access engaged DLJ to act as its financial advisor in connection with the WORLDxCHANGE merger. On February 11, 2000, DLJ 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. As described above under "World Access' reasons for the WORLDxCHANGE merger," DLJ's opinion was 107 121 only one of many factors taken into consideration by the board of directors of World Access in making its determination to approve the WORLDxCHANGE merger agreement. THE FULL TEXT OF DLJ'S OPINION IS INCLUDED AS ANNEX D TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO READ CAREFULLY DLJ'S OPINION IN ITS ENTIRETY FOR THE DESCRIPTIONS OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, OTHER MATTERS CONSIDERED AND LIMITATIONS OF THE REVIEW UNDERTAKEN IN ARRIVING AT THE OPINION. DLJ'S OPINION WAS PREPARED FOR AND ADDRESSED TO WORLD ACCESS' BOARD OF DIRECTORS AND ONLY ADDRESSES THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE PAID BY WORLD ACCESS. DLJ'S OPINION DOES NOT: (1) ADDRESS THE MERITS OF THE UNDERLYING DECISION BY WORLD ACCESS TO ENGAGE IN THE WORLDXCHANGE MERGER OR OTHER BUSINESS STRATEGIES CONSIDERED BY WORLD ACCESS; (2) CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD VOTE AT THE STOCKHOLDERS' MEETING; OR (3) CONSTITUTE AN OPINION AS TO THE PRICE AT WHICH WORLD ACCESS COMMON STOCK WILL ACTUALLY TRADE AT ANY TIME. The type and amount of consideration was determined in arms-length negotiations between World Access and WORLDxCHANGE. No restrictions or limitations were imposed by World Access upon DLJ with respect to the investigations made or the procedures followed by DLJ in rendering its opinion. In arriving at its opinion, DLJ, among other things: - reviewed the draft, dated February 10, 2000, of the WORLDxCHANGE merger agreement and assumed that the final form of that agreement would not vary in any respect that would be material to DLJ'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 certain financial projections of each of World Access and WORLDxCHANGE that were prepared by World Access' management; and - compared selected 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 and WORLDxCHANGE, reviewed prices paid in selected other business combinations and conducted other financial studies, analyses and investigations as DLJ deemed appropriate for purposes of its opinion. In rendering its opinion, DLJ 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. DLJ relied upon the estimates of the management of World Access of the operating synergies achievable as a result of the WORLDxCHANGE merger. DLJ 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. DLJ expressed no opinion with respect to such forecasts or the assumptions on which they were based, and DLJ 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 DLJ. DLJ 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. DLJ assumed that the WORLDxCHANGE merger would be accounted for as a pooling of interests under generally accepted accounting principles and that it would qualify as a tax-free reorganization for U.S. federal income tax purposes. 108 122 The preparation of a fairness opinion is a complex process that is not necessarily susceptible to partial analysis or summary description and involves determinations about the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. DLJ performed each of the analyses summarized below in order to provide a different perspective on the WORLDxCHANGE merger and add to the total mix of information available. However, although the separate analyses are summarized below, DLJ believes that its analyses must be considered as a whole. Selecting portions of the analyses or of the summary set forth below, without considering the analyses as a whole, could create an incomplete or misleading view of the processes underlying DLJ's opinion. DLJ 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 and did not attempt to assign specific weights to particular analyses or factors considered. Rather, in arriving at its opinion, DLJ considered the results of each of these analyses together, in their totality and in light of each of the other analyses and made qualitative judgements as to the significance and relevance of all of the factors and analyses considered in arriving at its opinion. In performing its analyses, DLJ made numerous assumptions with respect to industry performance, business and regulatory, financial, economic, monetary, political and market conditions and other matters, many of which are beyond the control of World Access or WORLDxCHANGE. In addition, analyses relating to the value of businesses or securities are not appraisals and do not reflect the prices at which the businesses or securities can actually be sold. Stockholders should understand that no company or transaction used in DLJ's analyses as a comparison is directly comparable to World Access, WORLDxCHANGE or the WORLDxCHANGE merger. It should also be understood that analyses based upon projections or forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties, none of World Access, WORLDxCHANGE or DLJ or any other person assumes responsibility if future results are different from those forecast. See "RISK FACTORS" elsewhere in this joint proxy statement/prospectus. DLJ's opinion is necessarily based upon economic, market, financial and other conditions as they existed on, and on information available to DLJ as of, the date of its opinion. It should be understood that, although subsequent developments may affect its opinion, DLJ does not have any obligation to update, revise or reaffirm its opinion as a result of changes in such conditions or otherwise. The following is a brief summary of the principal analyses performed by DLJ in connection with DLJ's opinion and included in its presentation to World Access' board of directors. For purposes of the following analyses, DLJ used the February 9, 2000 closing price of the World Access common stock of $22.88 per share. It should be understood that DLJ makes no prediction, and there can be no assurance, as to what the closing price of World Access common stock will actually be. Included in the discussion below are summaries of some of the statistical information appearing in that discussion presented in a tabular format. While these tables are presented for the purpose of clarity and ease of reference, they are not substitutes for, and must be read along with, all of the information appearing under the captions immediately preceding them as well as all of the information set forth in this document. 1. CONSIDERATION PAID ANALYSIS DLJ 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 (the "Initial Exchange Ratio") for the ten-day period ending at the close of trading on the second trading day preceding the closing (the "Averaging 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 (the "Maximum Exchange Ratio"). In reviewing the consideration to be 109 123 paid by World Access, DLJ 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 COMPANY ANALYSIS To provide comparative market information, DLJ compared selected historical and projected operating and financial ratios of WORLDxCHANGE to the corresponding data and ratios of selected publicly traded companies that operate businesses reasonably similar to WORLDxCHANGE. For purposes of these analyses, DLJ compared WORLDxCHANGE relative to the following five companies deemed by DLJ to be reasonably comparable to WORLDxCHANGE: (i) IDT Corporation; (ii) Pacific Gateway Exchange, Inc.; (iii) PRIMUS Telecommunications Group, Incorporated; (iv) RSL Communications, Ltd.; and (v) Startec Global Communications Corporation. However, no company utilized in DLJ's analysis of comparable publicly traded companies is identical to World Access or WORLDxCHANGE. Accordingly, this analysis necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of each of World Access and WORLDxCHANGE and other factors that could affect the public trading values of World Access, WORLDxCHANGE or any other comparable company included in this analysis. Historical financial information used with respect to the comparable companies was as of the most recent financial statements publicly available for each company as of February 9, 2000. DLJ examined certain publicly available financial data of the comparable companies including enterprise value (defined as market value of common equity plus book value of total debt and preferred stock less cash) as multiples of the latest publicly available last quarter annualized revenues, estimated 2000 revenues taken from various analysts research reports, gross property, plant and equipment and net property, plant and equipment. DLJ 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 at February 9, 2000. For purposes of this analysis, DLJ 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, DLJ 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 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. 110 124 COMPARABLE COMPANY ANALYSIS ($ IN MILLIONS) COMPARABLE COMPANIES REFERENCE RANGE(1) -------------------- -------------------- WORLDXCHANGE HIGH LOW HIGH LOW ------------ --------- ------- -------- -------- ($ IN MILLIONS) Enterprise Value/Last Quarter Annualized Revenues............ 1.5x 2.2x 0.6x 1.7x 1.2x Enterprise Value/2000 Estimated Revenues(2).................... 1.2x 1.9x 0.7x 1.5x 1.0x Enterprise Value/Gross PP&E...... 3.2x 7.5x 2.5x 4.5x 3.5x Enterprise Value/Net PP&E........ 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 PP&E..................... 924.5 2,173.8 711.4 1,295.9 1,007.9 Net PP&E....................... 924.5 1,705.1 565.7 1,066.5 872.6 - --------------- (1) In comparing the ratio of WORLDxCHANGE's enterprise value (based on the Initial Exchange Ratio) to its last quarter annualized revenues, estimated 2000 revenues, gross property, plant and equipment and net property, plant and equipment to those of the comparable companies at February 9, 2000, DLJ also determined a reference range for the comparable companies. The reference range represents a tighter range of the ratios as deemed reasonable by DLJ for comparative purposes. (2) Source of Projections: - IDT Corporation: Lazard Freres research report dated December 6, 1999; - Pacific Gateway Exchange, Inc.: Jefferies research report dated November 17, 1999; - PRIMUS Telecommunications Group, Incorporated: Jefferies research report dated December 1, 1999; - RSL Communications, Inc.: DLJ research report dated December 1, 1999; - WORLDxCHANGE: projections provided by World Access management. 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 DLJ reviewed selected mergers and acquisitions transactions of companies that operate businesses reasonably similar to that of WORLDxCHANGE. Of these selected M&A transactions, the following mergers and acquisitions transactions were deemed most relevant by DLJ: - Viatel, Inc.'s acquisition of Destia Communications, Inc. - PRIMUS Telecommunications Group, Incorporated's acquisition of TresCom International, Inc. However, no company, transaction or business utilized in DLJ's analysis of selected M&A transactions is identical to World Access, WORLDxCHANGE or the WORLDxCHANGE merger. Accordingly, this analysis necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of companies and other factors that could affect the acquisition, public trading or other values of the companies or transactions being analyzed. 111 125 DLJ performed this analysis in order to compare WORLDxCHANGE's ratios of the implied transaction value (based on the Initial Exchange Ratio) to its last quarter annualized revenues and net property, plant and equipment to those of the selected mergers and acquisitions transactions. In addition, DLJ compared the transaction value of WORLDxCHANGE (based on the Initial Exchange Ratio) to the implied transaction values obtained by the above mentioned ratios of the selected mergers and acquisitions transactions and WORLDxCHANGE's last quarter annualized revenues and net property, plant and equipment. 112 126 SELECTED MERGERS AND ACQUISITIONS TRANSACTIONS ($ IN MILLIONS) ALL SELECTED M&A KEY SELECTED M&A TRANSACTIONS TRANSACTIONS -------------------- -------------------- WORLDXCHANGE HIGH LOW HIGH LOW ------------ -------- -------- -------- -------- ($ IN MILLIONS) Transaction Value/Last Quarter Annualized Revenues........... 1.5x 4.0x 1.2x 2.6x 1.2x ====== ======== ======== ======== ======== Transaction Value/Net PP&E...... 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 PP&E...................... 924.5 8,143.1 1,148.3 1,206.6 1,148.3 - --------------- * For purposes of this analysis, DLJ compared WORLDxCHANGE's ratios of the implied transaction value (based on the Initial Exchange Ratio) to its last quarter annualized revenues and net property, plant and equipment to those of the selected mergers and acquisitions transactions deemed most relevant by DLJ. In addition, DLJ compared the transaction value of WORLDxCHANGE (based on the Initial Exchange Ratio) to the implied transaction values obtained by the above mentioned ratios of the selected mergers and acquisitions transactions deemed most relevant by DLJ and WORLDxCHANGE's last quarter annualized revenues and net property, plant and equipment. 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, DLJ 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. DLJ 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. DLJ calculated EBITDA for WORLDxCHANGE. EBITDA is earnings before interest, taxes, depreciation and amortization and other items. DLJ calculated the terminal value of WORLDxCHANGE at the end of the forecast period, by applying a range of estimated EBITDA multiples selected in DLJ'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 DLJ'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 DLJ'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............................... $924.5 113 127 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 is not a complete description of the analyses performed by DLJ, but describes, in summary form, the principal elements of the analyses made by DLJ in arriving at DLJ's opinion. The preparation of a fairness opinion involves determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily summarized. ENGAGEMENT LETTER World Access selected DLJ to render an opinion in connection with the WORLDxCHANGE merger based upon DLJ's qualifications, expertise and reputation, including the fact that DLJ, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Pursuant to the terms of an engagement letter dated January 18, 2000, World Access agreed to pay DLJ a fee of $850,000 at the time that DLJ delivered to the World Access board of directors its opinion, irrespective of the conclusion reached in the opinion, and to pay DLJ 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 DLJ for all of its out-of-pocket expenses, including the reasonable fees and expenses of counsel incurred by DLJ in connection with its engagement, and to indemnify DLJ for liabilities and expenses arising out of DLJ's engagement, including liabilities under federal securities laws. The terms of the fee arrangement with DLJ, which DLJ and World Access believe are customary in transactions of this nature, were negotiated at arms-length between World Access and DLJ. World Access' board of directors was aware of such arrangement, including the fact that a significant portion of the aggregate fee payable to DLJ is contingent upon consummation of the WORLDxCHANGE merger. DLJ provides a full range of financial, advisory and brokerage services and in the course of its normal trading activities may from time to time effect transactions and hold positions in the securities or debt of World Access for its own account and for the accounts of its customers. DLJ has performed investment banking and other services for World Access in the past and has been compensated for such services. DLJ acted as financial advisor to World Access in connection with its acquisition of FaciliCom International, Inc., and acted as solicitation agent in connection with the consent solicitation for FaciliCom's outstanding senior notes. DLJ is currently acting as financial advisor to World Access in connection with its proposed acquisition of STAR. Further, DLJ is currently providing advisory services in connection with the exploration of a possible sale of World Access' NACT Telecommunications Inc. and Telco Systems Inc. subsidiaries and World Access' Wireless Local Loop Division. CONSIDERATION TO BE RECEIVED IN THE WORLDXCHANGE MERGER Upon completion of the WORLDxCHANGE merger, each outstanding share of WORLDxCHANGE common stock will be automatically canceled and 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 of World Access common stock will be issued in connection with the WORLDxCHANGE merger. 114 128 Instead, WORLDxCHANGE shareholders will receive cash, without interest, in lieu of any fraction of a share of World Access common stock to which they would otherwise be entitled under the WORLDxCHANGE merger agreement. Upon completion of the WORLDxCHANGE merger, each outstanding WORLDxCHANGE stock option or warrant will be automatically converted into an option to acquire such number of shares of World Access common stock as is equal to the number of shares of WORLDxCHANGE common stock covered under such WORLDxCHANGE stock option or warrant multiplied by 0.6583. The exercise price will be the exercise price specified in the WORLDxCHANGE stock option or warrant divided by 0.6583. Each newly-issued World Access stock option will contain terms which are substantially similar to the terms governing the original WORLDxCHANGE stock option or warrant. CLOSING; EFFECTIVE TIME 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 such other 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. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE WORLDXCHANGE MERGER The following is a summary of certain material federal income tax consequences of the WORLDxCHANGE merger. Long Aldridge & Norman LLP, as counsel to World Access, is of the opinion that, except as to matters upon which they have expressly declined to express an opinion, as disclosed herein, to the extent the following discussion summarizes matters of law or legal conclusions, it is accurate in all material respects under the federal income tax laws as now in effect. The following discussion is general in nature and does not purport to be 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: (i) an insurance company; (ii) a tax-exempt organization; (iii) an employee stock ownership plan; (iv) a bank; (v) a broker, dealer or financial institution; (vi) 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; (vii) a holder that has a "functional currency" other than the United States dollar; (viii) a holder subject to the alternative minimum tax; (ix) 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; (x) 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 (xi) 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 (for example, 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 summary assumes that as a WORLDxCHANGE shareholder, you hold your WORLDxCHANGE capital stock as a "capital asset" (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This summary is based on the Code and final, temporary and proposed treasury regulations promulgated thereunder, 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 summary. 115 129 We have not requested a ruling from the IRS with respect to the federal income tax consequences of the WORLDxCHANGE merger nor is consummation of the WORLDxCHANGE merger conditioned on the receipt by World Access or WORLDxCHANGE of such a ruling or an opinion of tax counsel concerning such 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 that the WORLDxCHANGE merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code. This opinion is subject to the limitations, qualifications and assumptions referred to herein and in such opinion. In rendering its opinion as to the status of the WORLDxCHANGE merger as a "reorganization," and in rendering its opinion with respect to the accuracy of the following discussion, counsel has relied upon, and has assumed the accuracy of information, factual statements and representations made by World Access and WORLDxCHANGE in this joint proxy statement/prospectus and the WORLDxCHANGE merger agreement. Any inaccuracy or change with respect to such information, representations or assumptions, or any past or future actions by World Access or WORLDxCHANGE contrary to such information, representations or assumptions could adversely affect the conclusions reached in such opinion and the tax discussion set forth below. The opinion represents such counsel's best judgment as to the tax treatment of the WORLDxCHANGE merger, but neither binds the IRS nor precludes it from adopting a contrary position, and no assurance can be given that contrary positions will not be successfully asserted by the IRS or adopted by a court if the issues are litigated. 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 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 Code. 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. Under Section 354 of the Code, you will not recognize gain or loss upon the exchange of your WORLDxCHANGE common stock and preferred stock for World Access common stock (and fractional share interests) 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 IRS as a dividend distribution to you under Section 301 of the Code, 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. Cash for fractional shares. Based on the current published ruling position of the IRS, the cash you receive in lieu of a fractional share interest in World Access common stock will be treated as received in "exchange" for such fractional share interest under Section 302(a) of the Code. You will recognize gain or loss measured by the difference between the amount of cash received and the portion of the tax basis of 116 130 your WORLDxCHANGE capital stock allocable to such fractional share interest. Such 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 WORLDxCHANGE escrow agreement will be treated as if you held such shares of World Access common stock directly. Return of escrowed shares to World Access to satisfy claims. Pursuant to the WORLDxCHANGE escrow 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 agreed upon claim using the $20.38 share price to value such returned shares. Any such 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 such World Access common stock following the effective time of the WORLDxCHANGE merger. Accordingly, the return of such 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 under Section 354 of the Code. 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 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 such 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 because under both such arrangements described in the WORLDxCHANGE merger agreement, the stock-for-stock exchange under Section 354 of the Code 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 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 (the "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 IRS has taken the position that common stock issued by an acquiring company in payment of such dividends would be treated as part of an overall stock-for-stock exchange and would be tax-free to the recipient shareholders under Section 354 of the Code. Moreover, dividends have not been declared on any of the shares of the WORLDxCHANGE preferred stock and will not be declared as of the effective time of the WORLDxCHANGE merger, and, in general, which certain 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 IRS 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 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 117 131 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 IRS 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 under Section 301 of the Code, and therefore taxable as ordinary income to the extent of your allocable portion of the accumulated earnings and profits (as determined for federal income tax purposes) of WORLDxCHANGE. If the amount of such actual or deemed payment exceeds such 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 such amount will be treated as capital gain from the sale of such 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 such actual or deemed payment is treated as a dividend and you are a corporation, the distribution may qualify for the "dividends received deduction" under Section 243 of the Code, and may possibly be subject to the "extraordinary dividend" provisions of Section 1059 of the 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 IRS 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 IRS has been sought nor has any opinion of tax counsel been issued regarding this issue. 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 IRS. Cash received by dissenting WORLDxCHANGE shareholders. Cash received by WORLDxCHANGE shareholders who exercise appraisal rights will be treated as having been received in redemption of your WORLDxCHANGE common stock, subject to the provisions and limitations of Section 302 of the Code. If, as a result of such redemption, you own no World Access stock either directly or through the application of the stock ownership attribution rules of Section 318 of the Code, then "exchange" treatment occurs under Section 302(a) of the Code. If exchange treatment applies, 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 certain information required by the IRS 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. Tax considerations for the corporate parties World Access, WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co. and WORLDxCHANGE. No gain or loss will be recognized by World Access, WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., or WORLDxCHANGE as a result of the WORLDxCHANGE merger. However, under certain circumstances, acceleration of the vesting of specific WORLDxCHANGE options and the making of certain payments by World Access to WORLDxCHANGE employees following the WORLDxCHANGE merger may result in "excess parachute payments" within the meaning of Section 280G of the Code. Excess parachute payments are not deductible in accordance with Section 280G. No determination can be made at this time whether any amounts will be determined to be excess parachute payments, and therefore, Long Aldridge & Norman LLP has expressed no opinion with respect to this matter. 118 132 Limitation on WORLDxCHANGE tax attributes. Under Section 381 of the Code, WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co. will succeed to the net operating losses ("NOLs"), certain "recognized built-in losses," capital losses, general business credits, minimum tax credits, excess foreign tax credits and certain other tax attributes of WORLDxCHANGE. Use of these tax attributes by World Access is subject to specific limitations under Sections 381, 382, 383, 384 of the Code and certain provisions of the treasury regulations governing the filing of a consolidated federal income tax return, such as the "separate return limitation year" (the "SRLY") rules. Under Section 382 of the Code, special limitations apply after an "ownership change" to the use of NOLs and "net unrealized built-in losses" in excess of a threshold amount recognized during the five-year period after such ownership change. 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 NOLs 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 IRS (5.84% for May 2000). The Section 382 limitation for any post-ownership change year will generally be zero unless the loss corporation satisfies a "continuity of business enterprise" requirement for the two-year period following the ownership change. 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. f/k/a CTI Merger Co. as WORLDxCHANGE's corporate successor) will constitute a "loss subgroup" which will undergo a Section 382 ownership change upon consummation of the WORLDxCHANGE merger. Consequently, the World Access consolidated group's ability to utilize such loss subgroup's NOL carryover as of September 30, 1999, and any additional loss subgroup's NOL carryover of such loss subgroup arising in WORLDxCHANGE's fiscal year beginning October 1, 1999 during the period prior to the effective time of the WORLDxCHANGE merger (collectively, the "pre-change WORLDxCHANGE loss subgroup NOLs") against future World Access consolidated federal taxable income will be subject to an annual loss subgroup Section 382 limitation. If there is a prior Section 382 limitation, then successive ownership changes may result in an additional, lesser (but never in a greater) Section 382 limitation with respect to previously limited NOLs. An additional limitation may apply under which the pre-change WORLDxCHANGE loss subgroup NOLs can only be used to the extent of the "qualifying SRLY subgroup" members' aggregate, cumulative contribution to World Access consolidated taxable income (the "SRLY limitation"). Because the WORLDxCHANGE loss subgroup and its SRLY NOL subgroup should be treated as co-extensive, and the Section 382 ownership change and SRLY event will occur at the same time, the SRLY limitation should be eliminated with respect to the WORLDxCHANGE loss subgroup NOLs. However, the WORLDxCHANGE subgroup for built-in losses may not be co-extensive with the WORLDxCHANGE loss subgroup and its SRLY NOL subgroup and, if not, then if such WORLDxCHANGE subgroup built-in losses exceed a specified threshold amount, such built-in losses recognized during the five-year period following the SRLY event may still be subject to limitation under the SRLY rules. 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 NOL, and has a consolidated NOL carryover. As such, it constitutes a "loss group." Although it is currently unclear whether the World Access loss group will undergo a Section 382 ownership change as a result of consummating either or both the WORLDxCHANGE merger and the STAR merger, 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 NOL carryover as of December 31, 1999, and certain "recognized built-in losses" against its future consolidated federal taxable income may already be subject to an annual loss group Section 382 limitation. 119 133 If consummation 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 such 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 NOLs 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. 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 (i) an effective registration statement under the Securities Act of 1933 covering the resale of those shares, (ii) Rule 145 under the Securities Act of 1933 or (iii) any other applicable exemption under the Securities Act of 1933. 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. After the WORLDxCHANGE merger, the results of operations of World Access and WORLDxCHANGE 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 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, or HSR, which prevents transactions from being completed until 120 134 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 HSR 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. Certain 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. The WORLDxCHANGE merger also requires notification in certain European countries. 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. There can be no assurance that a challenge to the WORLDxCHANGE merger on competition law grounds will not be made or that, if such a challenge is made, it would not be successful in Germany. Following the completion of the WORLDxCHANGE merger, an information filing must be made in Denmark with the national competition authority. In addition, the WORLDxCHANGE merger is also subject to review and clearance by the foreign investment review boards of Australia and New Zealand. The WORLDxCHANGE merger is subject to state and federal telecommunications regulatory approvals. All but two of the state regulatory agencies and the FCC 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 FCC. 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 FCC 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. 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 121 135 Corporation Law, or the CGCL. This summary is not a complete statement of the law relating to dissenters' rights and is qualified in its entirety by reference to the full text of Chapter 13 of the CGCL. A copy of Chapter 13 of the CGCL is attached as Annex I to this joint proxy statement/prospectus and is incorporated herein by reference. Failure to comply with the procedures set forth in Chapter 13 of the CGCL will result in the loss or waiver of dissenters' rights. Therefore, this discussion and Chapter 13 of the CGCL 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, each WORLDxCHANGE shareholder owning shares on the date for the determination of shareholders entitled to vote on or consent to the WORLDxCHANGE merger that does not vote their shares in favor of the WORLDxCHANGE merger and who complies with the provisions and procedures of Chapter 13 of the CGCL, will 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 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 in consequence of the proposed WORLDxCHANGE merger (i.e., valuing the WORLDxCHANGE shares as if the WORLDxCHANGE merger had not occurred) but adjusted for any stock split, reverse stock split or share dividend that becomes effective thereafter. A failure to vote affirmatively against the WORLDxCHANGE merger will not constitute a waiver of dissenters' rights set forth in Chapter 13 of the CGCL. 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 WORLDxCHANGE merger. The WORLDxCHANGE merger agreement provides that WORLDxCHANGE will not be the surviving corporation in the WORLDxCHANGE merger. Under the CGCL, the surviving corporation will assume WORLDxCHANGE's obligations under Chapter 13 of the CGCL. To qualify as a dissenting share under the CGCL, 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 such 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 such shares of WORLDxCHANGE stock must submit share certificates for endorsement. WORLDxCHANGE is required within ten days after the date of the approval of the WORLDxCHANGE merger by the required WORLDxCHANGE shareholder vote or consent to mail a notice of the approval of the WORLDxCHANGE 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 CGCL, 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 such dissenting shareholder's shares. WORLDxCHANGE must receive such 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 122 136 mailed to dissenting shareholders. The demand must set forth the number and class of shares held of record by such shareholder 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 WORLDxCHANGE merger. The statement of fair market value in such demand by the dissenting shareholder constitutes an offer by the shareholder to sell the shares at such 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, such dissenting shareholder must also submit to WORLDxCHANGE at its principal office or the office of any transfer agent thereof share certificates representing any dissenting shares that the dissenting shareholder demands that WORLDxCHANGE purchase, so that such dissenting shares may either be stamped or endorsed with the statement that the shares are dissenting shares or 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 such agreement. Such amount is to be paid to the dissenting shareholder within the later of 30 days after the date of such agreement or 30 days after any statutory or contractual conditions to the consummation 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/or whether the shares qualify as dissenting shares. The costs and expenses of the action, including reasonable compensation to the appraisers, will be fixed and shall be assessed or apportioned as the court considers equitable, but, 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 CGCL and Section 1306 of the CGCL, 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 certain 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 the above mentioned provisions of the CGCL prohibit cash payments to holders of dissenting shares who exercise and perfect their dissenters' rights of their fair market value, such dissenting shareholders will become creditors of WORLDxCHANGE for an amount equal to the fair market value of their shares as to which the dissenters' rights are perfected plus interest accrued thereon at the legal rate on judgments until the date of payment. The rights of such dissenting shareholders, however, will be subordinate to the rights of all other creditors of WORLDxCHANGE in any liquidation proceeding, with such 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 CGCL fails to perfect, or effectively withdraws or loses his, her or its right to such purchase, the shares of such 123 137 holder will be converted into a right to receive the applicable merger consideration with respect thereto in accordance with the terms of the WORLDxCHANGE merger agreement. Dissenting shares lose their status as dissenting shares, and the holders of dissenting shares cease to be dissenting shareholders and cease to be entitled to require WORLDxCHANGE to purchase their shares if: - the WORLDxCHANGE merger is abandoned, in which case WORLDxCHANGE shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under Chapter 13 of the CGCL all necessary expenses incurred in such 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 such 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 such request for withdrawal. FAILURE TO FOLLOW THE STEPS REQUIRED BY CHAPTER 13 OF THE CGCL FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH EVENT A SHAREHOLDER WILL BE ENTITLED TO RECEIVE THE APPLICABLE MERGER CONSIDERATION WITH RESPECT TO SUCH DISSENTING SHARES IN ACCORDANCE WITH THE WORLDXCHANGE MERGER AGREEMENT). IN VIEW 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 CERTAIN PERSONS IN THE WORLDXCHANGE MERGER Under the terms of the WORLDxCHANGE merger agreement, World Access has agreed to cause one designee of WORLDxCHANGE to be elected to the World Access board of directors. 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 record date for determining the WORLDxCHANGE shareholders entitled to approve the WORLDxCHANGE merger, executive officers and directors of WORLDxCHANGE and Gold & Appel Transfer S.A. and Atocha, L.P. collectively beneficially owned a total of shares of WORLDxCHANGE common stock (not including any shares subject to outstanding options or warrants beneficially owned by these individuals or entities). Under the WORLDxCHANGE merger agreement, these shares will be converted in the WORLDxCHANGE merger into a total of shares of World Access common stock with an aggregate value of $ (assuming a per share value of World Access common stock equal to $20.38). In addition to the foregoing, WORLDxCHANGE executive officers and directors and Gold & Appel Transfer S.A. and Atocha, L.P. beneficially owned options and warrants to purchase an aggregate of shares of WORLDxCHANGE common stock. These options and 124 138 warrants had exercise prices ranging from $ to $ per share. Pursuant to the WORLDxCHANGE merger agreement, these options and warrants, to the extent not exercised as of immediately prior to the WORLDxCHANGE merger, will be converted into the right to acquire shares of World Access common stock in accordance with the WORLDxCHANGE merger agreement. Each of Roger Abbott, Chief Executive Officer and a director of WORLDxCHANGE, and Edward Soren, Executive Vice President and a director of WORLDxCHANGE, have agreed with World Access to vote his shares in favor of the WORLDxCHANGE merger. In addition, affiliates of Walter Anderson, WORLDxCHANGE's Chairman of the board, and Thomas Cirrito, a WORLDxCHANGE director, have agreed with World Access to vote their shares in favor of the WORLDxCHANGE merger. Each of Mr. Abbott, Mr. Soren, Gold & Appel Transfer S.A. and Atocha L.P. has agreed in his or its voting and stock transfer restriction agreement with World Access not to sell or otherwise transfer the World Access shares received by him or it in the WORLDxCHANGE merger until six months after the completion of the WORLDxCHANGE merger. However, Mr. Soren's agreement permits Mr. Soren immediately to sell up to 750,000 shares of World Access common stock to be received by Mr. Soren in the WORLDxCHANGE merger without restriction. In addition, Mr. Abbott's agreement permits Mr. Abbott immediately to sell such number of shares of World Access common stock to be received by Mr. Abbott in the WORLDxCHANGE merger as would provide Mr. Abbott with aggregate gross cash proceeds of up to $30.0 million. In no event will Mr. Abbott be permitted to sell more than $30.0 million worth of World Access common stock received by him in the WORLDxCHANGE merger prior to the expiration of the six-month transfer restriction period under his voting and stock transfer restriction agreement with World Access. Under Mr. Abbott's employment agreement with WORLDxCHANGE, if, in connection with a change of control of WORLDxCHANGE or otherwise, Mr. Abbott's employment with WORLDxCHANGE is terminated other than for cause, death or disability, or if Mr. Abbott's employment is constructively terminated, Mr. Abbott will be entitled to: - the payment of any earned but unpaid salary and/or bonus under the agreement; and - a lump sum cash payment in an amount equal to the amount he would have earned under the agreement from the date of termination through July 31, 2002 (currently $50,000 per month) plus the cost for Mr. Abbott to obtain benefits equivalent to those in effect at the time of the termination through July 31, 2002. Mr. Abbott's employment agreement defines "cause" to include: - Mr. Abbott's conviction of a felony; - fraudulent conduct by Mr. Abbott in connection with the business of WORLDxCHANGE; and - Mr. Abbott's bad faith refusal to perform his duties as WORLDxCHANGE's Chief Executive Officer. Mr. Abbott's employment agreement defines "constructive termination" as: - a material reduction in the kind or level of Mr. Abbott's employee benefits; - the relocation of Mr. Abbott to a location more than 40 miles from WORLDxCHANGE's current offices in San Diego without Mr. Abbott's prior consent; - the failure of WORLDxCHANGE to have Mr. Abbott's employment agreement assumed by any successor entity; or - any circumstances which would constitute a constructive termination of Mr. Abbott's employment under California law. The WORLDxCHANGE merger would constitute a change of control of WORLDxCHANGE under Mr. Abbott's employment agreement. 125 139 Patrick Aelvoet, WORLDxCHANGE's Chief Financial Officer, has an employment agreement with WORLDxCHANGE that provides for the payment of a $50,000 severance payment to Mr. Aelvoet if, in connection with a change of control of WORLDxCHANGE or otherwise, WORLDxCHANGE terminates Mr. Aelvoet's employment without cause and without at least 90 days' advance notice of such termination. Mr. Aelvoet's employment agreement defines "cause" to include: - personal dishonesty; - incompetence; - willful misconduct; - abandonment of employment or extensive absences; - conflict of interest or breach of fiduciary duty involving intent for or obtainment of material personal or family profit; - violation of any law (other than minor traffic offenses and the like); - a court order prohibiting Mr. Aelvoet's continued employment with WORLDxCHANGE; - a final cease-and-desist order issued by a regulatory agency; or - any material, uncured breach by Mr. Aelvoet of his employment agreement. The completion of the WORLDxCHANGE merger would constitute a change of control of WORLDxCHANGE under Mr. Aelvoet's employment agreement. Pursuant to three separate stock option agreements with WORLDxCHANGE, Mr. Aelvoet has options to purchase 50,000 WORLDxCHANGE shares at $9.00 per share, 25,000 shares at $10.00 per share, and 75,000 shares at $11.00 per share. Of the options to purchase 50,000 shares, options to purchase 25,000 shares are currently vested, with the remainder vesting at the rate of 3,125 shares per quarter commencing on July 1, 2000. Of the options to purchase 25,000 shares, options to purchase 7,812.5 shares are currently vested, with the remainder vesting at the rate of 1,562.5 shares per quarter commencing on August 1, 2000. Of the options to purchase 75,000 shares, options to purchase 14,062.5 shares are currently vested, with the remainder vesting at the rate of 4,687.5 shares per quarter commencing on July 1, 2000. Under Mr. Aelvoet's option agreements, if his employment with WORLDxCHANGE is involuntarily terminated within 12 months following a change of control of WORLDxCHANGE, his options would become immediately fully vested and remain exercisable until the earlier of one year from the date of such termination or ten years from the applicable grant date. Mr. Aelvoet's stock option agreements define "involuntary termination" as: - Mr. Aelvoet's involuntary dismissal or discharge for reasons other than misconduct; or - Mr. Aelvoet's voluntary resignation following: - a material reduction in Mr. Aelvoet's responsibilities; - a 15% or greater decrease in Mr. Aelvoet's total compensation; or - a relocation of Mr. Aelvoet's place of employment by more than 50 miles without Mr. Aelvoet's consent. Eric G. Lipoff, WORLDxCHANGE's Vice President and General Counsel, has an employment agreement with WORLDxCHANGE that provides that, if in connection with a change of control of WORLDxCHANGE or otherwise, WORLDxCHANGE terminates Mr. Lipoff's employment without 126 140 cause or there is otherwise an involuntary termination of Mr. Lipoff's employment, Mr. Lipoff will be entitled to: - the payment of any earned but unpaid salary and/or bonus under the agreement; and - the amount of compensation that he would have earned under the agreement from the date of termination through December 31, 2002 (currently $16,666 per month) plus the cost for Mr. Lipoff to obtain benefits equivalent to those in effect at the time of the termination through December 31, 2002. Mr. Lipoff's employment agreement defines "cause" to include: - willful misconduct of a serious nature in connection with his employment; - abandonment of employment or excessive absences after reasonable notice; - conflict of interest or breach of fiduciary duty involving his responsibilities as an employee involving intent for or obtainment of material personal or family profit; - conviction of any felony criminal offense; or - the issuance by any court or other governmental entity of an order prohibiting Mr. Lipoff's continued employment with WORLDxCHANGE which is not vacated within ten days after its entry. The agreement defines an "involuntary termination" as: - the relocation of Mr. Lipoff to a facility or location outside the California counties of Orange or San Diego without Mr. Lipoff's consent; - the failure of WORLDxCHANGE to have Mr. Lipoff's employment agreement assumed by any successor entity; or - any circumstances that would constitute a constructive termination of Mr. Lipoff's employment under California law. The completion of the WORLDxCHANGE merger would constitute a change of control of WORLDxCHANGE under Mr. Lipoff's employment agreement. Mr. Lipoff also has an option to purchase a total of 150,000 shares of WORLDxCHANGE common stock at $10.00 per share. Under the WORLDxCHANGE merger agreement, all of these options will be converted into the right to acquire shares of World Access common stock in accordance with the WORLDxCHANGE merger agreement. Pursuant to Mr. Lipoff's option agreement, this option will fully vest on December 31, 2002, except that the option will immediately fully vest if Mr. Lipoff's employment with WORLDxCHANGE is terminated without cause at any time prior to December 31, 2002. Mr. Lipoff's stock option agreement defines "cause" as it is defined in his employment agreement. If the vesting of this option is so accelerated, Mr. Lipoff will have 90 days following the termination of his employment to exercise the option. Effective January 3, 2000, each of Sen. Paul Laxalt and Dann Angeloff, who are directors of WORLDxCHANGE, received an option to purchase 12,500 shares of WORLDxCHANGE common stock at $10.00 per share. Under the WORLDxCHANGE merger agreement, all of these options will, to the extent not exercised by Sen. Laxalt and Mr. Angeloff, as applicable, as of the effective time of the WORLDxCHANGE merger, be converted into the right to acquire shares of World Access common stock in accordance with the WORLDxCHANGE merger agreement. These options are each currently vested as to 1,041.67 shares and vest at the rate of an additional 1,041.67 shares per month until fully vested. However, upon a change of control of WORLDxCHANGE, these options will each immediately fully vest and remain exercisable until the earlier of one year after the termination of these directors following a change of control of WORLDxCHANGE or ten years from the date of grant. The completion of the WORLDxCHANGE merger would constitute a change of control of WORLDxCHANGE under the terms of the options. 127 141 PRINCIPAL SHAREHOLDERS OF WORLDXCHANGE The following table sets forth certain information regarding beneficial ownership of WORLDxCHANGE's common stock as of March 22, 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 March 22, 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)....................................... 15,099,472 40.8% Edward S. Soren(3).......................................... 7,311,812 19.8 Gold & Appel Transfer, S.A.(4).............................. 4,790,428 12.9 Atocha, L.P.(5)............................................. 3,833,672 10.4 Eric G. Lipoff(6)........................................... 277,820 * Christopher Bantoft(7)...................................... 200,000 * Patrick M. Aelvoet(7)....................................... 48,876 * Dann V. Angeloff(7)......................................... 49,167 * Paul Laxalt(7).............................................. 49,167 * All directors and executive officers as a group (10 persons)(2)(3)(4)(5)(6)(7)................................ 30,702,934 81.2 - --------------- * Less than 1%. (1) Percentage calculation is based upon 37,022,683 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) 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., Walter 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 such shares. Mr. Anderson, however, disclaims beneficial ownership of these shares. Does not include a total of 6,893,937 shares of common stock issuable upon conversion of the WORLDxCHANGE Series A Convertible Preferred Stock and 128 142 WORLDxCHANGE Series B Convertible Preferred Stock held by Gold & Appel Transfer, S.A. If such shares of preferred stock were to be fully converted, Gold & Appel Transfer, S.A. will beneficially own 11,684,365 shares, or approximately 27.0%, of WORLDxCHANGE's common stock. The address for each of Gold & Appel Transfer, S.A. and Walt Anderson is c/o Gold & Appel Transfer, S.A., Omar Hodge Building, Wickhams Cay, Road Town, Tortula, British Virgin Islands. (5) Tom Cirrito, a WORLDxCHANGE director, is a general partner of Atocha, L.P., and as a result may be deemed to have beneficial ownership of these shares. The address for each of Atocha, L.P. and Tom Cirrito is c/o Atocha, L.P., 6429 Georgetown Pike, McLean, Virginia 22101. Does not include a total of 1,388,889 shares of common stock issuable upon conversion of the WORLDxCHANGE Series B Convertible Preferred Stock held by Atocha. If such shares of WORLDxCHANGE Series B Convertible Preferred Stock were to be fully converted, Atocha would beneficially own 5,222,561 shares or approximately 13.6% of WORLDxCHANGE's common stock. (6) Includes a total of 250,000 shares issuable pursuant to options that were exercisable as of March 22, 2000 or within 60 days of such date. (7) Represents shares issuable pursuant to options that were exercisable as of March 22, 2000, or within 60 days of that date. THE WORLDXCHANGE MERGER AGREEMENT This section of the joint proxy statement/prospectus describes 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 therein relating to the possible payment by World Access to the WORLDxCHANGE shareholders of contingent shares after the completion of the WORLDxCHANGE merger upon the satisfaction of the conditions for such payment contained in the WORLDxCHANGE merger agreement and to make the necessary conforming changes. The original WORLDxCHANGE merger agreement, as amended, is referred to in this joint proxy statement/prospectus as the WORLDxCHANGE merger agreement. While World Access and WORLDxCHANGE believe that the description covers the material terms of the WORLDxCHANGE merger agreement, this summary may not contain all of the information that is important to you. The WORLDxCHANGE merger agreement is attached to this joint proxy statement/prospectus as Annex B, and World Access and WORLDxCHANGE urge you to read it carefully. THE WORLDXCHANGE MERGER/EFFECTIVE TIME The WORLDxCHANGE merger agreement provides that upon completion of the merger, WORLDxCHANGE will be merged with and into WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., a wholly-owned subsidiary of World Access. WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co. will survive the merger. On the closing date 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. Upon the filing of the certificate of merger and the agreement of merger, the WORLDxCHANGE merger will be effective. THE WORLDXCHANGE MERGER CONSIDERATION Each share of WORLDxCHANGE capital stock owned or held by WORLDxCHANGE or a subsidiary of WORLDxCHANGE will no longer be outstanding and will be canceled and retired, and no consideration will be delivered for such shares. Each share of WORLDxCHANGE capital 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. No fractional shares will be issued. Instead, WORLDxCHANGE shareholders will receive cash based on the market price of World Access common stock. 129 143 ESCROW OF SHARES Of the shares of World Access common stock to be issued to the WORLDxCHANGE shareholders in the WORLDxCHANGE merger, 2,453,385 of such shares will be delivered to SunTrust Bank, Atlanta, as escrow agent. These shares will be held by SunTrust Bank as security for claims by World Access for indemnification pursuant to the WORLDxCHANGE merger agreement and the applicable escrow agreement. The shares of World Access common stock held in escrow constitute World Access' exclusive source of recovery for indemnification claims. At the closing of the WORLDxCHANGE merger, 49,068 of the shares of World Access common stock to be issued to the WORLDxCHANGE shareholders will be delivered to a corporate escrow agent. Such shares will be used by the WORLDxCHANGE shareholder representative to pay the costs associated with fulfilling his obligations under the WORLDxCHANGE merger agreement and the WORLDxCHANGE escrow agreement, including the settlement of World Access indemnification claims. REPRESENTATIONS AND WARRANTIES World Access, WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co. 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 structure; - due authorization by each such party of the WORLDxCHANGE merger agreement, the escrow agreement and the transactions contemplated thereby; - capitalization; - financial statements; - undisclosed liabilities; - compliance with laws; - absence of conflicts between each party's obligations under the WORLDxCHANGE merger agreement and its charter, bylaws, and material contracts, and applicable law; - pending or threatened litigation; - tax matters; - consents and approvals required to complete the WORLDxCHANGE merger; - changes in business or the occurrence of certain events since September 30, 1999 (in the case of WORLDxCHANGE) or December 31, 1999 (in the case of World Access); - required approvals by their respective boards of directors and stockholders; and - financial advisors. WORLDxCHANGE made additional representations and warranties regarding its, and its subsidiaries' real and personal property, intellectual property, employee benefits and other employee matters, licenses and permits necessary for the operation of its business, and material contracts. World Access made additional representations and warranties with respect to required filings and reports with the Securities and Exchange Commission and the valid issuance by World Access of its shares in the WORLDxCHANGE merger. 130 144 WORLDXCHANGE'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE WORLDXCHANGE MERGER WORLDxCHANGE has agreed that until the completion of the WORLDxCHANGE merger, it will, and will cause its subsidiaries to, conduct business in the usual, regular and ordinary course, substantially in accordance with past practice in all material respects. WORLDxCHANGE also agreed that subject to exceptions as contemplated by the WORLDxCHANGE merger agreement, until the completion of the WORLDxCHANGE merger, it would, and would cause its subsidiaries to, conduct business in compliance with specific restrictions relating to: - the issuance and redemption of securities; - employees and employee benefits and remuneration; - the issuance of dividends or other distributions; - the modification of certificates of incorporation or bylaws; - the acquisition of assets or other entities; - the disposition of assets; - the incurrence of indebtedness; - capital expenditures and other investments; - entering into contracts; - accounting policies and procedures; and - the settlement of litigation. NO OTHER NEGOTIATIONS INVOLVING WORLDXCHANGE Until the WORLDxCHANGE merger is completed, WORLDxCHANGE has agreed that neither it nor its subsidiaries will, and that it will cause its employees, officers, directors, affiliates, agents and representatives not to, directly or indirectly take any of the following actions without the prior written consent of World Access: - solicit, initiate, encourage or knowingly facilitate (including by way of furnishing information or engaging in discussions or negotiations) any inquiries regarding or the making, implementation or acceptance of an Acquisition Proposal, as defined below; - 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 and its subsidiaries would, and would cause it officers, directors, affiliates, employees, agents and representatives to, immediately discontinue any discussions or negotiations regarding an Acquisition Proposal in effect on February 11, 2000. An "Acquisition Proposal" is any offer or proposal with respect to (i) a business combination or similar action involving WORLDxCHANGE, (ii) any purchase or sale of a material portion of the assets of WORLDxCHANGE, taken as a whole, or (iii) any purchase or sale of, or tender or exchange offer for, a material portion of the equity securities of WORLDxCHANGE. TREATMENT OF WORLDXCHANGE STOCK OPTIONS AND WARRANTS Upon completion of the WORLDxCHANGE merger, each outstanding option or warrant to purchase WORLDxCHANGE capital stock will be automatically converted into an option to purchase such number of shares of World Access common stock as is equal to the number of shares of WORLDxCHANGE common stock covered under such WORLDxCHANGE stock option or warrant multiplied by 0.6583 at a per share price equal to the exercise price specified in the WORLDxCHANGE option or warrant divided 131 145 by 0.6583. Each newly-issued World Access stock option will contain terms substantially similar to the terms governing the original STAR stock option or warrant. World Access will file a registration statement on Form S-8 (or another appropriate form) with respect to each WORLDxCHANGE stock option or warrant converted into a World Access stock option, and with respect to shares of World Access common stock in respect of shares of World Access common stock underlying such option. World Access will maintain the effectiveness of the registration statement for as long as any of the options remain outstanding. BOARD OF DIRECTORS AND OFFICERS OF WORLD ACCESS World Access and WORLDxCHANGE have agreed that, immediately following the completion of the WORLDxCHANGE merger, World Access will cause one WORLDxCHANGE designee to be elected to the World Access board of directors. The WORLDxCHANGE designee will be Walter Anderson, or such other person designated by Gold & Appel Transfer S.A. and reasonably acceptable to World Access. Gold & Appel S.A. is a shareholder of WORLDxCHANGE. CONDITIONS TO COMPLETION OF THE WORLDXCHANGE MERGER The respective obligations of WORLDxCHANGE, World Access and WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co. to complete the WORLDxCHANGE merger are subject to the satisfaction or waiver of each of the following conditions before completion of the WORLDxCHANGE merger: - the waiting period (and any extension thereof) applicable to the WORLDxCHANGE merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, must have been terminated or must have expired; - the WORLDxCHANGE merger agreement and the WORLDxCHANGE merger must be approved by the requisite vote of the stockholders of World Access and WORLDxCHANGE; - the registration statement with respect to the shares of World Access common stock to be issued in the WORLDxCHANGE merger must have been declared effective by the Securities and Exchange Commission, and the registration statement must not be subject to a stop order or a threatened proceeding with respect to a stop order; 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 and to be held in escrow. WORLDxCHANGE's obligations to complete the WORLDxCHANGE merger are subject to the satisfaction or waiver of each of the following additional conditions before completion of the WORLDxCHANGE merger: - World Access' representations and warranties must be true and correct as of February 11, 2000 and as of the date the WORLDxCHANGE merger is to be completed except to the extent World Access' representations and warranties address matters only as of a particular date and except where any failure to be true and correct would not have a Material Adverse Effect (as defined below) on World Access or the surviving corporation; - World Access must perform or comply in all material respects with all of its agreements and covenants required by the WORLDxCHANGE merger agreement to be performed or complied with by World Access at or before completion of the WORLDxCHANGE merger; - all covenants and approvals required of World Access to complete the WORLDxCHANGE merger must be obtained, except where the failure to obtain any such consent or approval would not have a Material Adverse Effect on World Access or the surviving corporation; 132 146 - World Access' legal counsel must have delivered to WORLDxCHANGE a legal opinion pertaining to the corporate existence of World Access and WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co., the corporate power and authority of World Access and WORLDxCHANGE Communications, Inc. f/k/a CTI Merger Co. to execute and perform the WORLDxCHANGE merger agreement, the effectiveness of the WORLDxCHANGE merger and the issuance of World Access common stock pursuant to the WORLDxCHANGE merger agreement; and - no law, order or injunction must be adopted or issued which has the effect of making the WORLDxCHANGE merger illegal or prohibiting completion of the WORLDxCHANGE merger or which would otherwise have a Material Adverse Effect on World Access and its subsidiaries taken as a whole. World Access' obligations to complete the WORLDxCHANGE merger are subject to the satisfaction or waiver of each of the following additional conditions before completion of the WORLDxCHANGE merger: - WORLDxCHANGE's representations and warranties must be true and correct as of February 11, 2000 and as of the date the WORLDxCHANGE merger is to be completed except to the extent WORLDxCHANGE's representations and warranties address matters only as of a particular date and except where any failure to be true and correct would not have a Material Adverse Effect on World Access or the surviving corporation; - WORLDxCHANGE must perform or comply in all material respects with all of its agreements and covenants required by the WORLDxCHANGE merger agreement to be performed or complied with by WORLDxCHANGE at or before completion of the WORLDxCHANGE merger; - no Material Adverse Effect with respect to WORLDxCHANGE and its subsidiaries taken as a whole shall have occurred since February 11, 2000, except any change, circumstance or effect relating to the economy or financial markets in general or in general to the industries in which WORLDxCHANGE operates and not specifically relating to WORLDxCHANGE; - all consents and approvals required of WORLDxCHANGE to complete the WORLDxCHANGE merger must be obtained, except where the failure to obtain any such consent or approval would not have a Material Adverse Effect on World Access or the surviving corporation; - WORLDxCHANGE's legal counsel must have delivered to World Access a legal opinion pertaining to the corporate existence of WORLDxCHANGE, the corporate power and authority of WORLDxCHANGE to execute and perform the WORLDxCHANGE merger agreement, and the effectiveness of the WORLDxCHANGE merger; - no law, order or injunction must be adopted or issued which has the effect of making the WORLDxCHANGE merger illegal or prohibiting completion of the merger or which would otherwise have a Material Adverse Effect on World Access and its subsidiaries taken as whole; - the average World Access closing sale price for the ten consecutive trading days ending at the close of trading day on the second trading day prior to the completion of the WORLDxCHANGE merger was not below $15.00; - 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 shall have been voted in favor of the WORLDxCHANGE merger agreement and all transactions contemplated thereby (including the WORLDxCHANGE merger), and such shares shall have been deemed converted into not more than 8,282,829 shares of WORLDxCHANGE common stock. 133 147 A "Material Adverse Effect" is any change, circumstance or effect or breach of any of the provisions of the WORLDxCHANGE merger agreement that individually, or in the aggregate, is or would reasonably be expected to be materially adverse to the business, financial condition or results of operations of an entity taken as a whole with its subsidiaries or the ability of such entity to complete the transactions contemplated by the WORLDxCHANGE merger agreement. TERMINATION OF THE WORLDXCHANGE MERGER AGREEMENT The WORLDxCHANGE merger agreement may be terminated at any time prior to completion of the WORLDxCHANGE merger: - by mutual written consent of World Access and WORLDxCHANGE; - by World Access or WORLDxCHANGE, if the other party fails to comply in any material respects with any of its covenants or agreements in the WORLDxCHANGE merger agreement, which failure to comply is not cured within 30 days following receipt of notice of breach. However, if a breach is curable through the use of reasonable efforts, the non-breaching party may not terminate the WORLDxCHANGE merger agreement so long as the breaching party is using reasonable efforts to cure the breach. Further, no party may terminate the WORLDxCHANGE merger agreement if such party is then failing to comply in any material respect with any of its covenants and agreements; - by World Access or WORLDxCHANGE, if the other party has breached any of its representations or warranties, which breach has not been cured within 30 days following receipt of written notice of the breach. However, if the breach is curable through the use of reasonable efforts, the non- breaching party may not terminate the WORLDxCHANGE merger agreement so long as the breaching party is using reasonable efforts to cure the breach. Further, no party may terminate the WORLDxCHANGE merger agreement unless the breach would have a Material Adverse Effect on World Access, the surviving corporation in the WORLDxCHANGE merger or World Access and such surviving corporation; - by World Access or WORLDxCHANGE, if the WORLDxCHANGE merger is not completed before October 31, 2000 except that the right to terminate the WORLDxCHANGE merger agreement is not available to any 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 October 31, 2000 and such action or failure to act constitutes a breach of the WORLDxCHANGE merger agreement; - by World Access or WORLDxCHANGE if any governmental entity has issued a final and nonappealable order, decree or ruling permanently enjoining or prohibiting the WORLDxCHANGE merger or has failed to issue an order, decree or ruling (which failure to issue is final and nonappealable), which, in either case, is necessary to fulfill a party's obligation to complete the WORLDxCHANGE merger. However, no party may terminate the WORLDxCHANGE merger agreement if such party's failure to fulfill any obligation under the WORLDxCHANGE merger agreement is the cause of such action or inaction by the governmental entity; or - by World Access or WORLDxCHANGE, if the WORLDxCHANGE merger agreement fails to receive the requisite vote for adoption by the stockholders of World Access or WORLDxCHANGE, in each case upon the taking of such 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 (whether before or after adoption of the WORLDxCHANGE merger agreement by the stockholders of World Access and WORLDxCHANGE). However, following stockholder approval, no amendment may be made which, by law or in accordance with rules of any relevant stock exchange or automatic quotations system, requires 134 148 further approval by the stockholders. World Access and WORLDxCHANGE may, at any time prior to completion of the WORLDxCHANGE merger, 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 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 (the "WAXS Protected Parties") as a result of any of the following: - a breach of any representation or warranty of WORLDxCHANGE in the WORLDxCHANGE merger agreement (except with respect to certain tax matters and, except in limited circumstances, without regard to materiality qualifications contained in such representation or warranty); - 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 as set forth in the WORLDxCHANGE merger agreement (without regard, except in limited circumstances, to any materiality qualification contained in such representation or warranty); - 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 such matter and before the completion of the WORLDxCHANGE merger. 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 the WAXS Protected Parties may claim indemnification for the amount of losses (in each case net of $150,000) in excess of $3.0 million. The sole remedy of any WAXS Protected Party for a breach of a representation or warranty of WORLDxCHANGE is the right to receive indemnification pursuant to the WORLDxCHANGE merger agreement, and the shares of World Access common stock to be held in escrow will constitute the sole source of recovery for the WAXS Protected Parties. Upon approval of the WORLDxCHANGE merger agreement and the transactions contemplated thereby 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 and all actions and make any and all decisions required or permitted to be taken or made by the WORLDxCHANGE shareholders under the WORLDxCHANGE merger agreement and the escrow agreement (including those related to indemnification). RELATED TRANSACTION 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 135 149 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, W. Tod Chmar 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 (i) the termination of the WORLDxCHANGE merger agreement in accordance with the termination provisions of the WORLDxCHANGE merger agreement, (ii) the completion of the WORLDxCHANGE merger and (iii) 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, beneficially or of record, shares of World Access capital stock representing approximately % of the voting stock of World Access voting together as a single class. A copy of the voting and stock transfer restriction agreement is attached as Annex J to this joint proxy statement/prospectus. WORLDXCHANGE VOTING AGREEMENTS World Access has entered into separate voting and stock transfer restriction agreements with the following WORLDxCHANGE shareholders: Atocha, L.P.; Roger B. Abbott and Rosalind Abbott, whose shares of WORLDxCHANGE capital stock are owned jointly; Gold & Appel Transfer S.A.; 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 certain 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 (i) sell, hypothecate, transfer, pledge, encumber, assign or otherwise dispose of (collectively, "Transfer"), or enter into any contract or understanding with respect to the Transfer of, any shares of WORLDxCHANGE capital stock or options to acquire shares, (ii) trade or take any position, hedge or otherwise, with respect to shares of WORLDxCHANGE capital stock or options to acquire such shares, (iii) enter into any voting arrangement with respect to shares of WORLDxCHANGE capital stock or options to acquire such shares or (iv) take any action that would make any of such WORLDxCHANGE shareholder's representations or warranties untrue to 136 150 a material extent or have the effect of preventing or materially impeding such 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 such 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 such 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 or (ii) the expiration of the post-closing stock transfer restrictions set forth in the voting and stock transfer restriction agreements. While the voting and stock transfer restriction agreements are substantially similar, they do contain some differences. Edward S. Soren is permitted to Transfer up to 750,000 shares of World Access common stock issued to him in the WORLDxCHANGE merger. In addition, Roger B. Abbott and Rosalind Abbott will be permitted to sell, in the aggregate, shares of World Access common stock issued to them in the WORLDxCHANGE merger having aggregate gross cash proceeds of up to $30.0 million. As of the WORLDxCHANGE record date, these WORLDxCHANGE shareholders own, beneficially or of record, shares of WORLDxCHANGE capital stock representing approximately % of the voting stock of WORLDxCHANGE on a fully-diluted basis. ESCROW AGREEMENT As a condition to each party's obligations to complete the WORLDxCHANGE merger, World Access and WORLDxCHANGE must enter into an escrow agreement to secure the indemnification obligations of WORLDxCHANGE under the WORLDxCHANGE merger agreement. The escrow agreement contemplates that 2,453,385 shares of World Access common stock will be delivered to the escrow agent upon completion of the WORLDxCHANGE merger. The escrow agreement provides a mechanism for the release to World Access of World Access common stock in the event of undisputed claims by World Access of an indemnifiable loss. If a claim by World Access of a loss is disputed, no shares may be released by the escrow agent except as directed by a final, nonappealable decision of a court of competent jurisdiction or a notice in writing signed by World Access and the WORLDxCHANGE shareholder representative. On the first anniversary of the completion of the WORLDxCHANGE merger, the escrow agent must release to the WORLDxCHANGE shareholders their pro rata portion of the remaining shares of World Access common stock held in escrow, if no notice of an indemnifiable loss by World Access is pending at such time. If one or more notices of loss are pending at such time, the escrow agent will retain in escrow such number of shares as is sufficient to satisfy the amount claimed in such notice or notices of loss. The escrow agent will release to the WORLDxCHANGE shareholders all shares remaining in escrow upon final resolution of all claims for indemnity. For purposes of determining the number of shares of World Access common stock to be released from, or retained in, escrow, each share will be valued at $20.38. The escrow agreement will terminate on the first to occur of (i) the later of (a) ten days after the first anniversary of the completion of the WORLDxCHANGE merger, (b) the satisfaction of all indemnification claims pending on the first anniversary of the completion of the WORLDxCHANGE merger and (c) the disbursement of the entire escrow fund in accordance with the escrow agreement or (ii) a mutual consent signed by World Access and the WORLDxCHANGE shareholder representative. 137 151 WORLD ACCESS -- WORLDXCHANGE SERVICES AGREEMENT On February 14, 2000, World Access and WORLDxCHANGE entered into a services agreement, pursuant to which each party may provide the other party with operations services pending the completion of the WORLDxCHANGE merger. The World Access -- WORLDxCHANGE services agreement terminates at the earlier of (i) 90 days following the termination of the WORLDxCHANGE merger agreement or such earlier time as agreed by the parties, (ii) a written agreement of the parties terminating the services agreement or (iii) the completion of the WORLDxCHANGE merger. FOOTHILL CAPITAL CORPORATION PARTICIPATION AGREEMENT On February 11, 2000, World Access entered into a participation agreement with Foothill Capital Corporation, which, as amended, provides for World Access to provide up to $45.0 million to be advanced by Foothill to WORLDxCHANGE and certain of its subsidiaries, including WORLDxCHANGE Communications, Inc., CTS Telecom Holdings, Inc. and CTS Telecom, Inc. pursuant to the terms of an existing credit facility evidenced by a Loan and Security Agreement dated as of March 11, 1997, as thereafter amended, between Foothill, WORLDxCHANGE and the subsidiaries. The Foothill loan to WORLDxCHANGE and its subsidiaries is structured as a term loan which bears interest at a rate of 11% per annum, payable monthly in arrears, and matures on February 11, 2001, subject to extension by World Access up to October 1, 2003. Both the term loan and the existing indebtedness to Foothill under the credit facility will be secured by a blanket security interest in all personal property of WORLDxCHANGE and the subsidiaries. The participation interest of World Access in the term loan is a last-out participation, such that at any time after an acceleration by Foothill of the maturity of the obligations under the credit facility, or the failure of WORLDxCHANGE and the subsidiaries to repay such obligations in full upon their stated maturity, all amounts collected or received by Foothill from collateral liquidation or otherwise will be applied first to repayment of all principal, interest and costs owing to Foothill, and thereafter, to repayment of amounts owing to World Access. 138 152 COMPARATIVE PER SHARE MARKET PRICE DATA 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 1/2 21 5/8 28 3/64 13 29/32 Second Quarter............................................ 40 25 3/8 37 3/8 19 3/8 Third Quarter............................................. 30 15/16 18 3/4 23 9 11/16 Fourth Quarter............................................ 24 3/4 12 18 7 1/8 Year Ended December 31, 1999: First Quarter............................................. 22 3/4 6 3/8 15 3/4 9 5/8 Second Quarter............................................ 14 3/8 7 1/2 11 7/8 7 7/16 Third Quarter............................................. 16 3/16 10 5/16 8 7/16 5 1/4 Fourth Quarter............................................ 22 1/4 10 5/16 8 51/64 4 11/16 Year Ended December 31, 2000: First Quarter............................................. 26 7/8 17 1/4 8 3/8 5 1/2 Second Quarter (through May 23, 2000)..................... 20 11 1/16 5 3/4 2 3/8 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) May 23, 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 .3905, 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 7/8 $ 20 1/2 $ 8 May 23, 2000....................................... 2 3/8 11 1/16 4 5/16 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. 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. 139 153 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 three different scenarios, that World Access has completed or are currently contemplated. The first scenario assumes World Access acquires both STAR and WORLDxCHANGE. The second scenario assumes World Access acquires STAR but not WORLDxCHANGE. The third scenario assumes World Access acquires WORLDxCHANGE but not STAR. The Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1999 under all three scenarios also give effect to (i) the FaciliCom acquisition, (ii) the CommNet acquisition and (iii) the LDI acquisition as if each of the acquisitions had occurred on January 1, 1999. The Unaudited Pro Forma Condensed Combined Balance Sheets as of March 31, 2000 under all three scenarios gives effect to the STAR and WORLDxCHANGE acquisitions as if each acquisition had occurred on March 31, 2000. The Unaudited Pro Forma Condensed Combined Statements of Operations for the three months ended March 31, 2000 under all three scenarios also give effect to the LDI acquisitions as if the acquisition had occurred on January 1, 2000. The proforma adjustments are based upon currently available information and upon certain 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. 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 and WORLDxCHANGE and the related notes thereto. See "Incorporation of Certain Documents by Reference" and "Available Information." 140 154 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 2000 (IN THOUSANDS) PRO FORMA PRO FORMA WORLD ACCESS, HISTORICAL WORLD ACCESS STAR AND WORLD STAR AND STAR WXC WXC ACCESS STAR(1) ADJUSTMENTS COMBINED WXC(10) ADJUSTMENTS COMBINED ---------- -------- ----------- ------------ --------- ----------- ------------- ASSETS Cash and equivalents.............. $ 145,347 $159,290 $ -- $ 304,637 $ 9,553 $(45,000)(11) $ 269,190 Short-term investments............ 43,922 1,310 -- 45,232 -- -- 45,232 Restricted cash................... 30,847 -- -- 30,847 -- -- 30,847 Accounts and notes receivable..... 260,053 104,341 -- 364,394 92,172 (2,351)(17) 454,215 Prepaid expenses and other current assets........................... 29,835 19,620 -- 49,455 26,217 (210)(17) 75,462 Net assets held for sale.......... 238,405 -- -- 238,405 -- -- 238,405 ---------- -------- --------- ---------- --------- -------- ---------- Total Current Assets....... 748,409 284,561 -- 1,032,970 127,942 (47,561) 1,113,351 ---------- -------- --------- ---------- --------- -------- ---------- Property and equipment, net....... 154,250 268,750 -- 423,000 195,923 (6,500)(11) 612,423 Goodwill and other intangibles, net.............................. 1,081,172 196,521 (196,521)(5) 1,441,412 93,521 (93,521)(14) 2,011,741 360,240(2) 570,329(11) Other assets...................... 64,854 7,287 -- 72,141 5,126 -- 77,267 ---------- -------- --------- ---------- --------- -------- ---------- Total Assets............... $2,048,685 $757,119 $ 163,719 $2,969,523 $ 422,512 $422,747 $3,814,782 ========== ======== ========= ========== ========= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt................... $ 74,722 $42,299 $ -- $ 117,021 $ 174,142 $ (2,351)(17) $ 288,812 Accounts payable.................. 228,721 140,883 -- 369,604 173,175 -- 542,779 Other accrued liabilities......... 101,730 125,786 3,000(2) 230,516 49,302 3,000(11) 282,608 (210)(17) ---------- -------- --------- ---------- --------- -------- ---------- Total Current Liabilities.............. 405,173 308,968 3,000 717,141 396,619 439 1,114,199 Long-term debt.................... 413,989 38,567 -- 452,556 71,434 -- 523,990 Other long-term liabilities....... 652 39,118 -- 39,770 6,248 -- 46,018 ---------- -------- --------- ---------- --------- -------- ---------- Total Liabilities.......... 819,814 386,653 3,000 1,209,467 474,301 439 1,684,207 ---------- -------- --------- ---------- --------- -------- ---------- Stockholders' Equity (Deficit): Preferred stock................... 6 -- -- 6 78,658 (78,658)(15) 6 Common stock...................... 597 58 (58)(6) 826 99,378 (99,378)(15) 1,124 229(2) 298(11) Additional paid in capital........ 1,422,619 365,903 (365,903)(6) 1,956,435 -- 352,532(11) 2,326,679 514,657(2) 17,689(11) 16,299(2) 23(13) 2,860(4) Deferred compensation............. -- (1,985) 1,985(6) (2,860) -- (23)(13) (2,883) (2,860)(4) Notes receivable from shareholders..................... -- (3,785) 3,785(6) -- (1,888) 1,888(15) -- Accumulated other comprehensive loss............................. (4,368) (7,646) 7,646(6) (4,368) (6,860) 6,860(15) (4,368) Accumulated deficit............... (189,983) 17,921 (17,921)(6) (189,983) (221,077) 221,077(15) (189,983) ---------- -------- --------- ---------- --------- -------- ---------- Total Stockholders' Equity (Deficit)................ 1,228,871 370,466 160,719 1,760,056 (51,789) 422,308 2,130,575 ---------- -------- --------- ---------- --------- -------- ---------- Total Liabilities and Stockholders' Equity..... $2,048,685 $757,119 $ 163,719 $2,969,523 $ 422,512 $422,747 $3,814,782 ========== ======== ========= ========== ========= ======== ========== 141 155 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA PRO FORMA WORLD ACCESS, WORLD ACCESS STAR AND PRO FORMA STAR AND STAR WXC WXC WORLD ACCESS(20) STAR(1) ADJUSTMENTS COMBINED WXC(10) ADJUSTMENTS COMBINED ---------------- ------- ----------- ------------ -------- ----------- ------------- Carrier service revenues $264,220 $124,543 $(5,873)(7) $382,890 $148,276 $ (4,642)(16) $526,524 Operating expense: Cost of carrier services..... 233,880 111,819 (5,873)(7) 339,826 117,663 (4,642)(16) 452,847 Selling, general and administrative............. 28,587 19,875 200(4) 48,662 35,802 7(13) 84,471 Depreciation and amortization............... 21,782 11,573 1,956(3) 35,311 12,450 6,201(12) 53,637 (325)(11) Provision for doubtful accounts................... 3,281 1,214 -- 4,495 5,353 -- 9,848 -------- -------- ------- -------- -------- -------- -------- Total operating expenses........... 287,530 144,481 (3,717) 428,294 171,268 1,241 600,803 -------- -------- ------- -------- -------- -------- -------- Operating loss....... (23,310) (19,938) (2,156) (45,404) (22,992) (5,883) (74,279) Interest and other income.... 6,361 10,823 -- 17,184 (193) -- 16,991 Interest and other expense... (15,762) (930) -- (16,692) (7,647) -- (24,339) Foreign exchange loss........ 438 -- -- 438 -- -- 438 -------- -------- ------- -------- -------- -------- -------- Loss from continuing operations before income taxes and minority interests.......... (32,273) (10,045) (2,156) (44,474) (30,832) (5,883) (81,189) Benefit for income taxes..... (1,550) (3,163) (82)(8) (4,795) -- 130(18) (4,665) -------- -------- ------- -------- -------- -------- -------- Net loss from continuing operations before minority interest........... (30,723) (6,882) (2,074) (39,679) (30,832) (6,013) (76,524) Preferred stock dividends.... (632) -- -- (632) -- -- (632) -------- -------- ------- -------- -------- -------- -------- Loss from continuing operations available to common stockholders....... $(31,355) $(6,882) $(2,074) $(40,311) $(30,832) $ (6,013) $(77,156) ======== ======== ======= ======== ======== ======== ======== Loss per common share from continuing operations: Basic...................... $ (0.57) $ (0.72)(9)(19) ======== ======== Diluted.................... $ (0.57) $ (0.72)(9)(19) ======== ======== Weighted average shares outstanding: Basic...................... 55,189 107,908(9)(19) ======== ======== Diluted.................... 55,189 107,908(9)(19) ======== ======== 142 156 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(20) STAR(1) ADJUSTMENTS COMBINED WXC(10) ---------------- -------- ----------- ------------ --------- Carrier service revenues $1,019,553 $616,469 $(17,949)(7) $1,618,073 $ 607,035 Operating expense: Cost of carrier services.... 905,936 537,895 (17,949)(7) 1,425,882 477,317 Selling, general and administrative............ 132,251 108,246 798(4) 241,295 193,070 Depreciation and amortization.............. 93,252 38,975 9,477(3) 141,704 43,304 Provision for doubtful accounts.................. 13,980 -- -- 13,980 -- Merger expense.............. -- 1,867 -- 1,867 -- Restructuring and other special charges........... 44,187 -- -- 44,187 -- ---------- -------- -------- ---------- --------- Total operating expenses.............. 1,189,606 686,983 (7,674) 1,868,915 713,691 ---------- -------- -------- ---------- --------- Operating loss.......... (170,053) (70,514) (10,275) (250,842) (106,656) Interest and other income... 10,822 3,230 -- 14,052 -- Interest and other expense................... (58,208) (6,194) -- (64,402) (25,385) Foreign exchange loss....... (2,369) -- -- (2,369) -- ---------- -------- -------- ---------- --------- Loss from continuing operations before income taxes and minority interests.... (219,808) (73,478) (10,275) (303,561) (132,041) Provision (benefit) for income taxes.............. (6,999) (11,041) (327)(8) (18,367) -- ---------- -------- -------- ---------- --------- Net loss from continuing operations before minority interest..... (212,809) (62,437) (9,948) (285,194) (132,041) Minority interest........... -- -- -- -- 1,614 Preferred stock dividends... (2,461) -- -- (2,461) -- ---------- -------- -------- ---------- --------- Loss from continuing operations available to common stockholders.......... $ (215,270) $(62,437) $ (9,948) $ (287,655) $(130,427) ========== ======== ======== ========== ========= Loss per common share from continuing operations: Basic..................... $ (4.25) ========== Diluted................... $ (4.25) ========== Weighted average shares outstanding: Basic..................... 50,634 ========== Diluted................... 50,634 ========== PRO FORMA WORLD ACCESS, STAR AND WXC WXC ADJUSTMENTS COMBINED ----------- ------------- Carrier service revenues $(25,601)(16) $2,199,507 Operating expense: Cost of carrier services.... (25,601)(16) 1,877,598 Selling, general and administrative............ 23(13) 434,388 Depreciation and amortization.............. 9,875(12) 193,583 (1,300)(11) Provision for doubtful accounts.................. -- 13,980 Merger expense.............. -- 1,867 Restructuring and other special charges........... -- 44,187 -------- ---------- Total operating expenses.............. (17,003) 2,565,603 -------- ---------- Operating loss.......... (8,598) (366,096) Interest and other income... -- 14,052 Interest and other expense................... -- (89,787) Foreign exchange loss....... -- (2,369) -------- ---------- Loss from continuing operations before income taxes and minority interests.... (8,598) (444,200) Provision (benefit) for income taxes.............. 524(18) (17,843) -------- ---------- Net loss from continuing operations before minority interest..... (9,122) (426,357) Minority interest........... -- 1,614 Preferred stock dividends... -- (2,461) -------- ---------- Loss from continuing operations available to common stockholders.......... $ (9,122) $ (427,204) ======== ========== Loss per common share from continuing operations: Basic..................... $ (4.13)(9)(19) ========== Diluted................... $ (4.13)(9)(19) ========== Weighted average shares outstanding: Basic..................... 103,353(9)(19) ========== Diluted................... 103,353(9)(19) ========== 143 157 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 2000 (IN THOUSANDS) PRO FORMA HISTORICAL WORLD ACCESS ------------ STAR AND STAR WORLD ACCESS STAR(1) ADJUSTMENTS COMBINED ------------ -------- ----------- ------------ ASSETS Cash and equivalents........................... $ 145,347 $159,290 $ -- $ 304,637 Short-term investments......................... 43,922 1,310 -- 45,232 Restricted cash................................ 30,847 -- -- 30,847 Accounts and notes receivable.................. 260,053 104,341 -- 364,394 Prepaid expenses and other current assets...... 29,835 19,620 -- 49,455 Net assets held for sale....................... 238,405 -- -- 238,405 ---------- -------- --------- ---------- Total Current Assets................. 748,409 284,561 -- 1,032,970 ---------- -------- --------- ---------- Property and equipment, net.................... 154,250 268,750 -- 423,000 Goodwill and other intangibles, net............ 1,081,172 196,521 (196,521)(5) 1,441,412 360,240(2) Other assets................................... 64,854 7,287 -- 72,141 ---------- -------- --------- ---------- Total Assets......................... $2,048,685 $757,119 $ 163,719 $2,969,523 ========== ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt................................ $ 74,722 $ 42,299 $ -- $ 117,021 Accounts payable............................... 228,721 140,883 -- 369,604 Other accrued liabilities...................... 101,730 125,786 3,000(2) 230,516 ---------- -------- --------- ---------- Total Current Liabilities............ 405,173 308,968 3,000 717,141 Long-term debt................................. 413,989 38,567 -- 452,556 Other long-term liabilities.................... 652 39,118 -- 39,770 ---------- -------- --------- ---------- Total Liabilities.................... 819,814 386,653 3,000 1,209,467 ---------- -------- --------- ---------- Stockholders' Equity (Deficit): Preferred Stock................................ 6 -- -- 6 Common stock................................... 597 58 (58)(6) 826 229(2) Additional paid in capital..................... 1,422,619 365,903 (365,903)(6) 1,956,435 514,657(2) 16,299(2) 2,860(4) Deferred compensation.......................... -- (1,985) 1,985(6) (2,860) (2,860)(4) Notes receivable from shareholders............. -- (3,785) 3,785(6) -- Accumulated other comprehensive loss........... (4,368) (7,646) 7,646(6) (4,368) Accumulated deficit............................ (189,983) 17,921 (17,921)(6) (189,983) ---------- -------- --------- ---------- Total Stockholders' Equity........... 1,228,871 370,466 160,719 1,760,056 ---------- -------- --------- ---------- Total Liabilities and Stockholders' Equity............................. $2,048,685 $757,119 $ 163,719 $2,969,523 ========== ======== ========= ========== 144 158 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLD ACCESS(20) STAR(1) ADJUSTMENTS COMBINED ---------------- -------- ----------- ------------ Carrier service revenues................................ $ 264,220 $124,543 $ (4,459)(7) $ 384,304 Operating expenses: Cost of carrier services................................ 233,880 111,819 (4,459)(7) 341,240 Selling, general and administrative..................... 28,587 19,875 200(4) 48,662 Depreciation and amortization........................... 21,782 11,573 1,956(3) 35,311 Provision for doubtful accounts......................... 3,281 1,214 -- 4,495 ---------- -------- -------- ---------- Total operating expenses...................... 287,530 144,481 (2,303) 429,708 ---------- -------- -------- ---------- Operating loss................................ (23,310) (19,938) (2,156) (45,404) Interest and other income............................... 6,361 10,823 -- 17,184 Interest and other expense.............................. (15,762) (930) -- (16,692) Foreign exchange loss................................... 438 -- -- 438 ---------- -------- -------- ---------- Loss from continuing operations before income taxes....................................... (32,273) (10,045) (2,156) (44,474) Provision (benefit) for income taxes.................... (1,550) (3,163) (82)(8) (4,795) ---------- -------- -------- ---------- Net loss from continuing operations........... (30,723) (6,882) (2,074) (39,679) Preferred stock dividends............................... (632) -- -- (632) ---------- -------- -------- ---------- Loss from continuing operations available to common stockholders......................... $ (31,355) $ (6,882) $ (2,074) $ (40,311) ========== ======== ======== ========== Loss per common share from continuing operations: Basic................................................. $ (0.57) $ (0.52)(9) ========== ========== Diluted............................................... $ (0.57) $ (0.52)(9) ========== ========== Weighted average shares outstanding: Basic................................................. 55,189 78,083(9) ========== ========== Diluted............................................... 55,189 78,083(9) ========== ========== 145 159 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(20) STAR(1) ADJUSTMENTS COMBINED ---------------- -------- ----------- ------------ Carrier service revenues................................ $1,019,553 $616,469 $(17,949)(7) $1,618,073 Operating expenses: Cost of carrier services................................ 905,936 537,895 (17,949)(7) 1,425,882 Selling, general and administrative..................... 132,251 108,246 798(4) 241,295 Depreciation and amortization........................... 93,252 38,975 9,477(3) 141,704 Provision for doubtful accounts......................... 13,980 -- -- 13,980 Merger expense.......................................... -- 1,867 -- 1,867 Restructuring and other special charges................. 44,187 -- -- 44,187 ---------- -------- -------- ---------- Total operating expenses........................... 1,189,606 686,983 (7,674) 1,868,915 ---------- -------- -------- ---------- Operating loss..................................... (170,053) (70,514) (10,275) (250,842) Interest and other income............................... 10,822 3,230 -- 14,052 Interest and other expense.............................. (58,208) (6,194) -- (64,402) Foreign exchange loss................................... (2,369) -- -- (2,369) ---------- -------- -------- ---------- Loss from continuing operations before income taxes............................................ (219,808) (73,478) (10,275) (303,561) Provision (benefit) for income taxes.................... (6,999) (11,041) (327)(8) (18,367) ---------- -------- -------- ---------- Net loss from continuing operations................ (212,809) (62,437) (9,948) (285,194) Preferred stock dividends............................... (2,461) -- -- (2,461) ---------- -------- -------- ---------- Loss from continuing operations available to common stockholders..................................... $ (215,270) $(62,437) $ (9,948) $ (287,655) ========== ======== ======== ========== Loss per common share from continuing operations: Basic................................................. $ (4.25) $ (3.91)(9) ========== ========== Diluted............................................... $ (4.25) $ (3.91)(9) ========== ========== Weighted average shares outstanding: Basic................................................. 50,634 73,528(9) ========== ========== Diluted............................................... 50,634 73,528(9) ========== ========== 146 160 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 2000 (IN THOUSANDS) PRO FORMA WORLD ACCESS AND HISTORICAL WXC WXC WORLD ACCESS WXC(10) ADJUSTMENTS COMBINED ------------ --------- ----------- ---------------- ASSETS Cash and equivalents...................... $ 145,347 $ 9,553 $ (45,000)(11) $ 109,900 Short-term investments.................... 43,922 -- -- 43,922 Restricted cash........................... 30,847 -- -- 30,847 Accounts and notes receivable............. 260,053 92,172 -- 352,225 Prepaid expenses and other current assets.................................. 29,835 26,217 -- 56,052 Net assets held for sale.................. 238,405 -- -- 238,405 ---------- --------- --------- ---------- Total Current Assets............ 748,409 127,942 (45,000) 831,351 ---------- --------- --------- ---------- Property and equipment, net............... 154,250 195,923 (6,500)(11) 343,673 Goodwill and other intangibles, net....... 1,081,172 93,521 (93,521)(14) 1,651,501 570,329(11) Other assets.............................. 64,854 5,126 -- 69,980 ---------- --------- --------- ---------- Total Assets.................... $2,048,685 $ 422,512 $ 425,308 $2,896,505 ========== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt........................... $ 74,722 $ 174,142 $ -- $ 248,864 Accounts payable.......................... 228,721 173,175 -- 401,896 Other accrued liabilities................. 101,730 49,302 3,000(11) 154,032 ---------- --------- --------- ---------- Total Current Liabilities....... 405,173 396,619 3,000 804,792 Long-term debt............................ 413,989 71,434 -- 485,423 Other long-term liabilities............... 652 6,248 -- 6,900 ---------- --------- --------- ---------- Total Liabilities............... 819,814 474,301 3,000 1,297,115 ---------- --------- --------- ---------- Stockholders' Equity (Deficit): Preferred Stock........................... 6 78,658 (78,658)(15) 6 Common stock.............................. 597 99,378 (99,378)(15) 895 298(11) Additional paid in capital................ 1,422,619 -- 352,532(11) 1,792,863 17,689(11) 23(13) Deferred compensation..................... -- -- (23)(13) (23) Notes receivable from shareholders........ -- (1,888) 1,888(15) -- Accumulated other comprehensive loss...... (4,368) (6,860) 6,860(15) (4,368) Accumulated deficit....................... (189,983) (221,077) 221,077(15) (189,983) ---------- --------- --------- ---------- Total Stockholders' Equity (Deficit)..................... 1,228,871 (51,789) 422,308 1,599,390 ---------- --------- --------- ---------- Total Liabilities and Stockholders' Equity.......... $2,048,685 $ 422,512 $ 425,308 $2,896,505 ========== ========= ========= ========== 147 161 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS AND PRO FORMA WXC WXC WORLD ACCESS(20) WXC(10) ADJUSTMENTS COMBINED ---------------- -------- ----------- ---------------- Carrier service revenues............... $264,220 $148,276 $ (3,450)(16) $409,046 Operating expenses: Cost of carrier services............... 233,880 117,663 (3,450)(16) 348,093 Selling, general and administrative.... 28,587 35,802 7(13) 64,396 Depreciation and amortization.......... 21,782 12,450 6,201(12) 40,108 (325)(11) Provision for doubtful accounts........ 3,281 5,353 -- 8,634 -------- -------- -------- -------- Total operating expenses..... 287,530 171,268 2,433 461,231 -------- -------- -------- -------- Operating loss............... (23,310) (22,992) (5,883) (52,185) Interest and other income.............. 6,361 (193) -- 6,168 Interest and other expense............. (15,762) (7,647) -- (23,409) Foreign exchange loss.................. 438 -- -- 438 -------- -------- -------- -------- Loss from continuing operations before income taxes and minority interests.................. (32,273) (30,832) (5,883) (68,988) Provision (benefit) for income taxes... (1,550) -- 130(18) (1,420) -------- -------- -------- -------- Net loss from continuing operations before minority interest................... (30,723) (30,832) (6,013) (67,568) Preferred stock dividends.............. (632) -- -- (632) -------- -------- -------- -------- Loss from continuing operations available to common stockholders........ $(31,355) $(30,832) $ (6,013) $(68,200) ======== ======== ======== ======== Loss per common share from continuing operations: Basic................................ $ (0.57) $ (0.80)(19) ======== ======== Diluted.............................. $ (0.57) $ (0.80)(19) ======== ======== Weighted average shares outstanding: Basic................................ 55,189 85,014(19) ======== ======== Diluted.............................. 55,189 85,014(19) ======== ======== 148 162 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 WXC WXC WORLD ACCESS(20) WXC(10) ADJUSTMENTS COMBINED ---------------- ---------- ----------- ---------------- Carrier service revenues............ $1,019,553 $ 607,035 $ (23,534)(16) $1,603,054 Operating expenses: Cost of carrier services............ 905,936 477,317 (23,534)(16) 1,359,719 Selling, general and administrative.................... 132,251 193,070 23(13) 325,344 Depreciation and amortization....... 93,252 43,304 9,875(12) 145,131 (1,300)(11) Provision for doubtful accounts..... 13,980 -- -- 13,980 Restructuring and other special charges........................... 44,187 -- 44,187 ---------- ---------- ---------- ---------- Total operating expenses..... 1,189,606 713,691 (14,936) 1,888,361 ---------- ---------- ---------- ---------- Operating loss............... (170,053) (106,656) (8,598) (285,307) Interest and other income........... 10,822 -- -- 10,822 Interest and other expense.......... (58,208) (25,385) -- (83,593) Foreign exchange loss............... (2,369) -- -- (2,369) ---------- ---------- ---------- ---------- Loss from continuing operations before income taxes and minority interests................. (219,808) (132,041) (8,598) (360,447) Provision (benefit) for income taxes............................. (6,999) -- 524(18) (6,475) ---------- ---------- ---------- ---------- Net loss from continuing operations before minority interest.................. (212,809) (132,041) (9,122) (353,972) Minority interest................... -- 1,614 -- 1,614 Preferred stock dividends........... (2,461) -- -- (2,461) ---------- ---------- ---------- ---------- Loss from continuing operations available to common stockholders....... $ (215,270) $ (130,427) $ (9,122) $ (354,819) ========== ========== ========== ========== Loss per common share from continuing operations: Basic............................. $ (4.25) $ (4.41)(19) ========== ========== Diluted........................... $ (4.25) $ (4.41)(19) ========== ========== Weighted average shares outstanding: Basic............................. 50,634 80,459(19) ========== ========== Diluted........................... 50,634 80,459(19) ========== ========== 149 163 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 three months ended March 31, 2000 and for the year ended December 31, 1999 and have been adjusted to reflect the sale of PT-1 as required for the successful completion of the STAR merger. For pro forma purposes, we have assumed that the net cash proceeds on the sale of PT-1 will be equal to $150.0 million. STAR STAR EXCLUSION OF EXCLUDING PT-1 MARCH 31, 2000 PT-1 MARCH 31, 2000 -------------- ------------ -------------- Cash and equivalents....................... $ 14,170 $ (4,880)(i) $159,290 150,000(ii) Short-term investments..................... 1,316 (6)(i) 1,310 Accounts and notes receivable.............. 164,935 (60,594)(i) 104,341 Prepaid expenses and other current assets................................... 46,590 (26,970)(i) 19,620 -------- --------- -------- Total Current Assets............. 227,011 57,550 284,561 -------- --------- -------- Property and equipment, net................ 309,734 (40,984)(i) 268,750 Goodwill and other intangibles, net........ 197,518 (997)(i) 196,521 Other assets............................... 7,621 (334)(i) 7,287 -------- --------- -------- Total Assets..................... $741,884 $ 15,235 $757,119 ======== ========= ======== Short-term debt............................ $ 44,284 $ (1,985)(i) $ 42,299 Accounts payable........................... 162,758 (21,875)(i) 140,883 Other accrued liabilities.................. 180,714 (54,928)(i) 125,786 -------- --------- -------- Total Current Liabilities........ 387,756 (78,788) 308,968 Long-term debt............................. 43,096 (4,529)(i) 38,567 Other long-term liabilities................ 40,964 (1,846)(i) 39,118 -------- --------- -------- Total Liabilities................ 471,816 (85,163) 386,653 -------- --------- -------- Total Stockholders' Equity....... 270,068 100,398(iii) 370,466 -------- --------- -------- Total Liabilities and Stockholders' Equity........... $741,884 $ 15,235 $757,119 ======== ========= ======== (i) Represents the historical asset and liability amounts for PT-1. (ii) Represents the assumed net cash proceeds for the sale of PT-1. (iii) Represents the assumed gain on the sale of PT-1 (excluding the effect of PT-1 goodwill recorded by STAR). STAR STAR EXCLUDING PT-1 3 MONTHS 3 MONTHS ENDED EXCLUSION OF ENDED MARCH 31, 2000 PT-1 MARCH 31, 2000 -------------- ------------ -------------- Carrier service revenues...................... $ 255,105 $(130,562) $ 124,543 Cost of carrier services...................... (225,840) 114,021 (111,819) Selling, general and administrative........... (28,648) 8,773 (19,875) 150 164 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) STAR STAR EXCLUDING PT-1 3 MONTHS 3 MONTHS ENDED EXCLUSION OF ENDED MARCH 31, 2000 PT-1 MARCH 31, 2000 -------------- ------------ -------------- Depreciation and amortization................. (13,050) 1,477 (11,573) Provision for doubtful accounts............... (4,681) 3,467 (1,214) Interest and other income..................... 10,885 (62) 10,823 Interest expense.............................. (2,924) 1,994 (930) Benefit for income taxes...................... 2,629 534 3,163 --------- --------- --------- Net loss............................ $ (6,524) $ (358) $ (6,882) ========= ========= ========= STAR STAR EXCLUDING PT-1 12 MONTHS ENDED EXCLUSION OF 12 MONTHS 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) 5,261 (38,975) Merger expense............................ (1,878) 11 (1,867) Interest and other income................. 3,565 (335) 3,230 Interest expense.......................... (9,895) 3,701 (6,194) Benefit for income taxes.................. 12,096 (1,055) 11,041 ---------- --------- --------- Net loss........................ $ (63,847) $ 1,410 $ (62,437) ========== ========= ========= (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 151 165 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 such changes could be material. Purchase price: Issuance of World Access Common Stock(i).................. $ 514,886 Fair value of World Access options issued in exchange for STAR options(ii)....................................... 16,299 Estimated fees and expenses............................... 3,000 --------- Total estimated purchase price.................... $ 534,185 Allocation to fair values: Pro forma stockholders' equity as of March 31, 2000(iii).............................................. $(370,466) Adjust assets and liabilities: Eliminate historical goodwill as of March 31, 2000..... 196,521 --------- Preliminary goodwill.............................. $ 360,240 ========= ----------------------- (i) In accordance with the merger agreement, each share of STAR common stock issued and outstanding shall be converted into the right to receive .3905 shares of World Access Common Stock. At March 31, 2000, approximately 22,894,000 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 March 31, 2000............ 58,627 Multiplied by: Exchange ratio............................... 0.3905 -------- Shares of World Access Common Stock assumed to be exchanged................................................. 22,894 Multiplied by: Average market price(a)...................... $ 22.49 -------- Value of World Access Common Stock exchanged................ $514,886 ======== --------------------------- (a) The average market price represents the average market price of World Access Common Stock for the three trading days prior and the three trading days subsequent to February 14, 2000, the date economic terms of the merger were announced. (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. Any intrinsic value that is allocated to unearned compensation is deducted from the fair value of the unvested options. In accordance with the merger agreement, each STAR option is to be converted into an option to purchase 0.3905 shares of World Access Common Stock. At March 31, 2000, STAR had 3,717,665 options outstanding; 1,774,049 of which were vested and 1,943,616 were unvested. The vested and unvested options are convertible to 692,766 and 758,982 World Access options, respectively, totaling 1,451,748. The fair value of the 692,766 vested options is $9.9 million computed using the Black-Scholes Option Pricing Model and is included in the purchase price. The fair value of the 758,982 unvested options is $9.3 million computed using the Black-Scholes Option Pricing Model. Of this amount, $2.9 million was allocated to unearned compensation and $6.4 152 166 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) million is included in the purchase price. 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 March 31, 2000 assumes the sale of PT-1 for net cash proceeds of $150.0 million. (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 three months ended March 31, 2000............................... $360,240 $ 4,503 $(2,547) $1,956 STAR -- for the year ended December 31, 1999................................... $360,240 $18,012 $(8,535) $9,477 (4) The issuance of World Access unvested options in exchange for STAR unvested options resulted in unearned compensation of $2.9 million which will be recognized as compensation cost over the remaining future vesting period of the unvested options. The weighted average remaining vesting period for the unvested options is 43 months, resulting in compensation cost of $798,000 for the year ended December 31, 1999 and $200,000 for the three months ended March 31, 2000. (5) Elimination of STAR's historical goodwill and other intangibles. (6) Elimination of STAR's pro forma stockholders equity accounts. (7) Elimination of intercompany revenues and related costs. (8) Adjustment for the additional tax 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 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 22,894,000 shares of common stock to complete the STAR merger. 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. 153 167 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) WORLDXCHANGE ADJUSTMENTS (10) These columns represent the historical financial position and results of operations of WORLDxCHANGE as of and for the three months ended March 31, 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 --------- -------- --------- --------- Net loss.................. $ (63,851) $ 16,108 $ (28,443) $ (76,186) ========= ======== ========= ========= 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 --------- --------- --------- Net loss...................... $ (76,186) $ (54,241) $(130,427) ========= ========= ========= 154 168 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following table represents a reconciliation of WORLDxCHANGE's results of operations for the six months ended March 31, 2000 (as shown in the WORLDxCHANGE financial statements included in this registration statement) to the results of operations for the three months ended March 31, 2000: EXCLUSION OF RESULTS FOR THE RESULTS FOR THE RESULTS FOR THE SIX MONTHS THREE MONTHS ENDED THREE MONTHS ENDED ENDED MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31, 2000 -------------------- ------------------ ------------------ Revenues................ $ 291,600 $(143,324) $ 148,276 Cost of services........ (230,207) 112,544 (117,663) Selling, general and administrative........ (84,585) 43,430 (41,155) Depreciation and amortization.......... (21,825) 9,375 (12,450) Interest and other expense............... (14,255) 6,415 (7,840) --------- --------- --------- Net loss................ $ (59,272) $ (28,440) $ (30,832) ========= ========= ========= (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 such changes could be material. The preliminary purchase price and goodwill is currently estimated as follows (in thousands): Purchase price: Issuance of World Access Common Stock(i).................. $352,830 Fair value of World Access options issued in exchange for WxC options(ii)........................................ 17,689 Bridge financing(iii)..................................... 45,000 Estimated fees and expenses............................... 3,000 -------- Total estimated purchase price.................... $418,519 Allocation to fair values: Historical shareholders' deficit as of March 31, 2000..... $ 51,789 Adjust assets and liabilities: Eliminate historical intangible assets as of March 31, 2000.................................................. 93,521 Write-off impaired assets(iv).......................... 6,500 -------- Preliminary goodwill...................................... $570,329 ======== ----------------------- (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 March 31, 2000, a total of 29,824,610 shares of World 155 169 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 March 31, 2000......... 8,283 WORLDxCHANGE common shares outstanding at March 31, 2000.... 37,023 -------- Total WxC common shares outstanding............... 45,306 Multiplied by: Exchange ratio............................... 0.6583 -------- Shares of World Access Common Stock assumed to be exchanged................................................. 29,825 Multiplied by: Average market price (a)..................... $ 11.83 -------- Value of World Access Common Stock exchanged................ $352,830 ======== - --------------- (a) The average price represents the average market price of World Access Common Stock for the three trading days prior to and on 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. Any intrinsic value that is allocated to unearned compensation is deducted from the fair value of the unvested options. 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 March 31, 2000, WORLDxCHANGE had 3,965,531 options outstanding; 2,482,267 of which were vested and 1,483,264 were unvested. The vested and unvested options are convertible to 1,634,076 and 976,433 World Access options respectively, totaling 2,610,509. The fair value of the 1,634,076 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 976,433 unvested options is $5.0 million computed using the Black-Scholes Option Pricing Model. Of this amount, $23,000 was allocated to unearned compensation and $5.0 million is included in the purchase price. 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) World Access has issued WORLDxCHANGE a $45 million revolving credit facility. For purposes of the unaudited pro forma information, we have assumed that World Access will provide WORLDxCHANGE with $45 million of funding before the merger is consummated. As of March 31, 2000, $25 million had been advanced to WORLDxCHANGE. (iv) At March 31, 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 $1.3 million and $325,000 for the year ended December 31, 1999 and the three months ended March 31, 2000, respectively. 156 170 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (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 three months ended March 31, 2000................... $570,329 $ 7,129 $ (928) $6,201 WORLDxCHANGE -- For the year ended December 31, 1999...................... 570,329 28,516 (18,641) 9,875 (13) The issuance of World Access unvested options in exchange for WORLDxCHANGE unvested options resulted in unearned compensation of $23,000 which will be recognized as compensation cost over the remaining future vesting period of the unvested options. The weighted average remaining vesting period for the unvested options is 10 months, resulting in compensation cost of $23,000 for the year ended December 31, 1999 and $7,000 for the three months ended March 31, 2000. (14) Elimination of WORLDxCHANGE's historical goodwill and other intangibles. (15) Elimination of WORLDxCHANGE's historical shareholders' deficit accounts. (16) Elimination of intercompany carrier service revenues and related costs. (17) At March 31, 2000, WORLDxCHANGE had a $2,351,114 note payable plus $209,762 interest payable to STAR. Assuming the mergers of WORLDxCHANGE and STAR with World Access are consummated, this adjustment is necessary to eliminate the intercompany debt and interest payable. (18) Adjustment for the additional income tax provision derived from certain 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 29,824,610 shares issued to complete the WORLDxCHANGE merger. 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. PRO FORMA WORLD ACCESS (20) 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 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 157 171 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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 three months ended March 31, 2000 gives effect to our February 2000 acquisition of LDI as if the acquisition had been completed on January 1, 2000. 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 certain 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. 158 172 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 THREE MONTHS ENDED MARCH 31, 2000: WORLD PRO FORMA PRO FORMA ACCESS(A) LDI(D) ADJUSTMENTS WORLD ACCESS --------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Carrier service revenues........................ $255,541 $ 8,679 $ -- $264,220 Operating expenses: Cost of carrier services........................ 223,855 10,025 -- 233,880 Selling, general and administrative............. 21,861 6,726 -- 28,587 Depreciation and amortization................... 17,759 2,595 1,428(G) 21,782 Provision for doubtful accounts................. 1,915 1,366 -- 3,281 -------- -------- ------- -------- Total operating expenses.............. 265,390 20,712 1,428 287,530 -------- -------- ------- -------- Operating income (loss)............... (9,849) (12,033) (1,428) (23,310) Interest and other income....................... 2,619 3,742 -- 6,361 Interest expense................................ (14,545) (6,235) 5,018(J) (15,762) Foreign exchange loss........................... 532 (94) -- 438 -------- -------- ------- -------- Income (loss) from continuing operations before income taxes...... (21,243) (14,620) 3,590 (32,273) Provision (benefit) for income taxes............ (3,460) -- 1,910(K) (1,550) -------- -------- ------- -------- Income (loss) from continuing operations.......................... (17,783) (14,620) 1,680 (30,723) Preferred stock dividends....................... (632) -- -- (632) -------- -------- ------- -------- Income (loss) from continuing operations available to common stockholders........................ $(18,415) $(14,620) $ 1,680 $(31,355) ======== ======== ======= ======== Loss per common share from continuing operations: Basic......................................... $ (0.33) $ (0.57)(N) ======== ======== Diluted....................................... $ (0.33) $ (0.57)(N) ======== ======== Weighted average shares outstanding: Basic......................................... 55,189 55,189(N) ======== ======== Diluted....................................... 55,189 55,189(N) ======== ======== 159 173 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(B) COMM/NET(C) LDI(D) ADJUSTMENTS WORLD ACCESS --------- ------------ ----------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Carrier service revenues...... $501,081 $404,485 $13,868 $117,662 $(17,543)(F) $1,019,553 Operating expenses: Cost of carrier services...... 448,305 364,773 9,923 97,867 (14,932)(F) 905,936 Selling, general and administrative.............. 23,628 49,376 2,324 56,923 -- 132,251 Depreciation and amortization................ 13,541 27,823 390 20,716 37,750(G) 93,252 (6,968)(H) Provision for doubtful accounts.................... 4,805 7,276 -- 1,899 -- 13,980 Restructuring and other special charges............. 37,800 -- -- 6,387 -- 44,187 -------- -------- ------- -------- -------- ---------- Total operating expenses........... 528,079 449,248 12,637 183,792 15,850 1,189,606 -------- -------- ------- -------- -------- ---------- Operating income (loss)............. (26,998) (44,763) 1,231 (66,130) (33,393) (170,053) Interest and other income..... 3,308 3,026 -- 4,488 -- 10,822 Interest expense.............. (12,914) (33,413) (65) (33,607) (8,325)(I) (58,208) 30,116(J) Foreign exchange loss......... (620) (1,749) -- -- -- (2,369) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations before income taxes....... (37,224) (76,899) 1,166 (95,249) (11,602) (219,808) Provision (benefit) for income taxes....................... (10,126) (7,335) 264 -- 10,198(K) (6,999) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations......... (27,098) (69,564) 902 (95,249) (21,800) (212,809) Preferred stock dividends..... (1,968) -- -- (2,049) (493)(L) (2,461) 2,049(M) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations available to common stockholders....... $(29,066) $(69,564) $ 902 $(97,298) $(20,244) $ (215,270) ======== ======== ======= ======== ======== ========== Loss per common share from continuing operations: Basic....................... $ (0.78) $ (4.25)(N) ======== ========== Diluted..................... $ (0.78) $ (4.25)(N) ======== ========== Weighted average shares outstanding: Basic....................... 37,423 50,634(N) ======== ========== Diluted..................... 37,423 50,634(N) ======== ========== 160 174 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A. This column represents the historical 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 three months ended March 31, 2000 include the results of operations of LDI from February 11, 2000. B. This column represents the historical results of operations of FaciliCom for the period January 1, 1999 to December 6, 1999. C. This column represents the historical results of operations of Comm/Net for the period January 1, 1999 to April 30, 1999. D. 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. E. 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 February 11, 2000, 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) Property and equipment.................................... (17,127) Other assets.............................................. (1,420) Current liabilities....................................... 78,374 Other liabilities......................................... 478 -------- Goodwill.................................................... $248,347 ======== (i) Represents the fair value, as determined by World Access management, of the 185,000 shares of Series D Convertible Preferred Stock, as of December 17, 1999, the date the acquisition was announced to the public, issued as part of the LDI merger consideration. 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 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. 161 175 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (ii) Represents the fair value of approximately 1,500,000 options to acquire World Access Common Stock issued in exchange for certain 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. F. Elimination of inter-company revenues and related costs. G. 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 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 three months ended March 31, 2000: LDI........................................ $248,347 $ 3,104 $ (1,676) $ 1,428 For the year ended December 31, 1999: FaciliCom.................................. 592,153 29,608 (2,475) 27,133 Resurgens.................................. 127,425 6,371 (409) 5,962 LDI........................................ 248,347 12,417 (8,210) 4,207 Comm/Net................................... 22,713 1,136 (688) 448 ------- -------- ------- $49,532 $(11,782) $37,750 ======= ======== ======= H. Adjustment to depreciation expense for the adjustment to fair values of switching equipment and IRUs at FaciliCom. I. Represents the adjustment to interest expense related to the exchange of $300 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) ======== 162 176 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) J. Adjustment to reduce interest expense related to the elimination of certain LDI indebtedness resulting from the acquisition as follows: FOR THE THREE MONTHS ENDED FOR THE YEAR MARCH 31, ENDED 2000 DECEMBER 31, 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 certain notes payable to the holders of LDI's 12 1/4% Senior Notes............ 52 314 ------ ------- Net decrease in interest expense......... $5,018 $30,116 ====== ======= K. Adjustment for the additional tax 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 LDI's and FaciliCom's net operating losses. L. 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. M. To eliminate historical LDI preferred stock dividends and preferred stock and warrant redemption accretion. N. 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 three months ended March 31, 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. 163 177 COMPARISON OF RIGHTS OF HOLDERS OF WORLD ACCESS COMMON STOCK AND STAR COMMON STOCK This section of the joint proxy statement/prospectus describes certain differences between STAR common stock and World Access common stock. While World Access and STAR believe that the description covers the material differences between the two, this summary may not contain all of the information that is important to STAR stockholders, including the information set forth in the certificates of incorporation and bylaws of each company. STAR stockholders should read this entire document and the other documents referred to carefully for a more complete understanding of the differences between STAR common stock and World Access common stock. The rights of stockholders of STAR are currently governed by STAR's certificate of incorporation, as amended and restated, and STAR's bylaws. After the completion of the STAR merger, STAR stockholders will become stockholders of World Access. The rights of stockholders of World Access are governed by World Access' certificate of incorporation, as amended, and World Access' bylaws. 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 the General Corporation Law of the State of Delaware. The following paragraphs compare certain 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 STAR consists of 100,000,000 shares of common stock, of which shares were outstanding as of May 22, 2000 and 5,000,000 shares of preferred stock, of which no shares were outstanding as of May 22, 2000. The authorized capital stock of World Access currently consists of 160,000,000 shares, of which 150,000,000 shares shall be common stock of $.01 par value per share, and 10,000,000 shares of which shall be 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 May 22, 2000, 60,101,658 shares of World Access common stock were outstanding and 584,260 shares of World Access preferred stock were outstanding. 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. SPECIAL MEETING OF STOCKHOLDERS Special meetings of World Access may be called by a majority of 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 the majority of the board of directors. ACTION BY WRITTEN CONSENT IN LIEU OF A STOCKHOLDERS' MEETING World Access stockholders may not take action without a meeting by written consent except for preferred stockholders pursuant to the World Access certificate of incorporation. STAR stockholders may take action without a meeting only by unanimous written consent of the stockholders entitled to vote on such action. 164 178 VOTING BY WRITTEN BALLOT World Access' bylaws and STAR's certificate of incorporation both provide that the election of directors need not be by written ballot. RECORD DATE FOR DETERMINING STOCKHOLDERS Both the World Access bylaws and the STAR bylaws provide that their respective 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, shall not be more than 60 days nor less than ten days before the date of the meeting; and - in the case of any other action, shall not be more than 60 days prior to such 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 shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and - the record date for determining stockholders for any other purpose shall be at the close of business on the same day on which the World Access board of directors adopts the related resolution. NOMINATION OF DIRECTORS The STAR certificate of incorporation and bylaws are silent with respect to the nomination of persons for election to the STAR board of 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 be timely, a stockholder's nomination notice must be received by World Access at least 120 days prior to the one-year anniversary of the date of the proxy statement in connection with the previous year's annual meeting of stockholders. If (i) no annual meeting was held in the previous year, (ii) 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 (iii) the upcoming meeting is not an annual meeting, 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. NUMBER OF DIRECTORS The World Access amended certificate of incorporation and bylaws provide that the World Access board of directors must consist of not fewer than three and not more than 12 directors, with the exact number to be fixed 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 the certificate of incorporation which would increase the maximum number of directors to 15. The STAR certificate of incorporation and bylaws provide that the number of directors will be fixed from time to time by the STAR board of directors. 165 179 CLASSIFIED BOARD OF DIRECTORS Delaware law provides that a corporation's board of directors may be divided into various classes with staggered terms of office. Each of World Access' and STAR's board of directors is divided into three classes, as nearly equal in size as possible, with one class being elected annually. Directors of STAR and World Access are elected to a term of three years 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 an amendment to the certificate of incorporation of World Access which would eliminate World Access' classified board of directors. If this amendment is approved by the requisite vote of the World Access stockholders, all World Access 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 by World Access stockholders would be elected as the directors. REMOVAL OF DIRECTORS Delaware law provides that any director or the entire board of directors of STAR may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election 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, voting together as a single class. 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. NOTICE OF SPECIAL MEETING 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. AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS The World Access amended certificate of incorporation imposes a super-majority voting requirement with respect to certain 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 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. 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. 166 180 PREFERRED STOCK Both the World Access and STAR certificates of incorporation authorize their respective boards of directors to issue shares of preferred stock in one or more series and to fix the designations, preferences, powers and rights of the shares to be included in such shares. The STAR certificate of incorporation authorizes the issuance of 5,000,000 shares of preferred stock. No shares of STAR preferred stock are issued and outstanding. 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, 350,259.875 shares designated as Series C preferred stock, and 184,000 shares designated as Series D preferred stock are issued and outstanding. The material terms of the Series A preferred stock, the Series C preferred stock and the Series D preferred stock are summarized below. World Access Series A preferred stock Dividends. The holders of the Series A preferred stock are entitled to receive, when, as and if declared by the World Access board of directors, quarterly cash dividends at an annual rate on the liquidation preference of the Series A preferred stock (i.e., $1,000) equal to 4.25%. 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 such holder would be entitled to cast had such holder 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: (i) authorize, increase the authorized number of shares of or issue any shares of any class of stock ranking senior to, or on par with, the Series A preferred stock; (ii) 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 alter or change the powers, preferences or special rights of the Series A preferred stock, or would alter or change the powers, preferences or special rights of stock ranking senior to, or on par with, the Series A preferred stock; (iii) amend or alter the certificate of incorporation so as to affect the Series A preferred stock adversely and materially; (iv) 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 to, or on par with, the Series A preferred stock; (v) subject to certain limited exceptions described in the World Access certificate of incorporation, effect the voluntary liquidation, dissolution, winding up, 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; or (vi) 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 (i) 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 (ii) 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 167 181 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 by the holder thereof, 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 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. World Access Series C preferred stock Ranking. The Series C preferred stock ranks, as to dividends, on par 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 on par 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 such holder would be entitled to cast had such holder 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: (i) 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; (ii) authorize, adopt or approve an amendment to the certificate of incorporation of World Access that would increase or 168 182 decrease the par value of the Series C preferred stock, or alter or change the powers, preferences or special rights of the Series C preferred stock, or would alter or change the powers, preferences or special rights of stock ranking senior to the Series C preferred stock; (iii) amend or alter the certificate of incorporation so as to affect the Series C preferred stock adversely and materially; (iv) 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 to the Series C preferred stock; and (v) subject to certain limited exceptions described in the World Access certificate of incorporation, effect the voluntary liquidation, dissolution, winding up, 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 by the holder thereof, 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 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, on par 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 on par 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 169 183 stock is entitled to cast the number of votes per share as is equal to the number of votes that such holder would be entitled to cast had such holder 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 by the holder thereof, 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. CERTAIN INFORMATION REGARDING STAR STAR is a leading facilities-based international telecommunications company. 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 data center co-location and bandwidth provisioning. 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 page 234. 170 184 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 March 31, 2000 and for the three-month periods ended March 31, 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 such 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. THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------------- ---------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- ---------- ----------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) ---------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues........................................ $66,964 $283,450 $434,086 $619,220 $1,061,774 $228,209 $255,105 Operating expenses: Cost of services.............................. 50,300 244,153 374,504 523,621 925,206 192,914 225,840 Selling, general and administrative........... 13,356 41,804 48,906 66,140 160,067 31,465 33,329 Depreciation and amortization................. 952 2,343 5,650 15,054 44,236 8,730 13,050 Loss on impairment of goodwill................ -- -- -- 2,604 -- -- -- Merger expense................................ -- -- 286 1,026 1,878 1,442 -- ------- -------- -------- -------- ---------- -------- -------- Total operating expenses............... 64,608 288,300 429,346 608,445 1,131,387 234,551 272,219 ------- -------- -------- -------- ---------- -------- -------- Income (loss) from operations................... 2,356 (4,850) 4,740 10,775 (69,613) (6,342) (17,114) Other income (expenses): Interest income............................... 65 138 464 4,469 2,192 729 189 Interest expense.............................. (214) (1,270) (2,617) (3,386) (9,895) (1,213) (2,924) Legal settlements and expenses................ -- (100) (1,653) -- -- -- -- Other......................................... (97) 186 208 (304) 1,373 (2,021) 10,696 ------- -------- -------- -------- ---------- -------- -------- Income (loss) before provision for income taxes......................................... 2,110 (5,896) 1,142 11,554 (75,943) (8,847) (9,153) Provision (benefit) for income taxes............ 66 577 2,905 9,923 (12,096) (1,295) (2,629) ------- -------- -------- -------- ---------- -------- -------- Net income (loss)............................... $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847) $ (7,552) $ (6,524) ======= ======== ======== ======== ========== ======== ======== 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) $ (0.14) $ (0.11) ======= ======== ======== ======== ========== ======== ======== 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 52,628 58,601 Diluted....................................... 19,916 24,076 31,101 42,434 57,036 52,628 58,601 171 185 AS OF DECEMBER 31, AS OF MARCH 31, ---------------------------------------------------- ----------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- -------- --------- ----------- --------- (IN THOUSANDS) (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Working capital (deficit)........ $(1,065) $(10,913) $ 4,692 $ 46,698 $(197,921) $(85,773) $(160,745) Total assets..................... 37,169 76,250 130,382 374,651 807,754 638,674 741,884 Total long-term liabilities, net of current portion............. 2,980 8,834 14,800 33,048 96,693 38,691 84,060 Accumulated deficit.............. (6,294) (12,077) (13,737) (12,106) (75,953) (19,657) (82,477) Stockholders' equity............. 6,614 9,986 40,615 195,591 278,054 336,207 270,068 THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------------------------- ---------------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- ---------- ---------- ---------- ----------- -------- (IN THOUSANDS, EXCEPT RATE PER MINUTE DATA) (UNAUDITED) OTHER CONSOLIDATED FINANCIAL AND OPERATING DATA: Capital expenditures(3)....... $ 2,922 $ 14,810 $ 26,584 $ 147,236 $ 150,588 $ 32,021 $ 10,387 North American wholesale billed minutes of use(4).... 38,106 479,681 1,034,187 1,657,523 2,129,296 517,325 481,107 North American wholesale revenue per billed minute of use(5)...................... $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084 $ 0.2468 $ 0.1682 - --------------- (1) The pro forma net income or loss per share assumes that STAR and CEO, 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 and incorporated by reference herein, for STAR 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 forma basic and diluted income (loss) per common share. (3) Includes assets financed with capital leases, notes and vendor financing arrangements. See Note 2 of Notes to Consolidated Financial Statements of STAR. (4) Does not include wholesale billed minutes of use from T-One prior to the year ended December 31, 1997. Includes wholesale billed minutes of use to UDN for all years presented. (5) 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. 172 186 CERTAIN 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. WORLDxCHANGE connects its switches with a network of owned and leased undersea and land-based fiber optic cables. WORLDxCHANGE's services currently include international and domestic long distance telephone service, pre-paid calling card services, operator services, Internet access and e-commerce services. 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, Internet access and e-commerce services. 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 e-commerce services in the United States and Canada, as well as 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 pre-subscribed to WORLDxCHANGE's service may access the WORLDxCHANGE network by dialing a prefix. U.S. customers who have pre-subscribed to WORLDxCHANGE's service may use the service by dialing "1+," and U.S. customers who have not pre-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 retail customers for a fixed monthly price. e-Commerce services. WORLDxCHANGE has implemented several e-commerce services. For example, in July 1999, WORLDxCHANGE introduced "Virtual PIN," a program under which North American customers are able to purchase and recharge prepaid calling cards exclusively through the WORLDxCHANGE website, which may be accessed at www.worldxchange.com. In addition, North American customers are also offered the "iPlan" billing option, under which they can receive a discount by having their bills rendered over the Internet instead of by paper invoice. Other features allow North American customers, via the Internet, to sign up for WORLDxCHANGE services and make changes to 173 187 the services they select, view their call data, generate customized billing reports, and make billing and service inquiries. WORLDxCHANGE's e-commerce strategy also includes the "xPectations ML" marketing program. Under this program, independent representatives can obtain their own website, which WORLDxCHANGE hosts. This allows the representatives to use a professionally-designed website to market WORLDxCHANGE's services to potential customers and the xPectations ML program to prospective new representatives while allowing WORLDxCHANGE to retain control over the advertising content on the site. 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. - 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 March 1, 2000, WORLDxCHANGE's network consisted of: - 43 switches in ten countries; - IRUs in more than 25 million DS-0 miles of on-land fiber optic cable capacity in the United States; - seven satellite earth stations at locations in the United States and abroad; and 174 188 - an international transmission network consisting of direct ownership interests and indefeasible rights of use, which are commonly referred to as IRUs, comprising more than 370 E-1 circuits, including rights on the following undersea cables: SERVICE STATUS OR PLANNED CALENDAR MIU/ TOTAL E1 UNDERSEA CABLE QUARTER SERVICE DATE IRU CAPACITY - -------------- -------------------- ---- -------- Americas-I....................................... In Service MIU 1 APCN............................................. In Service IRU 2 Atlantic Crossing................................ In Service IRU 126 Cantat 3......................................... In Service MIU 2 Canus 1.......................................... In Service IRU 2 Columbus II...................................... In Service MIU 1 F.L.A.G.......................................... In Service IRU 7 Guam-Philippines................................. In Service MIU 3 HAW-5............................................ In Service IRU 1 Jasuraus......................................... In Service IRU 2 PacRim East...................................... In Service MIU 9 Pan American..................................... In Service MIU 10 PTAT............................................. In Service IRU 1 Taino-Caribe..................................... In Service IRU 1 Tasman 2......................................... In Service IRU 3 TAT-12/TAT-13.................................... In Service MIU 26 TPC-5............................................ In Service MIU 4 UK-Belgium 6..................................... In Service IRU 3 UK-Germany 6..................................... In Service MIU 168 UK-Japan......................................... In Service MIU 3 UK-Netherlands 12................................ In Service IRU 1 WORLDxCHANGE also has arrangements to connect with the telecommunications networks of dominant 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 local exchange 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 direct interconnection 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 interconnecting with the dominant national carriers. In addition, these interconnections 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, IRUs in 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 undersea cables and/or IRUs that connect network cities with substantial calling traffic between them. However, WORLDxCHANGE has used leased lines in regions where IRUs are either too expensive or if WORLDxCHANGE believes IRU prices will decline, or where IRUs are not available. In some cases, WORLDxCHANGE uses compression or multiplexing equipment to further increase the capacity of its IRUs. 175 189 Other. In addition to the cost of origination, transmission and termination, the other costs of the WORLDxCHANGE network relate primarily to switching equipment, compression equipment, WORLDxCHANGE's Internet protocol overlay and facility/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 infrastructure. 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 effecting least-cost routing. WORLDxCHANGE has installed a wide area network linking all its switch sites, which coordinates the use of WORLDxCHANGE's systems. TCIB 2000 feature platform. The TCIB 2000 performs switching, billing and customer care functions. These services are integrated with other platforms like the Siemens EWSD or Ericsson AXE-10 switch. The TCIB 2000 system is used in the operation of WORLDxCHANGE's operating subsidiaries in Belgium, Guatemala, The Netherlands and New Zealand. North American network WORLDxCHANGE has switches in each of the ten cities listed below that are connected with a fiber optic backbone. WORLDxCHANGE expects to relocate its switch in Seattle to San Francisco by approximately July 1, 2000. Chicago Montreal Vancouver Dallas New York City Washington D.C. Los Angeles Seattle Miami Toronto WORLDxCHANGE connects the North American portion of its network with other regions of the world through direct ownership interests or IRUs 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 approximately 17.5 million route miles of fiber optic transmission capacity, representing most of its U.S. transmission capacity, from MCI WorldCom. As those leases expired, they were converted to long-term IRU arrangements covering the same capacity. The IRU 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 covering approximately 19.4 million route miles of fiber optic transmission capacity. This lease is convertible into a 15-year IRU on the same capacity at the end of the lease. European network WORLDxCHANGE uses two TCIB 2000 switches in continental Europe, and Ericsson AXE-10 switches in the United Kingdom and Germany. WORLDxCHANGE connects the European portion of its network with other regions of the world through direct ownership interests or IRUs 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. 176 190 ACC Acquisition. In November 1999, WORLDxCHANGE acquired the operations of ACC Corp. in France, Germany and the United Kingdom, and a switch in Italy. WORLDxCHANGE is in the process of integrating the operations and network equipment and capacity 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 five TCIB 2000 switches in Australia, as well as Siemens EWSD switches in Sydney, Melbourne, Perth and Brisbane in Australia. WORLDxCHANGE is interconnected with Telstra through Telstra's National Access interconnection program. WORLDxCHANGE connects the Asia Pacific portion of its network with other regions of the world through direct ownership interests or IRUs 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 TCIB 2000 switch in Guatemala City, Guatemala and Santiago, Chile. WORLDxCHANGE connects the Latin American portion of its network through a direct ownership interest in the Pan American undersea cable, as well as via satellite services. Network hardware and software North America. WORLDxCHANGE uses Siemens DC0-CS and EWSD switches throughout its North American network. These switches enable WORLDxCHANGE to handle large, simultaneous call volumes, provide high quality service to customers and seamlessly interconnect with local operators. WORLDxCHANGE has installed the Siemens EWSD switch at its Dallas, Los Angeles and New York switch sites. The Siemens EWSD switch in Dallas has 15,000 ports, the Los Angeles switch has 21,000 ports, and the EWSD switch in New York has 31,000 ports. The Siemens DC0-CS switch has approximately 5,760 ports. A Siemens EWSD switch with 21,000 ports can simultaneously handle 21,000 calls. WORLDxCHANGE may replace the DC0-CS switches as capacity limits on those switches are approached. During the fourth quarter of 1998, WORLDxCHANGE experienced technical problems with the new Siemens EWSD switch that it installed in New York. The problems included the failure of the switch to record billing information for certain calls. WORLDxCHANGE worked with Siemens to fix the problems and has implemented new procedures to detect any similar problems that may arise with the Siemens EWSD switches in the future. Siemens has agreed to provide WORLDxCHANGE with additional future lease financing for third-party equipment, free software and deferred lease payments on most of the EWSD and DC0-CS switches in the United States. There can be no assurance that WORLDxCHANGE will not experience additional problems with the EWSD or other switching equipment in the future. Overseas operations. WORLDxCHANGE uses a combination of TCIB 2000, Siemens EWSD and Ericsson AXE-10 switching equipment in certain markets outside of North America. The TCIB 2000 is a personal computer-based, integrated telephony hardware and software platform designed by WORLDxCHANGE that combines standard switching functions with customer care 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 platform in place of the faulty ACC system in the United Kingdom. However, there can be no assurance that this replacement billing platform will not also experience problems. Least cost routing. WORLDxCHANGE uses a combination of network 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 certain routes change. 177 191 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 Ascend Communications MAX/TNT random access server in Los Angeles. The modems interface with a Radius server in Los Angeles. The Radius server verifies the customer's account number and password. Once the Radius server verifies the customer's account information, the call goes to a Cisco Series 7206 router for connection to the Internet backbone. WORLDxCHANGE uses Navais software to monitor the integrity of 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's correspondent relationships or through the third party itself. 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 of that carrier's network. The carrier would then terminate the call in Afghanistan either through a correspondent relationship that it has with a carrier with facilities in Afghanistan or directly through its own local facilities. 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 FCC or foreign regulatory agencies may assert that certain 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 certain of WORLDxCHANGE's termination arrangements violate FCC 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. 178 192 Direct mail. WORLDxCHANGE has developed a number of different direct mail programs, each tailored 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. 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 several e-commerce services, such as the "Virtual PIN" program under which our 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 distilled from 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, 179 193 independent agents also market WORLDxCHANGE's long distance services to Belgian commercial customers. WORLDxCHANGE is in the process of establishing a sales and marketing infrastructure 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 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. These foreign operating subsidiaries are briefly discussed below. 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. 180 194 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 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 December 31, 1999, WORLDxCHANGE employed approximately 1,312 people, including officers, administrative and sales personnel. 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 (the "CPUC") issued an order revoking WORLDxCHANGE's authority to provide intrastate calling service in California and imposing certain 181 195 other fines and penalties, including, among other things, a $19.6 million fine, against WORLDxCHANGE based on the CPUC'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 CPUC directives. Under the CPUC's order, the sanctions and fines are binding on any successor to WORLDxCHANGE, unless the CPUC orders otherwise. WORLDxCHANGE has implemented a number of policies and procedures designed to help reduce the likelihood of future allegations of the kind leading to the CPUC'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 CPUC directives, WORLDxCHANGE would be subject to paying the $17.6 million portion of the CPUC 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 CPUC 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 CPUC 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 such investigation were to be reopened or such 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 such 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 certain legal and administrative proceedings, claims and inquiries that arise in the ordinary course of its business, as well as to certain 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. 182 196 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. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. WORLDxCHANGE's actual results could differ materially from those anticipated by forward-looking information due to factors discussed under "Business" and 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 thereof) 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 certain recurring and non-recurring fees that are recognized 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. 183 197 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 six months ended March 31, 1999 and 2000: SIX MONTHS YEAR ENDED ENDED SEPTEMBER 30, MARCH 31, -------------------- ------------ 1997 1998 1999 1999 2000 ---- ---- ---- ---- ---- Retail: North America................................... 34% 31% 34% 29% 30% Outside North America........................... 8 17 16 19 28 --- --- --- --- --- Total Retail................................. 42 48 50 48 58 Carrier: North America................................... 46 40 41 41 28 Outside North America........................... 3 2 3 4 12 --- --- --- --- --- Total Carrier................................ 49 42 44 45 40 Operator Services................................. 9 10 6 7 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 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 six months ended March 31, 2000 has been primarily attributable to this purchase. Cost of services 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, known as "MIUs," and long-term rights of use in cables or other facilities, known as "IRUs," 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 MIUs or IRUs reduces its utilization of leased lines and the facilities of other long distance carriers, WORLDxCHANGE believes the increase in depreciation expense associated with the MIUs or IRUs 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 184 198 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 - MIU or IRU 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. WORLDxCHANGE expects depreciation and amortization expenses to increase significantly as a result of the amortization of the $68.2 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 begin 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. Pro-forma quarterly results of operations On November 4, 1999, WORLDxCHANGE purchased ACC Europe. The following table sets forth supplemental unaudited pro-forma quarterly results of operations for each of the past six quarters for the period ended March 31, 2000 that WORLDxCHANGE's management believes is important to provide an understanding of its results of operations. The supplemental unaudited pro-forma quarterly Statements of Operations assumes that the purchase of ACC Europe had been completed as of the beginning of the periods presented. This information has been prepared substantially on the same basis as the audited financial statements appearing elsewhere, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations data. The pro-forma adjustments give effect to the amortization of the intangible assets recorded in association with the ACC Europe purchase and the recognition of interest expense on the debt incurred as if the purchase were incurred at the beginning of the periods presented. The supplemental unaudited pro-forma quarterly statements of operations is not necessarily indicative of 185 199 either future results of operations or results that might have been achieved if the purchase had been consummated as of the indicated dates. PROFORMA THREE MONTHS ENDED ACTUAL THREE -------------------------------------------------------------------- MONTHS ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, 1998 1999 1999 1999 1999 2000 ------------- --------- -------- -------------- ------------ ------------ (IN MILLIONS) PRO-FORMA STATEMENT OF OPERATIONS DATA: Revenues............... $ 132.9 $137.0 $ 154.2 $ 157.7 $ 158.1 $ 148.3 Cost of services....... 101.4 109.3 123.4 123.0 124.3 117.7 ------- ------ ------- ------- ------- ------- Gross profit........... 31.5 27.7 30.8 34.7 33.8 30.6 Selling general and administrative....... 48.4 44.2 47.1 50.7 48.5 41.2 ------- ------ ------- ------- ------- ------- EBITDA................. (16.9) (16.5) (16.3) (16.0) (14.7) (10.6) Depreciation and amortization......... 8.9 9.9 10.8 11.8 10.8 12.5 ------- ------ ------- ------- ------- ------- Operating loss......... (25.8) (26.4) (27.1) (27.8) (25.5) (23.1) Interest expense....... 5.7 5.3 6.0 6.0 6.7 7.6 Other expense, net..... 0.1 0.3 0.1 0.5 0.5 0.2 Minority interest...... (0.6) (0.5) (0.7) (0.5) -- -- ------- ------ ------- ------- ------- ------- Net loss............... $ (31.0) $(31.5) $ (32.5) $ (33.8) $ (32.7) $ (30.9) ======= ====== ======= ======= ======= ======= Revenues. WORLDxCHANGE's revenues increased in each of the first five quarters presented, primarily due to increased revenues in North America and Europe. In October 1998, WORLDxCHANGE initiated a multilevel marketing program in North America to augment its direct mail marketing efforts and provide an added retail sales distribution channel. In addition, we began to offer and market calling card products. In Europe, revenues have grown due to increased marketing expenditures on direct mail campaigns and direct sales. The decline in revenue in the quarter ended March 31, 2000 is primarily attributable to reductions in North America of operator service revenue. WORLDxCHANGE made a strategic decision during the latter part of fiscal 1999 to reduce both marketing and sales efforts in the operator service market. Cost of Services. The gross margin percentages ranged from 20.2% to 22.0% over the most recent five quarters presented. The fluctuations between quarters were the result of changes in the mix of retail and wholesale revenue, margin degradations due to the expansion of network infrastructure in Europe, margin improvements gained in North America due to WORLDxCHANGE's purchase of its on-land fiber optic cable capacity and declining North American carrier margins throughout the periods presented. The decline in gross margins in the quarter ended March 31, 1999 from the quarter ended December 31, 1998 was due to a decline in margins in Europe. The decline in European margins was due to expansion of WORLDxCHANGE's European leased network facilities. The European leased network facilities were increased to obtain interconnection with the telecommunications networks of dominant carriers in Europe and to meet the minimum capacity levels required for this interconnection. The facilities were also expanded to provide WORLDxCHANGE with the capacity needed for its expected future growth. Selling, general and administrative expenses. Selling, general and administrative spending levels fluctuated throughout most of the periods presented due to increases and decreases in sales and marketing spending and the continued expansion of WORLDxCHANGE's European infrastructure. In spite of increased sales and marketing spending during most of the quarters, selling, general and administrative expenses as a percentage of revenues continued to decrease over the periods. Selling, general and administrative levels decreased in the quarter ending March 31, 2000 from the quarter ended December 31, 1999 due to a decline in promotional and selling expense in North America. WORLDxCHANGE plans to focus more of its promotional and selling efforts and resources in Europe. 186 200 Depreciation and amortization expenses. Depreciation and amortization increased during the quarters as WORLDxCHANGE made approximately $100.0 million in capitalized purchases during this period to expand the geographic scope and available capacity of its network. Interest expense. Interest expense fluctuated commensurate with the level of quarterly indebtedness. The decline in interest expense in the quarter ended March 31, 1999 from the quarter ended December 31, 1998 was due to a reduction in WORLDxCHANGE's notes payable of $8.5 million. The increase of interest expense in the quarters ended June 30, 1999, December 31, 1999 and March 31, 2000 were due to an increase in WORLDxCHANGE's indebtedness associated with the purchase of its on-land fiber optic capacity in the United States and capital lease obligations. RESULTS OF OPERATIONS Six months ended March 31, 2000 compared to six months ended March 31, 1999 Revenues. Total revenues increased by 52.8% to $291.6 million in the first six months of fiscal 2000 from $190.7 million for the first six 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 19.3% to $175.8 million for the first six months of fiscal 2000 from $147.4 million for the first six months of fiscal 1999. The increase was primarily attributable to an increase in WORLDxCHANGE's retail revenue from $56.1 million in the first six months of fiscal 1999 to $87.3 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 65.1% to $6.5 million for the first six months of fiscal 2000 from $12.9 million for the first six 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 increased 4.5% to $81.9 million for the first six months of fiscal 2000 from $78.4 million for the first six months of fiscal 1999. In the Pacific Rim, revenues decreased by 12.8%, to $25.8 million for the first six months of fiscal 2000 from $29.6 million for the first six 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. In Europe, revenues increased by 556.9% for the first six months of fiscal 2000 to $90.0 million from $13.7 million for the same period of fiscal 1999, primarily due to the acquisition of ACC Europe. ACC Europe contributed $76.1 million of total European revenue. The balance of the increase in revenues was due to geographic expansion in the region and increased direct mail campaigns in the region. Cost of services. Cost of services increased by 52.7% to $230.2 million for the first six months of fiscal 2000 from $150.8 million for the same six months in fiscal 1999 and, as a percentage of revenue, decreased to 78.9% from 79.0%, respectively. Cost of services as a percentage of revenue decreased primarily as a result of higher margins associated with ACC Europe's revenues and an overall increase in retail revenues as a percentage of total revenues. Retail revenues have higher gross margins than the gross margins associated with carrier revenues. ACC Europe's margins are higher 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 84.0% in the first six months of fiscal 1999 to 84.3% in the first six months of fiscal 2000. The increase was associated with a decline in carrier revenue margins, partially offset by a higher revenue mix of retail 187 201 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 82.4% for the first six months of fiscal 1999 to 94.2% 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 48.0% to $84.6 million for the first six months of fiscal 2000 from $57.1 million for the same period in fiscal 1999 and, as a percentage of revenues, decreased from 30.0% to 29.0%. 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 $8.2 million for the first six months of fiscal 1999 to $14.9 million for the first six 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 increased to $40.6 million for the first six months of fiscal 2000 from $38.1 million for the same period of fiscal 1999. The increase in these expenses in North America was due to increased commissions, billing costs and bad debt expense associated with increased revenues. As a percentage of revenue, North America selling, general and administrative expenses decreased to 20.7% in the first six months of fiscal 2000, from 22.6% in the first six months of fiscal 1999. 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 $21.8 million for the first six months of fiscal 2000 from $7.7 million in the first six months of fiscal 1999. The increase in depreciation and amortization was due to the amortization of $85.2 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 73.1% to $13.5 million for the first six months of fiscal 2000 from $7.8 million in the first six 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. 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. 188 202 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 decreasing margins associated with carrier revenues. Carrier revenues as a percentage of total revenues increased for fiscal 1999 compared to fiscal 1998. These revenues have lower gross margins than the gross margins 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 84.4% 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. 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 189 203 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 lower margins associated with carrier revenues. Although WORLDxCHANGE's carrier costs decreased during fiscal 1998 due to competitive pricing pressures, it was unable to maintain the gross margins WORLDxCHANGE experienced in 1997. 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 reduced overall gross margins. 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 due to efficiencies gained as WORLDxCHANGE's revenues increased. 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 March 31, 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 six-month period ending March 31, 2000, WORLDxCHANGE's net cash used in operating activities was $24.3 million, primarily consisting of a net loss of $59.3 million, offset by an increase in operating working capital of $3.8 million and $32.8 million of non-cash charges consisting of the provision for bad debts and depreciation and amortization. Cash used in investing activities totaled $58.4 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 190 204 of $14.7 million, offset by debt and capital lease payments of $9.2 million. As of March 31, 2000 WORLDxCHANGE had approximately $9.6 million in cash. 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. As of September 30, 1998, WORLDxCHANGE had approximately $20.9 million in cash. 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 CPUC subject to WORLDxCHANGE's refraining from committing any violations of statutes or CPUC directives. See "Certain 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 six-month period ended March 31, 2000 totaled approximately $16.3 million. Pursuant to the WORLDxCHANGE merger agreement, WORLDxCHANGE is subject to certain 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 March 31, 2000, the balance of capital lease financing obligations totaled $41.1 million, primarily relating to the lease of its switching platforms in North America. In addition, as of March 31, 2000 WORLDxCHANGE had outstanding $39.0 million vendor financed note payables relating to various fiber optic cable acquisitions. 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 191 205 balance of approximately $16.5 million at March 31, 2000, and $10.5 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 March 31, 2000 had an outstanding balance of approximately $4.7 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 March 31, 2000, the outstanding balance on the bridge loan was $25.0 million and $5.0 million was available for borrowing. In total as of March 31, 2000, WORLDxCHANGE had $46.2 million borrowed under the credit facility and $15.5 million available for borrowing. 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 mature at the earlier of 60 days prior to the maturity of the subordinated promissory notes or the notes due on the ACC Europe acquisition or October 1, 2003. As of March 31, 2000, WORLDxCHANGE was in compliance with the restrictive covenants under the credit facility. WORLDxCHANGE's obligations under the credit facility are secured by first position in substantially all of its property. In January 2000, WORLDxCHANGE secured a $15 million loan commitment from Gold & Appel. Any borrowings under this loan commitment will bear interest at 15% and is payable on December 31, 2000. As of March 31, 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 or AIF. 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 AIF 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 $17,102,000 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 March 31, 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 192 206 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 capacity on 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 March 31, 2000, WORLDxCHANGE had acquired approximately $37.1 million, leaving $7.9 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 from ACC Corp a switch located in the United States and certain indefeasible 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. 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 on hand, the proceeds of equity offerings, availability under WORLDxCHANGE's vendor financing arrangements, its secured credit facility, outstanding loan commitment and from the financing of WORLDxCHANGE's European receivables. 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 such 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 under the loan 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 such obligations can or will be restructured. 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 March 31, 2000 WORLDxCHANGE had outstanding debt, excluding capital lease obligations, in the amount of $204.5 million, of which $183.3 million is fixed interest debt. The remaining $16.5 million carries adjustable interest rates at the prime rate plus 1.75%, and the remaining $4.7 million carries an adjustable rate at prime plus 5.0%. A one percent change in the interest rate would change interest payments by approximately $17,700 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. 193 207 WORLDxCHANGE currently does not hedge against foreign currency exchange risks, but may in the future. Because of the number of currencies involved, WORLDxCHANGE's constantly changing foreign currency exposure and the fact that all foreign currencies do not fluctuate in the same manner against the U.S. dollar, WORLDxCHANGE cannot quantify the effect of exchange rate fluctuations on its future financial condition or results of operations. 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 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 certain 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 194 208 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. 195 209 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 March 31, 2000 and for the six-month periods ended March 31, 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. SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, ---------------------------------------------- ---------------- 1995 1996 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ ------ ------ (IN MILLIONS) STATEMENT OF OPERATIONS DATA: Revenues................... $101.7 $183.9 $331.7 $398.9 $421.6 $190.7 $291.6 Cost of services........... 64.5 127.9 235.0 287.3 328.3 150.8 230.2 ------ ------ ------ ------ ------ ------ ------ Gross profit............... 37.2 56.0 96.7 111.6 93.3 39.9 61.4 Selling, general & administrative........... 38.6 64.5 113.5 115.0 124.1 57.1 84.6 Depreciation and amortization............. 3.1 7.0 8.7 12.3 17.7 7.7 21.8 ------ ------ ------ ------ ------ ------ ------ Operating loss............. (4.5) (15.5) (25.5) (15.7) (48.5) (24.9) (45.0) Interest expense........... 3.3 5.7 8.7 11.9 16.9 7.8 13.5 Other expense, net......... (0.2) 0.6 3.4 1.4 0.6 .4 .7 Minority interest.......... (0.2) (0.2) (0.5) (1.5) (2.3) (1.1) ------ ------ ------ ------ ------ ------ ------ Net loss................... $ (7.4) $(21.6) $(37.1) $(27.5) $(63.7) $(32.0) $(59.2) ====== ====== ====== ====== ====== ====== ====== OTHER DATA: EBITDA(1).................. $ (1.4) $ (8.5) $(16.8) $ (3.3) $(30.9) $(17.2) $(23.2) Net cash provided by (used in) operating activities............... 2.6 7.6 (7.2) (31.7) (31.5) 2.2 (24.3) Capital expenditures....... 24.3 8.7 19.4 22.4 81.0 21.0 16.3 GEOGRAPHIC DATA: Net revenues: North America............ $100.9 $171.4 $291.7 $321.8 $337.5 $147.4 $175.8 Pacific Rim.............. 0.3 7.5 24.4 58.4 55.6 29.6 25.8 Europe................... 0.5 5.0 15.6 18.7 28.5 13.7 90.0 ------ ------ ------ ------ ------ ------ ------ Total.................... $101.7 $183.9 $331.7 $398.9 $421.6 $190.7 $291.6 196 210 AS OF SEPTEMBER 30, AS OF MARCH 31, ---------------------------------------------- ------------------ 1995 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ ------------------ (IN MILLIONS) BALANCE SHEET DATA: Cash and cash equivalents.... $ 1.4 $ 3.4 $ 4.3 $ 20.9 $ 38.0 $ 9.6 Working capital (deficit).... (15.1) (35.4) (50.4) (37.0) (37.2) (268.7) Total assets................. 55.2 62.8 103.7 120.1 235.0 422.5 Short-term debt and capital lease obligations.......... 13.5 15.7 9.5 20.3 20.4 174.1 Long-term debt, net of current portion............ 24.9 24.7 49.2 99.3 129.7 71.4 Minority interest............ -- 0.3 8.8 7.3 -- -- Total shareholders' deficit.................... (8.6) (32.0) (68.9) (89.6) (35.1) (51.8) - --------------- (1) EBITDA represents operating loss plus depreciation and amortization expense. WORLDxCHANGE has included information concerning EBITDA herein because such information is commonly used in the telecommunications industry as one measure of an issuer's operating performance and historical ability to service debt. EBITDA is not determined in accordance with generally accepted accounting principles, is not indicative of cash provided by operating activities, is not necessarily comparable to similarly titled measures of other companies, 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. 197 211 COMPARISON OF THE RIGHTS OF SHAREHOLDERS OF WORLDXCHANGE AND STOCKHOLDERS OF WORLD ACCESS The rights of WORLDxCHANGE's shareholders are governed by its articles of incorporation, as amended and restated, its bylaws, as amended and restated, and the laws of the State of California. 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. Upon completion of the WORLDxCHANGE merger, the WORLDxCHANGE shareholders will become World Access stockholders, and their rights will be governed by World Access' certificate of incorporation, as amended, its bylaws and the laws of the State of Delaware. The following is a summary of the material differences between the rights of holders of WORLDxCHANGE capital stock and the rights of holders of World Access capital stock at the date hereof. These differences arise from differences between the Delaware General Corporation Law, or DGCL, and the California General Corporation Law, or CGCL, and between the respective corporate charters and bylaws of WORLDxCHANGE and World Access. This summary is not a complete comparison of rights that may be of interest to you; therefore, you should read the full text of each state's corporate statute and the respective corporate charters and bylaws of WORLDxCHANGE and World Access. For information on how to obtain these documents, see "WHERE YOU CAN FIND MORE INFORMATION" on page . Pursuant to the Voting and Share Transfer Restriction Agreements referred to on page 136, 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 such series of preferred stock votes to approve a merger or other business combination transaction involving WORLDxCHANGE, such holder is deemed to have converted all of such holder's shares of such series into shares of WORLDxCHANGE common stock immediately prior to consummation of such 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 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 March 22, 2000, 37,022,683 shares of WORLDxCHANGE common stock were outstanding, and 80,000 shares of WORLDxCHANGE preferred stock were outstanding. The authorized capital stock of World Access consists of 160,000,000 shares, of which 150,000,000 shares shall be common stock of $.01 par value per share, and 10,000,000 shares of which shall be 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 , shares of World Access common stock were outstanding, and shares of World Access preferred stock were outstanding. COMPARISON OF RIGHTS OF COMMON STOCK The holders of WORLDxCHANGE common stock are entitled to one vote per share. The holders of WORLDxCHANGE common stock are entitled to receive dividends when and as declared by the board of directors out of funds legally available for the payment of dividends. The holders of WORLDxCHANGE common stock have no preemptive rights or redemption rights. The holders of World Access common stock are entitled to one vote per share. The holders of common stock are entitled to receive such dividends as may be declared from time to time by the board of directors. The holders of World Access common stock have no preemptive rights or redemption rights. 198 212 COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND CALIFORNIA LAW Number of directors. World Access' bylaws provide for a board of directors of not less than three nor more than 12, with the exact number to be fixed 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 the certificate of incorporation which would increase the maximum number of directors to 15. World Access' board currently consists of 11 members. Following the completion of the WORLDxCHANGE merger, the World Access board of directors will consist of 11 members. 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. 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. Removal of directors. 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 such 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 (i) declared of unsound mind by an order of court or (ii) convicted of a felony. 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 (i) 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 (ii) 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 such removal would be sufficient to elect the director under cumulative voting. World Access' bylaws provide for removal of directors only for cause. Filling new seats or vacancies on the board of directors. 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. 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 (i) otherwise provided in the corporation's certificate of incorporation or bylaws, or (ii) the certificate of incorporation directs that a particular class is to elect such director, in which case the majority of directors elected by such class, or a sole remaining director elected by such class, shall fill such vacancy. 199 213 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. 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. Indemnification and limitation of liability. California and Delaware have similar laws governing indemnification by a corporation of its officers, directors, employees and other agents. The laws of both states permit, with certain exceptions, a corporation to adopt charter provisions eliminating the liability of its directors to the corporation or its shareholders for monetary damages for breach of the directors' fiduciary duty of care. There are nonetheless certain differences between the laws of the two states and the charters of WORLDxCHANGE and World Access with respect to indemnification and limitation of liability, which are summarized below. WORLDxCHANGE's articles of incorporation eliminate the liability of directors to the corporation to the fullest extent permissible under California law. California law does not permit the elimination of monetary liability where such liability is based on: (i) intentional misconduct or knowing and culpable violation of law; (ii) acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director; (iii) receipt by the director of an improper personal benefit; (iv) acts or omissions that show reckless disregard for the director's duty to the corporation or its shareholders, where the director in the ordinary course of performing a director's duties should be aware of a risk of serious injury to the corporation or its shareholders; (v) acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation and its shareholders; (vi) transactions between the corporation and a director who has a material financial interest in such transaction; and (vii) liability for improper distributions, loans or guarantees. World Access' certificate of incorporation eliminates the liability of directors to World Access or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permissible under Delaware law, as it may be amended and supplemented. Under Delaware law, such provision may not eliminate or limit a director's monetary liability for: (i) breaches of the director's duty of loyalty to the corporation or its stockholders; (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; (iii) the payment of unlawful dividends or unlawful stock repurchases or redemptions; or (iv) transaction in which the director received an improper personal benefit. Such limitation of liability provisions also may not limit a director's liability for violation of, or otherwise relieve World Access or its directors from the necessity of complying with, federal or state securities laws, or affect the availability of nonmonetary remedies such as injunctive relief or rescission. California and Delaware law require indemnification of a present or former director or officer of the corporation when the individual has defended successfully any action on the merits. Delaware law generally permits indemnification of expenses, including attorneys' fees, actually and reasonably incurred in the defense or settlement of a derivative or third-party action, provided there is a determination by a majority vote of a disinterested quorum of the directors, by independent legal counsel or by a majority vote of a quorum of the stockholders that the person seeking indemnification acted in good faith and in a manner reasonably believed to be in the best interests of the corporation. California law generally permits the same. Under Delaware law, no indemnification may be made in respect of any derivative action or action in which the individual has been adjudged to be liable to the corporation, unless the court so authorizes. Under California law, no indemnification may be made (i) in respect of any derivative action or action in which the individual has been adjudged liable to the corporation, unless the court so authorizes, (ii) of amounts paid in settling or otherwise disposing of a pending action without court approval, or (iii) of 200 214 expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. Expenses incurred by an officer or director in defending an action may be paid in advance, under Delaware law and California law, if such director or officer undertakes to repay such amounts if it is ultimately determined that he or she is not entitled to indemnification. In addition, the laws of both states authorize a corporation's purchase of indemnity insurance for the benefit of its officers, directors, employees and agents whether or not the corporation would have the power to indemnify against the liability covered by the policy. WORLDxCHANGE's bylaws authorize the purchase of such insurance. California law permits a California corporation to provide rights to indemnification beyond those provided therein to the extent such additional indemnification is authorized in the corporation's articles of incorporation. Thus, if so authorized, rights to indemnification may be provided pursuant to agreements or bylaw provisions which make mandatory the permissive indemnification provided by California law. In addition, Delaware law states that the indemnification provided by statute shall not be deemed exclusive of any other rights under any bylaw, agreement, vote of shareholders, or of disinterested directors, or otherwise. Interested director transactions. Under both California and Delaware law, certain contracts or transactions in which one or more of a corporation's directors have an interest are not void or voidable because of such interest if certain conditions are met. With certain exceptions, the conditions are similar under California and Delaware law. Under California and Delaware law, (i) either the shareholders or the board of directors must approve any such contract or transaction after full disclosure of the material facts, and, in the case of board approval, the contract or transaction must also be "just and reasonable" (in California) or "fair" (in Delaware) to the corporation, or (ii) the contract or transaction must have been "just and reasonable" or "fair" (as applicable) as to the corporation at the time it was approved. In the latter case, California law explicitly places the burden of proof on the interested director. Under California law, if shareholder approval is sought, the interested director is not entitled to vote his shares at a shareholder meeting with respect to any action regarding such contract or transaction. If board approval is sought, the contract or transaction must be approved by a majority vote of a quorum of the directors, without counting the vote of any interested directors (except that interested directors may be counted for purposes of establishing a quorum). Under Delaware law, if stockholder approval is sought generally, the contract or transaction must be approved in good faith by a majority of stockholders. If board approval is sought, the contract or transaction must be approved by a majority of the disinterested directors (even though less than a majority of a quorum). Therefore, certain transactions that the WORLDxCHANGE board of directors might not be able to approve because of the number of interested directors could, in the case of World Access, be approved by a majority of the disinterested directors of World Access, although less than a majority of a quorum. Loans to officers and employees. Under California law, a corporation cannot make any loan or guaranty to or for the benefit of a director or officer of the corporation or its parent unless such loan or guaranty, or a plan providing for such loan or guaranty, is approved by shareholders owning a majority of the outstanding shares of the corporation. However, under California law, any corporation with 100 or more shareholders of record may seek approval, by vote of the majority of outstanding shares, of a bylaw provision authorizing the board of directors alone to approve loans or guaranties to or on behalf of officers (whether or not such officers are directors) if the board determines that any such loan or guaranty may reasonably be expected to benefit the corporation. WORLDxCHANGE's bylaws do not authorize the WORLDxCHANGE board of directors to approve such loans or guaranties. Under Delaware law, a corporation may make loans to, guaranty the obligations of, or otherwise assist its officers or other employees and those of its subsidiaries (including directors who are also officers or employees) when such action, in the judgment of the directors, may reasonably be expected to benefit the corporation. Shareholder derivative suits. California law provides that a shareholder bringing a derivative action on behalf of a corporation need not have been a shareholder at the time of the transaction in question, 201 215 provided that certain tests are met. Under Delaware law, a stockholder may bring a derivative action on behalf of the corporation only if the stockholder was a stockholder of the corporation at the time of the transaction in question or his or her stock thereafter devolved upon him or her by operation of law. California law also provides that the corporation or the defendant in a derivative suit may make a motion to the court for an order requiring the plaintiff shareholder to furnish a security bond. Delaware does not have a similar bonding requirement. Elimination of actions by written consent of shareholders. 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. WORLDxCHANGE's articles of incorporation do not eliminate shareholder actions by written consent. In contrast, except with respect to actions by preferred stockholders pursuant to World Access' certificate of incorporation, World Access stockholder actions may not be taken 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. Power to call special meeting of shareholders. 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 at such 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. 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 such 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. Notice procedures. World Access' bylaws provide that notice of a special meeting of stockholders must be timely given in writing not less than ten days nor more than 60 days prior 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 prior to the one-year anniversary of the date of the proxy statement in connection with the previous year's annual meeting of stockholders. If (i) no annual meeting was held in the previous year, (ii) 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 (iii) the upcoming meeting is not an annual meeting, 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. The bylaws of WORLDxCHANGE provide that upon request in writing that a special meeting of shareholders be called for any proper purpose, notice shall be given to shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor 202 216 more than 60 days after receipt of the request. The notice shall specify the general nature of the business to be transacted at the meeting, and no other business may be transacted at such meeting. Supermajority voting requirements. 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 (Amendments), Article Four (No Cumulative Voting) or Article Five (Election and Term of Directors). World Access' certificate of incorporation requires the approval of the holders of at least 75% of the combined voting power of its stockholders to alter, amend or repeal Article IX (Management) of the certificate of incorporation, or to adopt any provision in the certificate of incorporation or bylaws that would be inconsistent with that article. Stockholder approval of certain 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 such stockholder became an interested stockholder, with certain exceptions, unless: (i) prior to 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; (ii) 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 (iii) at or subsequent to 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: (i) 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; (ii) 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 certain exceptions; (iii) any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) 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 (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits, with certain 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. 203 217 Inspection of shareholder list. Both California and Delaware law allow any shareholder to inspect and copy the shareholder list for a purpose reasonably related to such person's interest as a shareholder. 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 such shares who have made certain filings with the Securities and Exchange Commission. Delaware law also provides for inspection rights as to a list of stockholders entitled to vote at a meeting within a ten day period preceding a stockholders' meeting for any purpose germane to the meeting. However, Delaware law contains no provisions comparable to the absolute right of inspection provided by California law to certain large shareholders. WORLDxCHANGE's bylaws mirror the California statutory provisions with respect to inspection of shareholder lists. World Access' bylaws mirror the Delaware statutory provisions with respect to inspection of shareholder lists. Dividends and repurchases of shares. California law dispenses with the concepts of par value of shares as well as statutory definitions of capital, surplus and the like. The concepts of par value, capital and surplus exist under Delaware law. Under California law, a corporation may not make any distribution to its shareholders unless either: (i) the corporation's retained earnings immediately prior to the proposed distribution equal or exceed the amount of the proposed distribution; or (ii) immediately after giving effect to such 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 (not including deferred taxes, deferred income and other deferred credits), 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). Such tests are applied to California corporations on a consolidated basis. 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 such redemption or repurchase would not impair the capital of the corporation. Mergers. Both California and Delaware law generally require that a majority of the holders of the stock of each of the acquiring and target corporations approve statutory mergers. Delaware law does not require a stockholder vote of the surviving corporation in a merger (unless the corporation provides otherwise in its certificate of incorporation) if (i) the merger agreement does not amend the existing certificate of incorporation, (ii) each share of the surviving corporation outstanding before the merger is an identical outstanding share after the merger, and (iii) either (a) no shares of common stock of the surviving corporation and no shares, securities or obligations convertible into such stock are to be issued or delivered under the plan of merger, or (b) the number of shares to be issued by the surviving corporation in the merger does not exceed 20% of the shares outstanding immediately prior to the merger. California law contains a similar exception to its voting requirements for reorganizations where shareholders or the corporation itself, or both, immediately prior to the reorganization own immediately after the reorganization equity securities constituting more than five-sixths of the voting power of the surviving or acquiring corporation or its parent entity. Both California and Delaware law also require that a sale of all or substantially all of the assets of a corporation be approved by a majority of the voting shares of the corporation transferring such assets. With certain exceptions, California law also requires that mergers, reorganizations, certain sales of assets and similar transaction be approved by a majority vote of each class of shares outstanding. By contrast, Delaware law generally does not require class voting, except in certain transactions involving an 204 218 amendment to the certificate of incorporation which adversely affects a specific class of shares. World Access' certificate of incorporation does not, except in limited circumstances, require class voting. Dissenters'/Appraisal rights. Under both California and Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under varying circumstances, be entitled to dissenters' rights pursuant to which such shareholder may receive cash in the amount of the fair market value of his, her or its shares in lieu of the consideration he, she or it would otherwise receive in the transaction. Under Delaware and California law such fair market value is determined exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation. Under Delaware law, appraisal rights are not available (i) with respect to the sale, lease or exchange of all or substantially all of the assets of a corporation, (ii) with respect to a merger or consolidation by a corporation whose shares are either listed on a national securities exchange or are held of record by more than 2,000 holders if such stockholders receive only shares of the surviving corporation or shares of any other corporation which are either listed on a national securities exchange or held of record by more than 2,000 holders, plus cash in lieu of fractional shares, or (iii) to stockholders of a corporation surviving a merger if, among other conditions, no vote of the stockholders of the surviving corporation is required to approve the merger because the merger agreement does not amend the existing certificate of incorporation, each share of the surviving corporation outstanding prior to the merger is an identical outstanding or treasury share after the merger, and the number of shares to be issued in the merger does not exceed 20% of the shares of the surviving corporation outstanding immediately prior to the merger, unless otherwise provided in the certificate of incorporation. The limitations on the availability of appraisal rights under California law are different from those under Delaware law. Shareholders of a California corporation whose shares are listed on a national securities exchange generally do not have such appraisal rights unless the holders of at least 5% of the class of outstanding shares claim the right or the corporation or any law restricts the transfer of such shares. Appraisal rights are also unavailable if the shareholders of a corporation or the corporation itself, or both, immediately prior to the merger will own immediately after the reorganization equity securities constituting more than 83.3% (or five-sixths) of the voting power of the surviving or acquiring corporation or its parent entity. California law generally affords appraisal rights in sale of assets reorganizations. Dissolution. 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. 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 such supermajority voting requirement. The foregoing is an attempt to summarize the material differences in the corporation laws of California and Delaware, the WORLDxCHANGE articles of incorporation and the World Access amended certificate of incorporation, the WORLDxCHANGE bylaws and the World Access bylaws, and does not purport to be a complete list of differences in the rights and remedies of holders of shares of California, as opposed to Delaware, corporations and shareholders or stockholders of WORLDxCHANGE and World Access in particular. Such differences can be determined in full by reference to California law, to Delaware law and to the WORLDxCHANGE articles of incorporation and the World Access amended certificate of incorporation and the WORLDxCHANGE bylaws and the World Access bylaws. In addition, the laws of California and Delaware provide that provisions in the charter or bylaws of the corporation may modify the statutory provisions that affect various rights of holders of shares. 205 219 PREFERRED STOCK The World Access amended certificate of incorporation authorizes the board of directors to issue shares of preferred stock in one or more series and to fix the designations, preferences, powers and 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, 350,259.875 shares designated as Series C preferred stock, and 184,000 shares designated as Series D preferred stock are issued and outstanding. The material terms of the Series A preferred stock, the Series C preferred stock and the Series D preferred stock are summarized below. World Access Series A preferred stock Dividends. The holders of the Series A preferred stock are entitled to receive, when, as and if declared by the World Access board of directors, quarterly cash dividends at an annual rate on the liquidation preference of the Series A preferred stock (i.e., $1,000) equal to 4.25%. 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 such holder would be entitled to cast had such holder 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: (i) authorize, increase the authorized number of shares of or issue any shares of any class of stock ranking senior to, or on par with, the Series A preferred stock; (ii) 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 alter or change the powers, preferences or special rights of the Series A preferred stock, or would alter or change the powers, preferences or special rights of stock ranking senior to, or on par with, the Series A preferred stock; (iii) amend or alter the certificate of incorporation so as to affect the Series A preferred stock adversely and materially; (iv) 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 to, or on par with, the Series A preferred stock; (v) subject to certain limited exceptions described in the World Access certificate of incorporation, effect the voluntary liquidation, dissolution, winding up, 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; or (vi) 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 (i) 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 (ii) 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 206 220 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 by the holder thereof, 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 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. World Access Series C preferred stock Ranking. The Series C preferred stock ranks, as to dividends, on par 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 on par 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 such holder would be entitled to cast had such holder 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: (i) 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; (ii) 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 alter or change the powers, preferences or special 207 221 rights of the Series C preferred stock, or would alter or change the powers, preferences or special rights of stock ranking senior to the Series C preferred stock; (iii) amend or alter the certificate of incorporation so as to affect the Series C preferred stock adversely and materially; (iv) 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 to the Series C preferred stock; and (v) subject to certain limited exceptions described in the World Access certificate of incorporation, effect the voluntary liquidation, dissolution, winding up, 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 by the holder thereof, 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 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, on par 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 on par 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 such holder 208 222 would be entitled to cast had such holder 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 by the holder thereof, 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. 209 223 MANAGEMENT OF THE COMBINED COMPANIES 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 companies, and Walter J. Burmeister will serve as the President of the combined companies. It is anticipated that the other current executive officers of World Access will continue as executive officers of the combined companies 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, pursuant to the terms of the World Access Certificate of Designation of the Series C preferred stock, due to the decreased 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, 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. PROPOSAL 4 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 The World Access board of directors has adopted a resolution unanimously approving, deeming advisable and recommending to the World Access stockholders for their approval an amendment to Article IV of World Access' amended certificate of incorporation to provide therein for an increase in the number of shares of common stock authorized for issuance from 150,000,000 shares to 290,000,000 shares. 210 224 World Access' authorized common stock currently consists of 150,000,000 shares of common stock, $.01 par value per share, of which 60,101,658 were issued and outstanding as of May 22, 2000 and approximately 46,006,000 were reserved for issuance upon conversion of Series A preferred stock, Series C preferred stock and Series D preferred stock, upon the conversion of Series A preferred stock underlying options for such stock and upon exercise of options and warrants granted under World Access' stock option plans and director warrant plans. Accordingly, as of May 22, 2000, World Access had available for issuance approximately 43,892,342 shares of common stock. 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. In addition, an increase in the number of shares of common stock authorized for issuance is required in order for World Access to complete both the STAR merger and the WORLDxCHANGE merger. 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 thereof, 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. Approval of this Proposal 4 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 and Series D 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 APPROVES, RECOMMENDS AND DEEMS ADVISABLE 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 5 AMENDMENT OF THE WORLD ACCESS AMENDED CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED DIRECTORS FROM 12 TO 15 AND 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, deeming advisable 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 and to end the classification of the World Access board of directors. 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 211 225 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. In addition, 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. 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. 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 and Series D 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 the 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 APPROVES, RECOMMENDS AND DEEMS ADVISABLE 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 AND 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. 212 226 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 AND TO CHANGE THE PERFORMANCE CRITERIA UNDER THE PLAN 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 (the "Warrant 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. DESCRIPTION OF PROPOSED THIRD 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 May 22, 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 (i) 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 and (ii) change the performance criteria of World Access common stock under the Warrant Plan. If the proposed amendment is approved by the World Access stockholders, these changes will be effective as of April 25, 2000. 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, and 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 increase in the authorized shares under the Warrant Plan and 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 Warrant Plan will provide World Access with approximately $4.7 million of new capital in the future, assuming full exercise of all outstanding warrants. In addition, the nonqualified nature of the warrants may result in significant future tax deductions for World Access equal to the difference between the market value and exercise price of the warrants on the dates of exercise. 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. 213 227 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 such 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 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 thereof. 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 such family members, to a partnership of which such family members are the only partners, or to a charitable organization, under certain circumstances. The World Access board shall adjust the number of shares of World Access common stock available for issuance under the Warrant Plan as well as the price per share of World Access common stock covered by each outstanding warrant proportionately for 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 (not including 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 (i) if World Access is to be consolidated with or acquired by another entity in a merger, (ii) 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, (iii) 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 as a result thereof), or (iv) upon the liquidation or dissolution of World Access. The World Access board has authority to: (i) determine, upon review of relevant information and in accordance with the Warrant Plan, the fair market value of the World Access common stock, (ii) interpret the Warrant Plan, (iii) prescribe, amend and rescind rules and regulations relating to the Warrant Plan, (iv) 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 (v) 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. 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. 214 228 As of May 22, 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 May 22, 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 and Series D preferred stock, voting as a single class. If approved by the World Access stockholders, the amendment to the World Access Directors' Warrant Incentive Plan will become effective upon such approval. THE WORLD ACCESS BOARD OF DIRECTORS APPROVES AND 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 AND TO CHANGE THE PERFORMANCE CRITERIA OF WORLD ACCESS COMMON STOCK UNDER THE PLAN. PRINCIPAL STOCKHOLDERS OF WORLD ACCESS World Access' only issued and outstanding classes of voting securities are common stock, Series A preferred stock, Series C preferred stock and Series D preferred stock. As of May 22, 2000, there were 60,101,658 shares of World Access common stock issued and outstanding; 50,000 shares of Series A preferred stock issued and outstanding (convertible to 4,347,826 shares of World Access common stock); 350,260 shares of Series C preferred stock issued and outstanding (convertible into 17,186,451 shares of World Access common stock) and 184,000 shares of Series D preferred stock issued and outstanding (convertible into 10,222,222 shares of World Access common stock). 215 229 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 May 22, 2000 for (i) each person who beneficially owns more than 5% of the World Access common stock, (ii) each World Access director individually, (iii) each World Access executive officer who would be a named executive officer under Rule 402 of Regulation S-K and (iv) all directors and executive officers of World Access as a group. SHARES UNDERLYING TOTAL SHARES SHARES DERIVATIVE BENEFICIALLY PERCENTAGE NAME OWNED(1) SECURITIES(2) OWNED(1) OWNED - ---- ---------- ----------------- ------------ ---------- World Access common stock Armstrong International Telecommunications, Inc.(3)........... -- 15,162,015 15,162,015 20.3% One Armstrong Place Butler, PA 16001 WorldCom Network Services, Inc.(4)...... 6,327,344 -- 6,327,344 10.6 500 Clinton Center Drive Clinton, MS 39056 The 1818 Fund III, L.P.(5).............. -- 6,086,956 6,086,956 9.3 59 Wall Street New York, NY 10005 Morgan Stanley & Co. Incorporated(6).... -- 5,685,111 5,685,111 8.7 1585 Broadway New York, NY 10036 Walter J. Burmeister+++(7).............. -- 1,135,694 1,135,694 1.9 Kirby J. Campbell+...................... -- -- -- * Bryan Cipoletti+........................ -- -- -- * Stephen J. Clearman+(8)................. 1,309,044 167,000 1,476,044 2.5 John P. Imlay, Jr.+..................... 59,900 179,000 238,900 * John D. Phillips+++(9).................. 1,312,500 1,117,000 2,429,500 4.0 Massimo Prelz Oltramonti+(10)........... 1,885,251 100,000 1,985,251 3.3 John P. Rigas+(11)...................... 816,942 100,000 916,942 1.5 Carl E. Sanders+(12).................... 62,000 179,000 241,000 * Dru A. Sedwick+......................... -- -- -- * Lawrence C. Tucker+(5).................. -- 6,186,956 6,186,956 9.4 W. Tod Chmar++.......................... 312,500 25,000 337,500 * Mark A. Gergel++(13).................... 26,791 237,500 264,291 * Michael F. Mies++(13)................... 2,267 28,750 31,017 * All directors and executive officers as a group (15 persons).................. 5,787,195 9,455,900 15,243,095 16.1 Series A preferred stock The 1818 Fund III, L.P.................. 50,000 20,000 70,000 100.0 Series C preferred stock Armstrong International Telecommunications, Inc............... 309,002 -- 309,002 88.2 Walter J. Burmeister.................... 19,161 -- 19,161 5.5 Juan Carlos Valls....................... 19,161 -- 19,161 5.5 1530 Key Boulevard #306 Arlington, VA 22209 216 230 SHARES UNDERLYING TOTAL SHARES SHARES DERIVATIVE BENEFICIALLY PERCENTAGE NAME OWNED(1) SECURITIES(2) OWNED(1) OWNED - ---- ---------- ----------------- ------------ ---------- Series D preferred stock Morgan Stanley & Co. Incorporated....... 102,332 -- 102,332 55.6 AIM High Yield Fund..................... 16,851 -- 16,851 9.1 11 Greenway Plaza, #1919 Houston, TX 77046 NETnet International S.A................ 14,800 -- 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 6.4 222 South Riverside Plaza Chicago, IL 60606 - --------------- * Less than one percent + Director ++ Named executive officer (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 July 21, 2000. (3) Represents 15,162,015 shares of World Access common stock issuable upon the conversion of 309,002 shares of Series C preferred stock. (4) 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 MCI 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. (5) Includes 4,347,826 shares of World Access common stock issuable upon the conversion of 50,000 shares of Series A preferred stock owned of record by The 1818 Fund III, a private equity partnership, and 1,739,130 shares of World Access common stock reserved for issuance upon the conversion of 20,000 shares of Series A preferred stock which is subject to an option held by The 1818 Fund III. The general partner of the 1818 Fund III is Brown Brothers Harriman & Co. Mr. Tucker, a partner at Brown Brothers Harriman, is deemed to be the beneficial owner of these shares due to his role as co-manager of The 1818 Fund III. (6) Represents 5,685,111 shares of World Access common stock issuable upon the conversion of 102,332 shares of Series D preferred stock. (7) Includes 940,204 shares of World Access common stock issuable upon the conversion of 19,161 shares of Series C preferred stock. (8) 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. (9) 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 217 231 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. (10) 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, is deemed to be the beneficial owner of these shares. (11) Represents 816,942 shares of World Access common stock owned by Zilkha Capital Partners, L.P. Mr. Rigas, a Managing Partner of Zilkha Capital Partners, is deemed to be the beneficial owner of these shares. (12) Includes 2,000 shares of World Access common stock owned by Mr. Sanders' wife, with respect to which Mr. Sanders disclaims beneficial ownership. (13) Includes the following shares of World Access common stock acquired through voluntary employee contributions to our 401(k) Plan and contributed to the 401(k) Plan under a matching contribution program offered to all 401(k) Plan participants: Mr. Gergel -- 4,041 shares and Mr. Mies -- 517 shares. PROPOSAL 7 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, such 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 such range to be fixed from time to time by the World Access board. If Proposal 5 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, and 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 5 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 three director positions in the class whose term of office expires in 2000. Two of 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 218 232 World Access board. A director elected to fill a vacancy shall serve until the next election of the class of directors to which such director belongs and until his or her successor is elected and qualified. THE BOARD OF DIRECTORS OF WORLD ACCESS 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 May 22, 2000. NOMINEES FOR DIRECTOR Stephen J. Clearman. Mr. Clearman (age 49) 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. John D. ("Jack") Phillips. Mr. Phillips (age 57) 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. DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING Massimo Prelz Oltramonti. Mr. Prelz (age 45) 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. Lawrence C. Tucker. Mr. Tucker (age 57) 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 219 233 III, L.P., and The 1818 Mezzanine Fund, L.P. Mr. Tucker serves on our board of directors as the designee of the 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. DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING John P. Imlay, Jr. Mr. Imlay (age 63) 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. John P. Rigas. Mr. Rigas (age 36) 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. Carl E. Sanders. Mr. Sanders (age 74) 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. DIRECTORS NOT DIVIDED INTO CLASSES Walter J. Burmeister. Mr. Burmeister (age 60) 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. Kirby J. Campbell. Mr. Campbell (age 52) 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. Bryan Cipoletti. Mr. Cipoletti (age 39) 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 220 234 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 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. Dru A. Sedwick. Mr. Sedwick (age 34) 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. 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 (i) the total number of meetings of the World Access board which such director was eligible to attend during 1999 and (ii) the total number of meetings held by any committee of the World Access board upon which such 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 such duties as are delegated to it by the board of directors, subject to the limitations on such 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 such auditors, reviews and evaluates World Access' accounting system and its system of internal controls and performs other related duties delegated to such 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 such duties regarding compensation for executive officers as the World Access board may delegate to such 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. 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 board. Warrants may be granted under the Warrant Plan only to directors of World Access who are 221 235 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 adjustment in certain instances 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 adjustment in certain instances 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 $8.25 per share, 110% of the then current market price. These warrants became fully vested on December 31, 1999 and expire on March 10, 2004. Notwithstanding the foregoing, the Warrant Plan and the Incentive Plan provide that warrants awarded pursuant to these plans will become immediately exercisable (i) if we are consolidated with or acquired by another entity in a merger, (ii) upon the sale of substantially all of our assets or the sale of at least 90% of outstanding common stock to a third party, (iii) upon our merger or consolidation with or into any other corporation or the merger or consolidation of any corporation with or into us (in which consolidation or merger our stockholders received distributions of cash or securities as a result thereof), or (iv) upon our liquidation or dissolution. 222 236 EXECUTIVE OFFICERS OF WORLD ACCESS INFORMATION REGARDING EXECUTIVE OFFICERS The information with respect to World Access' executive officers is set forth in Item 4.5 of Part I of World Access' Annual Report on Form 10-K for the fiscal year ended December 31, 1999. EXECUTIVE COMPENSATION Summary of Compensation. The following table sets forth the cash and non-cash compensation World Access awarded or paid its named executive officers, consisting of its Chief Executive Officer and its four most highly compensated executive officers other than its Chief Executive Officer, during 1997, 1998 and 1999. SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION SECURITIES ---------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) 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. (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 $21,500 for the relocation of his household to Atlanta, Georgia. (6) Except as noted above, All Other Compensation represents matching contributions that World Access provides to all eligible employees under its 401(k) benefit plan. 223 237 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information regarding the grant of stock options to the named executive officers during 1999. POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE ($) 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. 224 238 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. 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 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 may be provided by the terms of the appropriate program, all of Mr. Chmar's stock options, warrants and 225 239 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. For the purposes of the employment agreements with each of Messrs. Phillips, Chmar and Gergel, 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. 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: (i) 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; (ii) 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; (iii) any failure to pay the employee any compensation or benefits to which he is entitled within five days of the date due; (iv) 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; (v) 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; (vi) the insolvency or the filing of a petition for bankruptcy by World Access; (vii) 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 (viii) any breach by World Access of any provision of an employment agreement. 226 240 A change in control shall have occurred if: (i) a majority of the directors of World Access shall be persons other than persons: (A) for whose election proxies shall have been solicited by the board, or (B) 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; (ii) 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 (iii) there shall have occurred: (A) 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 such class or series); (B) 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; (C) 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 (D) 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 (i) Mr. Phillips' death or disability, (ii) 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 (or, upon conversion into or other acquisition of World Access common stock, by 50% of the directors nominated, designated or elected by Armstrong International Telecommunications, Epic Interests, Inc. and BFV Associates, Inc., or their affiliates) vote in favor of such removal or fail to vote in favor of such reelection, (iii) 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 (iv) 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: (i) a cash payment equal to 0.75% of the gross consideration received by World Access upon the sale of the NACT Switching Division; (ii) 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 (iii) 0.5% of the gross consideration received by World Access upon the sale of the Transport and Access 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 Transport and Access 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 227 241 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. 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 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 (i.e., 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 (i) earnings per share; (ii) revenue; (iii) earnings before interest, taxes, depreciation and amortization; and (iv) 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. 228 242 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: (i) $50.0 million investment by The 1818 Fund III; (ii) acquisition of Comm/Net; (iii) FaciliCom merger; (iv) $75.0 million private placement by institutional investors; (v) pending acquisition of Long Distance International; and (vi) 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 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. 229 243 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 Stock Market -- United States owned companies and Nasdaq Telecommunications Stocks for the five years ended December 31, 1999. The Nasdaq 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 230 244 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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. EXPERTS 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 accountants during the period covered by this joint proxy statement/prospectus and such accountants' report on the financial statements for each of the past two years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedules included in our Annual Report on Form 10-K for the years ended December 31, 1999 and 1998, 231 245 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 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, 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. The Long Distance International, Inc. 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. The consolidated financial statements of STAR incorporated in this joint proxy statement/prospectus by reference to STAR's Form 10-K 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. 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 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 such stockholders' notice must be so received not later than the close of business on the tenth day following the earlier of (i) the day on which notice of the date of the forthcoming meeting was mailed or given to stockholders by or on behalf of 232 246 World Access or (ii) 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 2001 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 2001 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 such 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 such matters. LEGAL MATTERS The legality of the World Access common stock offered by this joint proxy statement/prospectus, including certain material federal income tax consequences of the mergers, will be passed upon for World Access by Long Aldridge & Norman LLP, Atlanta, Georgia. Certain matters with respect to the offering of World Access common stock pursuant to this joint proxy statement/prospectus will be passed upon for STAR by Riordan & McKinzie, a Professional Corporation, Los Angeles, California. With respect to certain matters concerning Delaware law, STAR will rely on Richards, Layton & Finger, a Professional Corporation, Wilmington, Delaware. WHERE YOU CAN FIND MORE INFORMATION Federal securities laws require World Access and STAR to file information with the Securities and Exchange Commission concerning our business and operations. Accordingly, we 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 public reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You can also do so at the following regional offices of the SEC: New York Regional Office Seven World Trade Center Suite 1300 New York, New York 10048 233 247 Chicago Regional Office Northwest Atrium Center 500 West Madison Street 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 our filings and the reports, proxy and information statements and other information regarding other companies. You can also inspect information about World Access and STAR at the offices of the Nasdaq Stock 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 certain 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 CERTAIN DOCUMENTS BY REFERENCE The SEC allows World Access and STAR to "incorporate by reference" the information each files with it, 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 (i) the World Access special meeting, with respect to the World Access stockholders, (ii) the STAR special meeting, with respect to the STAR stockholders, and (iii) 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 this exchange offer: World Access SEC Filings (Commission File No. 0-29782): - Current Report on Form 8-K/A on April 26, 2000 (event date: February 11, 2000;) - Current Report on Form 8-K 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); - Current Report on Form 8-K filed on December 22, 1999, as amended by Form 8-K/A filed on February 22, 2000 (event date: December 7, 1999); - Current Report on Form 8-K filed on February 9, 2000 (event date: February 2, 2000); - Quarterly Report on Form 10-Q for the quarter ended March 31, 2000; - Annual Report on Form 10-K for the fiscal year ended December 31, 1999; and - The description of the World Access common stock included in World Access' Registration Statement on Form S-4 (No. 333-67025), as filed with the SEC on November 10, 1998. STAR SEC filings (Commission File No. 000-22581): - Quarterly Report on Form 10-Q for the quarter ended March 31, 2000; and - Annual Report on Form 10-K for fiscal year ended December 31, 1999. 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 are included with this joint proxy statement/prospectus. 234 248 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. 235 249 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-1 250 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) MARCH 31, SEPTEMBER 30, ----------- -------------------- 2000 1999 1998 ----------- --------- -------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 9,553 $ 38,030 $ 20,917 Accounts receivable, net of allowance of $13,912 at March 31, 2000 (unaudited) and $9,590 and $10,690 at September 30, 1999 and 1998, respectively......................... 92,172 54,991 38,966 Prepaid expenses and other current assets................. 26,217 8,224 3,825 --------- --------- -------- Total current assets............................... 127,942 101,245 63,708 Equipment and leasehold improvements, net................... 195,923 114,765 49,697 Intangible assets........................................... 93,521 12,194 -- Other assets................................................ 5,126 6,798 6,724 --------- --------- -------- Total assets....................................... $ 422,512 $ 235,002 $120,129 ========= ========= ======== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accrued network costs..................................... $ 145,426 $ 83,993 $ 49,796 Accounts payable.......................................... 27,749 13,770 14,144 Other accrued liabilities................................. 43,213 16,333 15,377 Payable to related parties................................ 1,596 -- 468 Deferred revenue.......................................... 4,493 3,941 686 Current portion of long-term debt and subordinated debentures.............................................. 162,012 9,799 13,421 Current portion of capital lease obligations.............. 12,130 10,582 6,851 --------- --------- -------- Total current liabilities.......................... 396,619 138,418 100,743 Long-term debt.............................................. 42,467 100,324 75,287 Subordinated debentures..................................... -- -- 1,182 Capital lease obligations................................... 28,967 29,395 22,844 Other long-term liabilities................................. 6,248 1,918 2,397 --------- --------- -------- Total liabilities.................................. 474,301 270,055 202,453 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 March 31, 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 -- 50,000 at March 31, 2000 and zero at September 30, 1999 and 1998; liquidation preference of $1,000 per share...................................... 48,658 -- -- Common Stock, no par value; Authorized shares -- 100,000,000, Issued and outstanding 37,057,182 at March 31, 2000 and -- 36,965,911 at September 30, 1999 and 28,576,552 at September 30, 1998............... 99,378 99,047 10,297 Notes receivable from shareholders........................ (1,888) (1,474) -- Accumulated other comprehensive loss...................... (6,860) (2,405) (3,529) Accumulated deficit....................................... (221,077) (160,221) (96,368) --------- --------- -------- Total shareholders' deficit........................ (51,789) (35,053) (89,593) --------- --------- -------- Total liabilities and shareholders' deficit........ $ 422,512 $ 235,002 $120,129 ========= ========= ======== See accompanying notes. F-2 251 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) SIX MONTHS ENDED MARCH 31, YEARS ENDED SEPTEMBER 30, ------------------- ------------------------------ 2000 1999 1999 1998 1997 -------- -------- -------- -------- -------- (UNAUDITED) Revenues.................................... $291,600 $190,758 $421,580 $398,867 $331,660 Operating expenses: Cost of services.......................... 230,207 150,839 328,334 287,312 235,027 Selling, general and administrative....... 84,585 57,135 124,112 114,897 113,459 Depreciation and amortization............. 21,825 7,679 17,705 12,332 8,677 -------- -------- -------- -------- -------- Total operating expenses.......... 336,617 215,653 470,151 414,541 357,163 Operating loss.............................. (45,017) (24,895) (48,571) (15,674) (25,503) Interest expense............................ 13,528 7,802 16,883 11,947 8,682 Other expense, net.......................... 727 397 648 1,378 3,366 -------- -------- -------- -------- -------- Loss before minority interest............... (59,272) (33,094) (66,102) (28,999) (37,551) Minority interest........................... -- 1,071 2,251 1,546 473 -------- -------- -------- -------- -------- Net loss.................................... $(59,272) $(32,023) $(63,851) $(27,453) $(37,078) Preferred stock dividends................... 1,584 -- 2 7 13 -------- -------- -------- -------- -------- Net loss applicable to common stockholders........................... $(60,856) $(32,023) $(63,853) $(27,460) $(37,091) ======== ======== ======== ======== ======== See accompanying notes. F-3 252 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 ACCUMULATED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS DEFICIT ------ ------- ------- ------- ---------- ------- ---------------- ----------- BALANCE AT SEPTEMBER 30, 1996...... 82 $ 36 -- -- 27,572,000 $ 196 $ -- $ (31,817) Repurchase of Series A Cumulative Preferred Stock................... (59) (29) -- -- -- -- -- -- Dividends on Series A Cumulative Preferred Stock................... -- -- -- -- -- -- -- (13) Exercise of options/warrants....... -- -- -- -- 162,000 62 -- -- Comprehensive loss: Net loss........................... -- -- -- -- -- -- -- (37,078) Foreign currency translation adjustment........................ -- -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- ------- ------- --------- BALANCE AT SEPTEMBER 30, 1997...... 23 7 27,734,000 258 -- (68,908) Dividends on Series A Preferred Stock.................... -- -- -- -- -- -- -- (7) Issuance of Common Stock........... -- -- -- -- 788,127 10,000 -- -- Exercise of options/warrants....... -- -- -- -- 54,425 39 -- -- Comprehensive loss: Net loss........................... -- -- -- -- -- -- -- (27,453) Foreign currency translation adjustment........................ -- -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- ------- ------- --------- BALANCE AT SEPTEMBER 30, 1998...... 23 7 -- -- 28,576,552 10,297 -- (96,368) Repurchase of Series A Cumulative Preferred Stock......... (23) (7) -- -- -- -- -- -- Dividends on Series A Preferred Stock.................... -- -- -- -- -- -- -- (2) 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........................... -- -- -- -- -- -- -- (63,851) Foreign currency translation adjustment........................ -- -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- ------- ------- --------- BALANCE AT SEPTEMBER 30, 1999...... 30,000 $30,000 -- -- 36,965,911 $99,047 $(1,474) $(160,221) ------ ------- ------- ------- ---------- ------- ------- --------- Dividends on Series A Preferred Stock (unaudited)....... -- -- -- -- -- -- -- (1,584) Issuance of Series B Cumulative Preferred Stock, net of issuance cost of $1,342 (unaudited)..................... -- -- 50,000 48,658 -- -- -- -- Exercise of options/warrants (unaudited)....................... -- -- -- -- 91,271 331 -- -- Notes receivable for sales of common stock (unaudited).......... -- -- -- -- -- -- (414) -- Comprehensive loss: Net loss (unaudited)............... -- -- -- -- -- -- -- (59,272) Foreign currency translation adjustment (unaudited)............ -- -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- ------- ------- --------- BALANCE AT MARCH 31, 2000 (UNAUDITED)....................... 30,000 $30,000 50,000 $48,658 37,057,182 $99,378 $(1,888) $(221,077) ====== ======= ======= ======= ========== ======= ======= ========= ACCUMULATED OTHER COMPREHENSIVE TOTAL INCOME SHAREHOLDERS' (LOSS) DEFICIT ------------- ------------- BALANCE AT SEPTEMBER 30, 1996...... $ (434) $(32,019) Repurchase of Series A Cumulative Preferred Stock................... -- (29) Dividends on Series A Cumulative Preferred Stock................... -- (13) Exercise of options/warrants....... -- 62 Comprehensive loss: Net loss........................... -- (37,078) Foreign currency translation adjustment........................ 197 197 -------- Total comprehensive loss..... (36,881) ------- -------- BALANCE AT SEPTEMBER 30, 1997...... (237) (68,880) Dividends on Series A Preferred Stock.................... -- (7) Issuance of Common Stock........... -- 10,000 Exercise of options/warrants....... -- 39 Comprehensive loss: Net loss........................... -- (27,453) Foreign currency translation adjustment........................ (3,292) (3,292) -------- Total comprehensive loss..... (30,745) ------- -------- BALANCE AT SEPTEMBER 30, 1998...... (3,529) (89,593) Repurchase of Series A Cumulative Preferred Stock......... -- (7) Dividends on Series A Preferred Stock.................... -- (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) Foreign currency translation adjustment........................ 1,124 1,124 -------- Total comprehensive loss..... (62,727) ------- -------- BALANCE AT SEPTEMBER 30, 1999...... $(2,405) $(35,053) ------- -------- Dividends on Series A Preferred Stock (unaudited)....... -- (1,584) Issuance of Series B Cumulative Preferred Stock, net of issuance cost of $1,342 (unaudited)..................... -- 48,658 Exercise of options/warrants (unaudited)....................... -- 331 Notes receivable for sales of common stock (unaudited).......... -- (414) Comprehensive loss: Net loss (unaudited)............... -- (59,272) Foreign currency translation adjustment (unaudited)............ (4,455) (4,455) -------- Total comprehensive loss..... (63,727) ------- -------- BALANCE AT MARCH 31, 2000 (UNAUDITED)....................... $(6,860) $(51,789) ======= ======== See accompanying notes. F-4 253 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) SIX MONTHS ENDED MARCH 31, YEARS ENDED SEPTEMBER 30, --------------------- ---------------------------------- 2000 1999 1999 1998 1997 --------- --------- ---------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss........................................ $ (59,272) $ (32,027) $ (63,851) $ (27,453) $ (37,078) Adjustments to reconcile net loss to net cash used in operating activities: Provision for bad debt........................ 10,954 8,406 15,202 15,170 22,348 Depreciation and amortization................. 21,826 7,679 17,705 12,332 8,677 Deferred revenue.............................. (1,654) 1,529 3,255 (2,275) 2,714 Impairment of long-lived assets............... - - - - 659 Minority interest............................. - (1,080) (2,251) (1,546) (473) Changes in operating assets and liabilities: Accounts receivable......................... (19,532) (12,418) (31,227) (391) (48,411) Receivables from related parties............ - - (1,448) (1,864) 1,317 Prepaid expenses and other assets........... (1,766) 320 (4,740) (5,551) (3,478) Accrued network costs....................... 42,972 15,407 34,629 (12,255) 21,200 Accounts payable............................ (3,926) 13,474 (1,031) (1,584) 12,136 Other accrued liabilities................... (13,946) 921 2,208 (6,318) 13,183 --------- --------- ---------- --------- --------- Net cash provided by (used in) operating activities................. (24,344) 2,210 (31,549) (31,735) (7,206) INVESTING ACTIVITIES Acquisition of equipment and leasehold improvements.................................. (2,629) (16,928) (27,633) (11,990) (10,871) Acquisition of ACC Europe, net of cash acquired...................................... (55,745) - - - - --------- --------- ---------- --------- --------- Net cash used in investing activities........... (58,374) (16,928) (27,633) (11,990) (10,871) FINANCING ACTIVITIES Proceeds from revolving credit agreement........ 187,099 111,516 283,485 256,535 154,961 Repayments on revolving credit agreement........ (197,353) (114,710) (278,407) (255,885) (128,598) Proceeds from issuance of long-term debt........ 25,000 - - 55,152 - Repayment of long-term debt, subordinated debentures, loans payable and capital leases........................................ (9,163) (18,053) (30,433) (5,299) (16,602) Payment of dividends on Preferred Stock......... - - (2) (7) (11) Proceeds from the issuance of Preferred Stock... 48,658 - 30,000 - - Proceeds from issuance of Common Stock.......... - 41,278 71,648 10,039 62 Repurchase of Preferred Stock................... - - (7) - (30) Proceeds from issuance of subsidiary common stock to minority holders..................... - - - - 9,001 --------- --------- ---------- --------- --------- Net cash provided by financing activities....... 54,241 20,031 76,284 60,535 18,783 Effect of exchange rate changes on cash......... - - 11 (219) 197 --------- --------- ---------- --------- --------- Net increase (decrease) in cash................. (28,477) 5,313 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...... $ 9,553 $ 26,230 $ 38,030 $ 20,917 $ 4,326 ========= ========= ========== ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest...................................... $ 7,749 $ 5,215 $ 9,248 $ 6,686 $ 7,176 Income taxes.................................. - - 2 8 102 NON-CASH INVESTING AND FINANCING ACTIVITIES Assets acquired by incurring capital lease obligations or long-term debt................. 13,714 4,075 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-5 254 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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 for the next twelve months. 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 March 31, 2000 and for the six months ended March 31, 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 March 31, 2000 are not necessarily indicative of results for the entire year or future periods. F-6 255 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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. Estimated credit losses are provided for in the financial statements at the same time the corresponding revenue is recognized. No one customer accounted for more than 10% of revenues for any period during fiscal 1999, 1998 and 1997 and for the six months ended March 31, 2000. Equipment and Leasehold Improvements Equipment and leasehold improvements, including equipment under capital leases, 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) or the term of the related lease (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. 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 F-7 256 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) network services with certain operator services customers. These costs are amortized using the straight-line method over three years. 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. Advertising WORLDxCHANGE charges advertising costs to expense as the costs are incurred. Total advertising expense was $11,278,000, and $7,717,000 for the six months ended March 31, 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. 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. F-8 257 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) 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. ("CTS") and WORLDxCHANGE Limited ("WxL"), 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 WxL. The accompanying pooled consolidated financial statements are derived from the combined historical financial statements of CTS, WxL and WORLDxCHANGE. All significant intercompany accounts and transactions have been eliminated. F-9 258 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) 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 March 31, 2000 the outstanding balance of such accounts for which WORLDxCHANGE is contingently liable was approximately $691,902. 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, MARCH 31, ------------------- 2000 1999 1998 ----------- -------- -------- (UNAUDITED) Telecommunications equipment and cables............... $207,975 $125,190 $ 56,091 Computer equipment and software....................... 32,854 15,365 9,985 Office furniture, equipment and vehicles.............. 13,327 9,745 9,335 Leasehold improvements................................ 7,344 3,147 1,614 Equipment in progress................................. 448 10,266 4,932 -------- -------- -------- 261,948 163,713 81,957 Accumulated depreciation and amortization............. (66,025) (48,948) (32,260) -------- -------- -------- $195,923 $114,765 $ 49,697 ======== ======== ======== Telecommunications equipment and cables include eight Indefeasible Rights of Use ("IRU") in cable systems amounting to $41,892,000 and $825,000 and eleven ownership interests in international cables F-10 259 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) amounting to $15,605,000 and $4,224,000 at September 30, 1999 and 1998, respectively. As of March 31, 2000, WORLDxCHANGE had IRUs in cable systems amounting to $52,255,000 and ownership interests in international cables amounting to $16,720,000. 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, MARCH 31, --------------- 2000 1999 1998 ----------- ------ ------ (UNAUDITED) Deposits.................................................. $3,436 $4,240 $3,417 Debt issuance costs, net of accumulated amortization of $2,272, $1,686 and $97 at March 31, 2000, September 30, 1999 and 1998, respectively............................. 982 1,718 3,307 Offering Costs............................................ -- 652 -- Other..................................................... 708 188 -- ------ ------ ------ $5,126 $6,798 $6,724 ====== ====== ====== Accrued Liabilities Other accrued liabilities consist of the following (in thousands): SEPTEMBER 30, MARCH 31, ----------------- 2000 1999 1998 ----------- ------- ------- (UNAUDITED) Accrued taxes.......................................... $16,482 $ 3,734 $ 1,766 Accrued commissions.................................... 1,169 1,575 2,311 Accrued compensation and benefits...................... 6,594 3,144 3,384 Accrued settlements (Note 11).......................... 899 1,211 2,059 Accrued interest....................................... 4,546 634 901 Other.................................................. 13,463 6,035 4,956 ------- ------- ------- $43,213 $16,333 $15,377 ======= ======= ======= 5. LONG-TERM DEBT Long-term debt consists of the following (in thousands): SEPTEMBER 30, MARCH 31, -------------------------- 2000 1999 1998 ----------- --------------- -------- (UNAUDITED) Unsecured subordinated note balance due December 2000 with interest payable at maturity of 12%... $ 53,000 $ -- $ -- Secured subordinated note, balance due November 2000 with interest payable quarterly at 12.5%... 45,200 45,200 55,000 F-11 260 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) SEPTEMBER 30, MARCH 31, -------------------------- 2000 1999 1998 ----------- --------------- -------- (UNAUDITED) 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.......... 20,295 -- -- Term loan due October 2000, with principal reductions of $300,000 due monthly and interest payable monthly at prime plus 5.00% (14.00% at March 31, 2000) and prime plus 6.75% (15.00% at September 30, 1999 and 1998, respectively)...... 4,700 4,600 5,125 Loan and security agreement payable upon collections of accounts receivable with interest payable monthly at prime rate plus 1.75% (10.75% at March 31, 2000) and prime plus 2.75% (11.00% at September 30, 1999 and 1998 respectively).... 16,544 24,362 21,888 Term loan due February 2001 with interest payable at a per annum rate equal to 11.0%.............. 25,000 -- -- 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%.............. 6,855 7,521 -- Notes payable due June 2004 to March 2005, with aggregate monthly principal and interest payments at 12% due in monthly installments of $299,064 at March 31, 2000 and $197,222 at September 30, 1999.............................. 14,214 8,693 -- Note payable due May 2004, with principal and interest payments payable in monthly installments of $322,632 at 11.5%............... 12,569 13,742 -- Note payable due August 2004, with principal and interest payments payable in monthly installments of $73,235 at 11.5%................ 2,988 3,247 -- Note payable due June 2004, with principal and interest payments payable in monthly installments of $56,777 at 10%.................. 2,351 2,568 -- Note Payable due June 2002 with quarterly payments of $67,000...................................... 604 -- -- F-12 261 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) SEPTEMBER 30, MARCH 31, -------------------------- 2000 1999 1998 ----------- --------------- -------- (UNAUDITED) 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%.......................................... 159 190 429 ---------- ---------- -------- 204,479 110,123 83,642 Less current portion.............................. (162,012) (9,799) (8,355) ---------- ---------- -------- $ 42,467 $ 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 $16.5 million at March 31, 2000, and $10.5 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 March 31, 2000 had an outstanding balance of approximately $4.7 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 March 31, 2000, the outstanding balance on the bridge loan was $25.0 million and $5.0 million was available for borrowing. In total, as of March 31, 2000, WORLDxCHANGE had $46.2 million borrowed under the credit facility and $15.5 million available for borrowing. The revolving credit agreement and the term loan mature at the earlier of 60 days prior to the maturity of the subordinated promissory notes or the notes due in the ACC Europe acquisition or October 1, 2003. As of March 31, 2000, WORLDxCHANGE was in compliance with the restrictive covenants under the credit facility. WORLDxCHANGE's obligations under the credit facility are secured by first position in substantially all of its property. 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 March 31, 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 F-13 262 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) 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 March 31, 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 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 March 31, 2000 and September 30, 1999, the outstanding balance related to this agreement was $6,855,030 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 March 31, 2000 and September 30, 1999, the outstanding balances related to this agreement were $14,213,922 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 March 31, 2000 and September 30, 1999, the aggregate outstanding balance were approximately $15,556,864 and $16,989,000, respectively, which was comprised of two separate notes with balances outstanding of $12,568,751 and $2,988,113 at March 31, 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 March 31, 2000 and September 30, 1999, the outstanding balances related to this agreement were $2,351,114 and $2,568,000 respectively. F-14 263 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) 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 $4,059,000, $4,783,000, and $3,129,000, respectively, for the six months ended March 31, 2000 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 March 31, 2000 and September 30, 1999 and 1998 assets acquired under these leases have an original cost of $51,894,739, $42,958,000 and $40,099,000, respectively, and accumulated amortization of $28,713,089, $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-15 264 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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 March 31, 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 March 31, 2000, $7.9 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-16 265 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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-17 266 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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-18 267 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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).............. (618,581) 618,581 $10.00-$13.00 11.64 Exercises (unaudited)........... -- (91,271) $ .42-$10.00 3.78 Cancellations (unaudited)....... 304,201 (304,201) $ 5.00-$11.00 9.33 ----------- ----------- ------------- ------- Balance as of March 31, 2000 (unaudited)..................... 3,570,701 3,965,531 $ 0.42-$13.00 $ 7.34 =========== =========== ============= ======= The following table summarizes significant ranges of outstanding and exercisable options at March 31, 2000: 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-$ 5.00 1,366,477 3.88 $ 2.06 1,312,370 $ 1.94 $7.00-$ 9.00 291,597 7.56 $ 8.12 160,706 $ 7.93 $10.00 1,591,251 8.69 $10.00 538,964 $10.00 $11.00-$13.00 716,206 9.55 $11.20 43,623 $11.00 --------- ---- ------ --------- ------ 3,965,531 7.10 $ 7.34 2,055,663 $ 4.71 ========= ==== ====== ========= ====== 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 six months ended March 31, 2000. F-19 268 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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 subject to limitations. 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. F-20 269 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) In May 1997, the California Public Utilities Commission ("CPUC") issued an order, which became effective in October 1997, revoking WORLDxCHANGE's Certificate of Public Convenience and Necessity (the "CPCN") in California and imposing certain other fines and penalties against WORLDxCHANGE based on the CPUC'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 CPCN, 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 CPUC directives; (ii) reimburse the CPUC 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 $899,000 remains payable at March 31, 2000. Under the CPUC's order, the suspension of WORLDxCHANGE's CPCN and the other sanctions and fines imposed on WORLDxCHANGE are binding on any successor of WORLDxCHANGE. WORLDxCHANGE may apply to the CPUC for reinstatement of the CPCN 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-21 270 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 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 -------- ------- -------- ---------- March 31, 2000, and for the six months then ended (in thousands) Sales to unaffiliated customers.................... $175,778 $25,829 $ 89,993 $ 291,600 Intersegment revenues.............................. 20,085 2,665 6,313 29,063 -------- ------- -------- ---------- Segment revenues................................... 195,863 28,494 96,306 320,663 Depreciation and amortization...................... 9,763 1,335 10,728 21,826 Segment operating loss............................. (19,424) (5,629) (19,964) (45,017) Segment assets..................................... 611,513 27,306 387,056 1,025,875 Expenditures for long-lived assets................. 2,235 158 236 2,629 Reconciliations: NET LOSS Total operating loss for reportable segments....... $ (45,017) Interest expense................................... (13,528) Other expense, net................................. (727) ---------- Total consolidated net loss................ $ (59,272) ========== ASSETS Total assets for reportable segments............... $1,025,875 Elimination of intercompany receivables............ (593,363) ---------- Total consolidated assets.................. $ 432,512 ========== March 31, 1999 and for the six months then ended (in thousands) Sales to unaffiliated customers.................... $147,398 $29,621 $ 13,739 $ 190,758 Intersegment revenues.............................. 21,493 7,052 3,708 32,253 -------- ------- -------- ---------- Segment revenues................................... 168,891 36,673 17,447 223,011 Depreciation and amortization...................... 6,132 823 723 7,678 Segment operating loss............................. (17,164) (1,928) (5,803) (24,895) Segment assets..................................... 287,196 21,591 45,896 354,684 Expenditures for long-lived assets................. 8,988 4,668 3,272 16,928 Reconciliations: NET LOSS Total operating loss for reportable segments......... $ (24,895) Interest expense................................... (7,802) Other expense, net................................. (397) Minority interest.................................. 1,071 ---------- Total consolidated net loss................ $ (32,023) ========== F-22 271 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) ASSETS Total assets for reportable segments............... $ 354,683 Elimination of intercompany receivables............ (211,532) ---------- Total consolidated assets.................. $ 143,152 ========== 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) ========== F-23 272 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) ASSETS Total assets for reportable segments............... $ 225,266 Elimination of intercompany receivables............ (105,137) ---------- Total consolidated assets.................. $ 120,129 ========== 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: SIX MONTHS ENDED MARCH 31, YEARS ENDED SEPTEMBER 30, --------------- --------------------------- 1999 2000 1999 1998 1997 ------ ------ ------- ------- ------- (UNAUDITED) (IN MILLIONS) REVENUE BY REGIONS: United States................................. $144.3 $171.5 $330.0 $318.1 $287.4 North America (other)......................... 3.1 4.3 7.5 3.7 4.3 ------ ------ ------ ------ ------ North America total........................... 147.4 175.8 337.5 321.8 291.7 Pacific Rim................................... 29.6 25.8 55.6 58.4 24.4 Europe........................................ 13.8 90.0 28.5 18.7 15.6 ------ ------ ------ ------ ------ Total............................... $190.8 $291.6 $421.6 $398.9 $331.7 ====== ====== ====== ====== ====== F-24 273 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) SIX MONTHS ENDED MARCH 31, YEARS ENDED SEPTEMBER 30, --------------- --------------------------- 1999 2000 1999 1998 1997 ------ ------ ------- ------- ------- (UNAUDITED) (IN MILLIONS) REVENUE BY CUSTOMERS: Carrier....................................... 85.9 $116.8 $186.9 $166.1 $163.3 Residential................................... 75.9 124.6 185.3 161.1 116.9 Operator Services............................. 12.9 6.7 22.9 41.1 28.7 Commercial.................................... 16.1 43.5 26.5 30.6 22.8 ------ ------ ------ ------ ------ Total............................... $190.8 $291.6 $421.6 $398.9 $331.7 ====== ====== ====== ====== ====== 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 F-25 274 COMMUNICATIONS TELESYSTEMS INTERNATIONAL WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO MARCH 31, 2000 AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED) 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. Total payments totaling monthly of which $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-26 275 ANNEX A AGREEMENT AND PLAN OF MERGER AMONG WORLD ACCESS, INC. STAR TELECOMMUNICATIONS, INC. AND STI MERGER CO. 276 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-1 277 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-2 278 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-3 279 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-4 280 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-5 281 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-6 282 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-7 283 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-8 284 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-9 285 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-10 286 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-11 287 (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-12 288 (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-13 289 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-14 290 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-15 291 (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-16 292 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-17 293 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-18 294 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-19 295 (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-20 296 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-21 297 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-22 298 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-23 299 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-24 300 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-25 301 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-26 302 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-27 303 (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-28 304 (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-29 305 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-30 306 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-31 307 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-32 308 (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-33 309 (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-34 310 (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-35 311 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-36 312 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-37 313 ANNEX B AGREEMENT AND PLAN OF MERGER AMONG WORLD ACCESS, INC. COMMUNICATION TELESYSTEMS INTERNATIONAL D/B/A WORLDXCHANGE COMMUNICATIONS 314 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-1 315 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-2 316 (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-3 317 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-4 318 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-5 319 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-6 320 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-7 321 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-8 322 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-9 323 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-10 324 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-11 325 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-12 326 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-13 327 (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-14 328 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-15 329 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-16 330 (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-17 331 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-18 332 (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-19 333 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-20 334 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-21 335 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-22 336 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-23 337 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-24 338 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-25 339 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-26 340 (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-27 341 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-28 342 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-29 343 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-30 344 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-31 345 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-32 346 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-33 347 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-34 348 (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-35 349 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-36 350 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-37 351 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-38 352 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-39 353 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-40 354 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-41 355 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-42 356 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-43 357 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-44 358 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-45 359 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-46 360 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 361 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 ("DLJ"), 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. DLJ has performed investment banking and other services for the Company in the past and has been compensated for such services. DLJ 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. DLJ 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, DLJ 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-2 362 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 363 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 ("DLJ"), 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. DLJ has performed investment banking and other services for the Company in the past and has been compensated for such services. DLJ 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. DLJ is currently acting as financial advisor to the Company in connection with its proposed acquisition of STAR Telecommunications, Inc. Further, DLJ 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-2 364 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-1 365 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, and for the use and benefit of, 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-2 366 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. E-3 367 ANNEX F [Name of PT-1 acquiror] March 29, 2000 Star Telecommunications, Inc. 223 E. De La Guerra Street Santa Barbara, California 93101 Ladies and Gentlemen: This letter of intent (the "Letter") sets forth our binding agreement with respect to the acquisition by [PT-1 acquiror] or one of its affiliates ("[PT-1 acquiror]") from Star Telecommunications, Inc. or one of its affiliates (the "Seller", and together with [PT-1 acquiror], the "Parties") of all of the assets relating to or used in connection with the debit card and dial-around businesses (the "Businesses") operated by the Seller's wholly-owned subsidiary PT-1 Communications, Inc. (together with any subsidiaries thereof, "PT-1"). The assets acquired by [PT-1 acquiror] hereunder are referred to as the "Assets". 1. Terms. [PT-1 acquiror] will pay to the Seller at the closing of the transactions contemplated hereby (the "Closing") a purchase price of $150,000,000 in cash (the "Purchase Price") in exchange for the Seller transferring to [PT-1 acquiror] the Assets, including, without limitation, all cash, cash equivalents, accounts receivable and other line item asset categories (except for deferred tax assets) in respect of the Assets set forth on the Balance Sheet (as defined below) and for the period of PT-1's operation from December 31, 1999 through Closing; provided that the Purchase Price shall be adjusted upward or downward to the extent at Closing the net value of the Assets (i.e., total Assets (not including any deferred tax asset) less Assumed Liabilities (as defined below) as set forth on an audited balance sheet of PT-1 to be delivered by the accounting firm of Arthur Andersen as soon as practicable following Closing, and subject to [PT-1 acquiror's] right to dispute the accuracy of such audited balance sheet) is greater than or less than $37,223,490 (i.e., the net value thereof set forth on the Balance Sheet as of December 31, 1999); and provided further that if the Seller is able, or is reasonably determined by an independent third party jointly selected by the Parties to be able, to utilize any benefit from its deferred tax asset set forth on the Balance Sheet, the Purchase Price shall be reduced by an amount equal to 50% of such benefit (or if such benefit is determined to be realizable after the Closing, the Seller shall promptly pay such amount to [PT-1 acquiror] in cash). At Closing [PT-1 acquiror] will assume only liabilities of PT-1 in respect of the following line items on the Balance Sheet: (i) Accounts payable and accrued expenses; (ii) Accrued taxes payable; (iii) Short-Term debt; (iv) Deferred Revenue; and (v) Long-term debt (the "Assumed Liabilities"). All pre-Closing liabilities other than the Assumed Liabilities will remain obligations of the Seller. 2. Financial Information. The Seller represents and warrants to [PT-1 acquiror] that (a) the balance sheet of PT-1 attached as Exhibit A as of December 31, 1999 (the "Balance Sheet") and the income statement of PT-1 for the year ended December 31, 1999 are true and accurate, have been prepared from the books and records of PT-1 in accordance with United States generally accepted accounting principles ("GAAP") consistently applied and fairly present in all material respects the financial condition of PT-1, (b) the Balance Sheet shows all material liabilities, absolute or contingent, of PT-1 required to be recorded thereon, (c) the assets shown on the Balance Sheet consist only of the Assets and (d) since the date of the Balance Sheet, (i) PT-1 has incurred no liabilities or obligations other than liabilities or obligations incurred in the ordinary course of business, consistent with the past practices of PT-1 and which do not and could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of PT-1, the Assets or the Businesses (a "Material Adverse Effect"), (ii) there has been no Material Adverse Effect and (iii) there has not occurred any other event, circumstance or condition that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. F-1 368 3. Negotiation of Definitive Agreements; Exclusivity. (a) Good Faith. The Parties will proceed diligently and in good faith to negotiate, execute and deliver definitive agreements (including, without limitation, an asset purchase agreement, employment agreements with key executives, a shared network services agreement, and other necessary or desirable services agreements (collectively, the "Agreements")), the present intent of the Parties being to deliver such Agreements by April 21, 2000 (provided that the failure to so deliver the Agreements by such date shall not constitute a breach of this Letter), subject in all respects to the approval of the Parties, verification of legal and factual issues deemed relevant to the Parties and receipt of requisite regulatory and other approvals or consents. The Seller shall make all reasonable efforts (i) to assist [PT-1 acquiror] in identifying key executives of the Seller and PT-1, and recruiting such key employees and other officers and employees of the Seller and PT-1 identified by [PT-1 acquiror] for employment by the entity operating the Businesses following the Closing and (ii) to facilitate conversations and meetings between [PT-1 acquiror] and World Access, Inc. ("WAI") with a view to securing for [PT-1 acquiror] a right of first refusal for the purchase of any business competitive with the Businesses that is owned and offered for sale by WAI at any time after the date hereof. (b) Terms of the Agreements. The Agreements will contain, among other things, representations and warranties, covenants, conditions and indemnification provisions appropriate for such agreements; provided that (i) the representations and warranties of the Seller will survive the Closing for two years (other than those in respect of tax matters, which will survive the Closing until the expiration of the applicable statute of limitations); (ii) the Parties will proceed diligently and in good faith to file all documents necessary to satisfy any applicable waiting period under the Hart-Scott-Rodino Act; (iii) the Seller will obtain all material third-party consents to the transactions contemplated hereby prior to Closing (which condition may be waived by [PT-1 acquiror] in its absolute discretion); (iv) the Seller will represent and warrant (and hereby represents and warrants) that the accounts receivable of PT-1 shown on the Balance Sheet and any more recent financial statements furnished to [PT-1 acquiror] are valid, genuine and fully collectible, and adequate reserves have been provided therefor under GAAP; and (v) the Seller shall use its reasonable commercial efforts to identify, with [PT-1 acquiror], and to cause certain of the Seller's key executives to enter into exclusive employment agreements with [PT-1 acquiror], or to agree to not, directly or indirectly, engage in any business competitive with the Businesses and [PT-1 acquiror], and the Seller will not, and shall use its reasonable commercial efforts to cause such key executives to not, solicit or hire away any of the employees of [PT-1 acquiror] or its affiliates, in the case of each of the foregoing for a period of three years following the Closing. Promptly following the execution of this Letter, Christopher Edgecomb, the Chief Executive Officer of the Seller, shall deliver his agreement, in his capacity as a shareholder, to at all times vote his shares of the Seller in favor of the transactions contemplated hereby. (c) No Other Arrangements. None of the Seller or its affiliates, officers, directors, employees or other agents shall (i) directly or indirectly, solicit, discuss or encourage the making of any inquiry, offer or proposal which constitutes or is reasonably likely to lead to any Transaction Proposal (as defined below); or (ii) accept or entertain an offer by any person, other than [PT-1 acquiror], or enter into discussions with, or provide information to any person, other than [PT-1 acquiror], concerning any Transaction Proposal. The Seller agrees that it will promptly notify [PT-1 acquiror] after receipt of any Transaction Proposal of the material terms thereof and any ongoing developments with respect thereto. For purposes of this Letter, "Transaction Proposal" shall mean any proposal or offer to acquire an equity interest in, or a substantial portion of, PT-1, the Businesses or the Assets, whether by merger, sale of equity interests, asset purchase or other transaction, other than pursuant to the transactions contemplated by this Letter. 4. Due Diligence; Access. The transactions contemplated herein are subject to the completion by [PT-1 acquiror] of a due diligence review of PT-1, the Businesses and the Assets satisfactory to [PT-1 acquiror] in its absolute discretion. [PT-1 acquiror] will have the right to, and Seller shall provide to [PT-1 acquiror], reasonable access during normal business hours to the facilities, personnel, records, contracts and other documents of F-2 369 PT-1, including, without limitation, information related to financial, accounting, commercial, legal, environmental, regulatory and employee benefits matters as reasonably requested and necessary to complete such review. Any investigation pursuant to this Section shall be conducted so as not to interfere unreasonably with the conduct of the business of PT-1. 5. Confidentiality; Public Announcements. The Parties agree (i) not to disclose (and to cause their affiliates and their directors, officers, employers and agents not to disclose) to any third party (other than to WAI and to directors, officers, employers and agents on a need to know basis) any matters in respect of this Letter, and (ii) not to make any announcement regarding the transactions contemplated hereby without the prior written consent of the other Party. 6. Closing Date; Interim Operations. The parties shall proceed diligently and in good faith to complete the Closing (including by completing and facilitating the completion of all pre-Closing actions required or contemplated hereby) by the earlier of (i) the closing of the acquisition of the Seller by WAI or (ii) June 30, 2000. At all times prior to the Closing of the transactions contemplated hereby, the Seller shall, and shall cause PT-1 to, conduct the business and operations of PT-1 in the ordinary course consistent with past practice. 7. Miscellaneous. (a) Injunctive Relief; Liquidated Damages. Each Party acknowledges and agrees that the other Party would be irreparably damaged in the event that any of the terms of this Letter are not performed in accordance with their specific terms or are otherwise breached. Accordingly, each Party agrees that the other party shall be entitled to an injunction, specific performance or other equitable relief to prevent breaches of the terms of this Letter and to enforce specifically such terms in addition to any other remedies to which the Parties may be entitled, at law or in equity. Without limiting the foregoing, each Party agrees to indemnify and hold harmless the other Party (the "Indemnified Party") with respect to any losses or damages suffered by the Indemnified Party arising out of any breach of the terms of this Letter; provided that in addition to and not in limitation of the foregoing indemnity and the other remedies available to [PT-1 acquiror], and in order to induce [PT-1 acquiror] to enter into this Letter, the Seller hereby agrees that in the event that the Seller fails or refuses to consummate the transactions contemplated hereby with [PT-1 acquiror] for any reason (other than (i) the failure to obtain necessary regulatory approval for the transactions contemplated hereby, (ii) the failure of a majority of the Seller's shareholders entitled to vote to approve the transactions contemplated hereby (provided that if within 12 months of such failure to approve the Assets or PT-1 are directly or indirectly sold to a third party other than [PT-1 acquiror], the exclusion contained in this clause (ii) shall not apply), (iii) [PT-1 acquiror's] breach of the material terms and conditions of the Agreements, or (iv) the mutual written consent of the Parties), the Seller shall promptly upon demand pay to [PT-1 acquiror] $5,850,000 in cash as liquidated damages (the "Liquidated Damages Amount"). The Seller hereby acknowledges that the Liquidated Damages Amount is reasonable and not punitive in nature. (b) Authorization. Each Party represents and warrants to the other Party that this Letter has been duly authorized by such Party and constitutes its valid and binding agreement. (c) Governing Law. This Letter shall be governed by the laws of the State of New York without regard to the conflicts of law principles thereof and shall be enforceable in the state and federal courts of the State of New York, to which exclusive jurisdiction the Parties hereby submit. (d) Counterparts. This Letter may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same document. (e) Assignment. This Letter may not be assigned by any party hereto without the prior written consent of the other Party hereto. F-3 370 In this Letter accurately describes our agreement with respect to the foregoing, please so indicate by executing and returning the enclosed copy of this Letter, whereupon it will become a binding agreement between us. Very truly yours, [PT-1 acquiror] By -------------------------------------- Accepted and agreed to as of the date first above written: STAR TELECOMMUNICATIONS, INC. By - ------------------------------------------------------ F-4 371 ANNEX G 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. G-1 372 (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 G-2 373 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 G-3 374 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. G-4 375 ANNEX H 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 H-1 376 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 H-2 377 (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. H-3 378 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 H-4 379 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. H-5 380 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-1 381 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). 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). 3.7 -- 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. II-2 382 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 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. 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. 8.2* -- Opinion of O'Melveny & Myers LLP regarding certain tax matters. 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). II-3 383 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 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). 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). II-4 384 EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ---------------------- 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). 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* -- Services Agreement dated as of February 14, 2000 by and between World Access, Inc. and Communication TeleSystems International d/b/a WORLDxCHANGE Communications. 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). 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. II-5 385 (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. ITEM 22. UNDERTAKINGS (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. (2) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes 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) 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. (4) The undersigned registrant hereby undertakes 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. (5) The undersigned registrant hereby undertakes 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-6 386 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on May 23, 2000. WORLD ACCESS, INC. By: /s/ JOHN D. PHILLIPS ------------------------------------ John D. Phillips Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints John D. Phillips and Mark A. Gergel, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated as of May 23, 2000. SIGNATURES TITLE ---------- ----- /s/ JOHN D. PHILLIPS Chairman and Chief Executive Officer (Principal - --------------------------------------------------- Executive Officer) John D. Phillips /s/ MARK A. GERGEL Executive Vice President and Chief Financial - --------------------------------------------------- Officer (Principal Financial Officer) Mark A. Gergel /s/ MARTIN D. KIDDER Vice President and Corporate Controller - --------------------------------------------------- (Principal Accounting Officer) Martin D. Kidder /s/ WALTER J. BURMEISTER President and Director - --------------------------------------------------- Walter J. Burmeister /s/ KIRBY J. CAMPBELL Director - --------------------------------------------------- Kirby J. Campbell /s/ BRYAN CIPOLETTI Director - --------------------------------------------------- Bryan Cipoletti /s/ STEPHEN J. CLEARMAN Director - --------------------------------------------------- Stephen J. Clearman /s/ JOHN P. IMLAY, JR. Director - --------------------------------------------------- John P. Imlay, Jr. /s/ MASSIMO PRELZ OLTRAMONTI Director - --------------------------------------------------- Massimo Prelz Oltramonti II-7 387 SIGNATURES TITLE ---------- ----- /s/ JOHN P. RIGAS Director - --------------------------------------------------- John P. Rigas /s/ CARL E. SANDERS Director - --------------------------------------------------- Carl E. Sanders /s/ DRU A. SEDWICK Director - --------------------------------------------------- Dru A. Sedwick /s/ LAWRENCE C. TUCKER Director - --------------------------------------------------- Lawrence C. Tucker II-8