1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- WORLD ACCESS, INC. (Exact name of Registrant as specified in its charter) --------------------- DELAWARE 58-2398004 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 945 EAST PACES FERRY ROAD SUITE 2200 ATLANTA, GEORGIA 30326 (404) 231-2025 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------------- BRYAN D. YOKLEY EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER WORLD ACCESS, INC. 945 EAST 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: From time to time after the Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(c) 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. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF SHARES TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(1) - --------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value per share............................ 14,722,340 3.094 45,550,919.96 12,025.45 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- (1) Pursuant to Rule 457(c), the proposed offering price and registration fee are based upon the average of the high and low prices of the Registrant's common stock as reported on the Nasdaq National Market on December 14, 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 SUBJECT TO COMPLETION, DATED DECEMBER 18, 2000. PROSPECTUS (WORLD ACCESS LOGO) WORLD ACCESS, INC. Shares of World Access, Inc. Common Stock --------------------- TERMS OF SALE This prospectus relates to the resale by their holders of shares of common stock of World Access, Inc. The common stock is listed on the Nasdaq National Market under the trading symbol "WAXS." On December 14, 2000, the last reported sale price of the common stock on the Nasdaq National Market was $3.00 per share. The principal executive offices of World Access are located at 945 East Paces Ferry Road, Suite 2200, Atlanta, Georgia 30326, and its telephone number is (404) 231-2025. --------------------- THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- The date of this prospectus is December , 2000. 3 TABLE OF CONTENTS PAGE ---- Description of World Access, Inc............................ 3 Securities Offered.......................................... 3 Forward-Looking Statements.................................. 3 Use of Proceeds............................................. 3 Unaudited Pro Forma Condensed Combined Financial Statements................................................ 4 Selling Security Holders.................................... 49 Plan of Distribution........................................ 51 Legal Matters............................................... 52 Experts..................................................... 52 Where You Can Find More Information......................... 53 Incorporation of Certain Documents By Reference............. 54 2 4 DESCRIPTION OF WORLD ACCESS, INC. World Access transports international long distance voice, data and Internet traffic primarily for long distance carriers and local phone companies operating in the United States and Europe. These services are provided through a combination of its own network facilities and agreements with other carriers to terminate traffic in regions of the world where World Access does not have its own network. Through the acquisition of FaciliCom International in December 1999 and NETnet International in February 2000, World Access has expanded its service offerings to include the sale of bundled voice, data and Internet services directly to small and medium sized businesses located throughout Western Europe. In 1999, World Access adopted a strategy designed to build on its U.S.-based carrier service business and position itself to become a significant provider of bundled voice, data and Internet services to retail business customers located in selected European countries. World Access believes that the European telecommunications market has become extremely fragmented in recent years due primarily to deregulation and significant forecasted growth. As a result, World Access expects that a significant consolidation of carriers operating in Europe will occur in the next few years, not unlike that which occurred in the United States telecommunications market during the late 1980's and 1990's. The strategy of World Access is to establish a pan-European telecommunications network and gain significant market share during this period as a consolidator in this market. To execute its strategy, World Access intends to aggressively pursue the acquisition of businesses, with a particular emphasis on those that provide retail services to small and medium sized businesses operating in Europe. SECURITIES OFFERED This prospectus relates to 14,722,340 shares of common stock of World Access offered for resale for the account of holders of common stock. The common stock trades on the Nasdaq National Market under the symbol "WAXS." FORWARD-LOOKING STATEMENTS This prospectus and the documents incorporated by reference in this prospectus contain certain information regarding our financial projections, plans and strategies that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this 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 our assessment of a number of risks and uncertainties, and our actual results could differ materially from the results anticipated in these forward-looking statements. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation, actual future financial results differing materially from financial projections, potential inability to identify, complete and integrate acquisitions, difficulties in expanding into new business activities, delays in new service offerings, the potential termination of certain service agreements or the inability to enter into additional service agreements and the other issues discussed in the Risk Factors sections incorporated into this prospectus by reference. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. USE OF PROCEEDS We will not receive any proceeds from the sale of the securities offered by this prospectus. All proceeds will be payable solely to the selling security holders, less any compensation payable by the selling security holders to broker dealers in the form of commissions or otherwise. 3 5 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The Unaudited Pro Forma Condensed Combined Financial Statements of World Access give effect to the following different scenarios that World Access currently contemplates in connection with the STAR and WorldxChange mergers and the TelDaFax transactions. Because World Access and WorldxChange each has received irrevocable proxies to vote in favor of the WorldxChange merger from the holders of at least a majority of voting stock and, to the extent permitted by law, World Access has assumed management of the business and affairs of WorldxChange effective August 1, 2000 pursuant to a management services agreement, it is highly likely that the stockholders of World Access and WorldxChange will approve the WorldxChange merger. In addition, although World Access solely controls whether to terminate the merger agreement or to take some action giving WorldxChange the right to terminate the merger agreement, it is unlikely that World Access will take any of these actions because of the significant integration of World Access' and WorldxChanges' operations that has occurred since August 1, 2000 and the significant financial obligations World Access has assumed under the management services agreement. Accordingly, the scenarios described below each contemplate that World Access has acquired WorldxChange. Scenario 1: World Access acquires STAR, WorldxChange and TelDaFax. Scenario 2: World Access acquires STAR and WorldxChange. Scenario 3: World Access acquires WorldxChange and TelDaFax. Scenario 4: World Access acquires WorldxChange. The Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1999 also give effect to: - the FaciliCom acquisition; - the Comm/Net acquisition; - the LDI acquisition; and - the acquisition of 33.03% of TelDaFax as if each of the acquisitions had occurred on January 1, 1999. The Unaudited Pro Forma Condensed Combined Balance Sheets as of September 30, 2000 under all four scenarios gives effect to the STAR, WorldxChange and TelDaFax acquisitions as if each acquisition had occurred on September 30, 2000. The Unaudited Pro Forma Condensed Combined Statements of Operations for the nine months ended September 30, 2000 under all four scenarios also give effect to the LDI acquisition and the acquisition of 33.03% of TelDaFax as if the acquisitions had occurred on January 1, 1999. On June 14, 2000, World Access entered into a definitive agreement pursuant to which it agreed to acquire all of or a majority share in TelDaFax in a series of transactions. TelDaFax is a facilities-based provider of bundled fixed line, wireless, Internet and e-Commerce services to business and residential customers in Germany. On September 21, 2000, World Access acquired a 33.03% interest in TelDaFax held by the Apax funds by issuing World Access common stock at an exchange ratio of 1.025 shares of World Access for each share of TelDaFax. World Access intends to make a tender offer for all of the remaining shares of TelDaFax at an exchange ratio of 1.16. Under the TelDaFax purchase agreement all TelDaFax shares to be acquired were to be exchanged at the exchange ratio of 1.025. On December 5, 2000, World Access increased the exchange ratio to 1.16 in order to comply with the German Takeover Code. TelDaFax shares to be acquired from Dr. Klose and A+M will be exchanged at 1.025, as Dr. Klose and A+M waived their rights under the TelDaFax purchase agreement to receive additional shares under the new exchange ratio. The Apax funds also waived their rights under the TelDaFax purchase agreement to receive additional shares under the new exchange ratio. World Access also expects to contribute certain of its German businesses to TelDaFax in exchange for newly issued TelDaFax shares. The completion of the tender offer and the contribution of the German businesses is subject to acquisitions by World Access in the transactions of no less than 50.1% of the fully diluted shares outstanding of TelDaFax on a pro forma basis, regulatory approvals, including antitrust approval in 4 6 Germany, and the approval of the stockholders of World Access. The closing of the tender offer and the contribution will occur simultaneously. The transactions are anticipated to close in January 2001. Concurrent with the transactions, World Access intends to apply for listing on one or more European stock exchanges, including the Neuer Markt in Germany. The pro forma adjustments are based upon currently available information and upon assumptions that the management of World Access believes are reasonable. Each of the acquisition transactions above has been accounted for using the purchase method of accounting. The adjustments recorded in the Unaudited Pro Forma Condensed Combined Financial Statements represent the preliminary determination of these adjustments based upon available information. The total estimated purchase price of each transaction has been allocated on a preliminary basis to assets and liabilities based on management's estimate of their fair values. There can be no assurance that the actual adjustments will not differ significantly from the pro forma adjustments reflected in the Unaudited Pro Forma Condensed Combined Financial Statements. On a combined basis, the networks and operations of all three companies contain redundant switching equipment, facilities and personnel. World Access plans to eliminate these redundant assets and significantly reduce the headcount of the combined company in an effort to realize cost synergies. Implementing this process includes the write-down of switching and transmission equipment taken out of service, the write-off of certain leasehold improvements, establishing provisions for lease commitments remaining on certain facilities with no future use, employee termination benefits and other related costs. To the extent that these items relate to World Access facilities and personnel, World Access will record a restructuring charge in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of. All other costs relate to facilities and personnel of the acquired enterprises, and, accordingly, will be treated as purchase price in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. Management expects to implement the process prior to or shortly after consummation of each transaction and anticipates completion within six months after implementation. In connection with the Executive Services Management Contract entered into by World Access and WorldxChange on August 1, 2000, World Access management committed to such a consolidation plan. Pursuant to this agreement, World Access began managing the operations and business affairs of WorldxChange as if the WorldxChange merger had occurred as of August 1, 2000. The costs of this restructuring plan was $38.3 million and has been recorded as a restructuring charge by World Access in the third quarter of 2000. Consolidation plans remain under development for the STAR and TelDaFax integrations. Such plans indicate that consolidation activities associated with the STAR transactions will not materially involve World Access facilities or personnel; however, consolidation plans related to TelDaFax transaction are too preliminary to estimate an impact. During the third quarter of 2000, World Access has incurred approximately $35.0 million in additional selling, general and administrative expenses. The major categories of such costs include costs associated with billing system migration issues, re-branding efforts and increases in reserves for doubtful accounts. The first two items relate to the WorldxChange integration. The third item is unrelated to any purchase transactions, but rather results from significant shifts in credit policies applied to existing customers. Management implemented substantially tighter credit policies as a result of market conditions in the telecom industry, particularly the inability of customers to obtain sources of working capital required to remain solvent. 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 5 7 consolidated financial statements of World Access, LDI, STAR, WorldxChange and TelDaFax and the related notes thereto. See "Incorporation of Documents by Reference" and "Available Information." As noted above, on August 1, 2000, World Access and WorldxChange entered into a management agreement. Generally, the agreement cannot be terminated by WorldxChange, but may be terminated by World Access. Additionally, the merger between WorldxChange and World Access will also cause the management agreement to terminate. See "Executive management services agreement with WorldxChange" for further discussion regarding the agreement. The agreement is being accounted for as a management services agreement. 6 8 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 2000 (IN THOUSANDS) PRO FORMA PRO FORMA WORLD ACCESS, WORLD STAR AND STAR ACCESS STAR(1) ADJUSTMENTS COMBINED ---------- --------- ------------- ------------- ASSETS Cash and equivalents(2(i)).................................. $ 164,600 $ 104,567 $ -- $ 269,167 Short-term investments...................................... 82,249 1,599 -- 83,848 Restricted cash............................................. 17,229 -- -- 17,229 Accounts and notes receivable............................... 226,411 118,499 -- 344,910 Prepaid expenses and other current assets................... 23,333 36,777 -- 60,110 Net assets held for sale.................................... 42,946 -- -- 42,946 ---------- --------- --------- ---------- Total Current Assets.................................. 556,768 261,442 -- 818,210 ---------- --------- --------- ---------- Property and equipment...................................... 130,618 245,142 (94,000)(2) 281,760 Goodwill and other intangibles.............................. 1,097,251 3,605 (1,764)(4) 1,306,793 257,393(2) 11,900(2) (61,592)(6) Investment in TelDaFax...................................... 64,242 -- -- 64,242 Net advances to WorldxChange................................ 54,650 54,650 Other assets................................................ 74,426 5,534 -- 79,960 ---------- --------- --------- ---------- Total Assets.......................................... $1,977,955 $ 515,723 $ 111,937 $2,605,615 ========== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt............................................. $ 60,017 $ 137,673 $ (85,330)(6) $ 112,360 Accounts payable............................................ 260,994 87,474 -- 348,468 Other accrued liabilities................................... 167,303 116,581 3,000(2) 282,214 (4,670)(6) ---------- --------- --------- ---------- Total Current Liabilities............................. 488,314 341,728 (87,000) 743,042 Long-term debt.............................................. 247,151 34,462 -- 281,613 Other long-term liabilities................................. 3,789 22,076 -- 25,865 ---------- --------- --------- ---------- Total Liabilities..................................... 739,254 398,266 (87,000) 1,050,520 ---------- --------- --------- ---------- Minority Interests.......................................... Stockholders' Equity (Deficit): Preferred Stock............................................. 6 -- -- 6 Common stock................................................ 732 58 (58)(5) 1,037 227(2) 78(6) Additional paid in capital.................................. 1,539,915 366,309 (366,309)(5) 1,856,004 279,620(2) 8,139(2) 28,330(6) Deferred compensation....................................... -- (1,224) 1,224(5) -- Notes receivable from shareholders.......................... -- (3,928) 3,928(5) -- Accumulated other comprehensive loss........................ (22,671) (10,077) 10,077(5) (22,671) Accumulated deficit......................................... (279,281) (233,681) 233,681(5) (279,281) ---------- --------- --------- ---------- Total Stockholders' Equity (Deficit).................. 1,238,701 117,457 198,937 1,555,095 ---------- --------- --------- ---------- Total Liabilities and Stockholders.................... $1,977,955 $ 515,723 $ 111,937 $2,605,615 ========== ========= ========= ========== PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE WORLDXCHANGE WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ------------- ------------- ASSET ASSETS Cash and equivalents(2(i)).................................. $ 12,123 $ -- $ 281,290 Short-term investments...................................... -- -- 83,848 Restricted cash............................................. -- -- 17,229 Accounts and notes receivable............................... 133,198 (2,201)(17) 517,513 41,606(11) Prepaid expenses and other current assets................... 11,331 -- 71,441 Net assets held for sale.................................... -- -- 42,946 --------- --------- ---------- Total Current Assets.................................. 156,652 39,405 1,014,267 --------- --------- ---------- Property and equipment...................................... 193,257 (6,500)(11) 415,517 (68,000)(11) 15,000(11) Goodwill and other intangibles.............................. 88,208 (76,327)(13) 1,936,844 593,978(11) 41,300(11) (17,108)(15) Investment in TelDaFax...................................... -- -- 64,242 Net advances to WorldxChange................................ (54,650)(11) -- Other assets................................................ 3,464 -- 83,424 --------- --------- ---------- Total Assets.......................................... $ 441,581 $ 467,098 $3,514,294 ========= ========= ========== LIABILITIES AND STOC LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt............................................. $ 204,219 $ (2,201)(17) $ 264,606 (14,040)(15) (35,732)(11) Accounts payable............................................ 103,989 (10,960)(15) 464,185 22,688(11) Other accrued liabilities................................... 208,884 3,000(11) 494,098 --------- --------- ---------- Total Current Liabilities............................. 517,092 (37,245) 1,222,889 Long-term debt.............................................. 63,082 -- 344,695 Other long-term liabilities................................. 3,162 -- 29,027 --------- --------- ---------- Total Liabilities..................................... 583,336 (37,245) 1,596,611 --------- --------- ---------- Minority Interests.......................................... Stockholders' Equity (Deficit): Preferred Stock............................................. 30,000 (30,000)(14) 6 Common stock................................................ 148,056 (148,056)(14) 1,357 298(11) 22(15) Additional paid in capital.................................. -- 336,686(11) 2,218,272 17,712(11) 7,870(15) Deferred compensation....................................... -- -- -- Notes receivable from shareholders.......................... (1,988) 1,988(14) -- Accumulated other comprehensive loss........................ (14,243) 14,243(14) (22,671) Accumulated deficit......................................... (303,580) 303,580(14) (279,281) --------- --------- ---------- Total Stockholders' Equity (Deficit).................. (141,755) 504,343 1,917,683 --------- --------- ---------- Total Liabilities and Stockholders.................... $ 441,581 $ 467,098 $3,514,294 ========= ========= ========== PRO FORMA WORLD ACCESS, STAR, WORLDXCHANGE TELDAFAX AND TELDAFAX TELDAFAX(20) ADJUSTMENTS COMBINED ------------ ------------ ------------------ ASSET Cash and equivalents(2(i)).................................. $ 18,115 $ -- $ 299,405 Short-term investments...................................... -- -- 83,848 Restricted cash............................................. -- -- 17,229 Accounts and notes receivable............................... 33,707 -- 551,220 Prepaid expenses and other current assets................... 21,581 -- 93,022 Net assets held for sale.................................... -- -- 42,946 -------- -------- ---------- Total Current Assets.................................. 73,403 -- 1,087,670 -------- -------- ---------- Property and equipment...................................... 57,144 (24,000)(21) 448,661 Goodwill and other intangibles.............................. 14,080 (10,900)(23) 2,051,338 78,314(21) 33,000(21) Investment in TelDaFax...................................... -- (64,242)(21) -- Net advances to WorldxChange................................ -- Other assets................................................ 15,066 -- 98,490 -------- -------- ---------- Total Assets.......................................... $159,693 $ 12,172 $3,686,159 ======== ======== ========== LIABILITIES AND STOC Short-term debt............................................. $ 6,983 $ -- $ 271,589 Accounts payable............................................ 56,738 -- 520,923 Other accrued liabilities................................... 9,374 5,000(21) 508,472 -- -------- -------- ---------- Total Current Liabilities............................. 73,095 5,000 1,300,984 -- Long-term debt.............................................. 16,206 -- 360,901 Other long-term liabilities................................. 314 -- 29,341 -------- -------- ---------- Total Liabilities..................................... 89,615 5,000 1,691,226 -------- -------- ---------- Minority Interests.......................................... 685 -- 685 Stockholders' Equity (Deficit): Preferred Stock............................................. -- -- 6 Common stock................................................ 77,359 (77,359)(24) 1,616 259(21) Additional paid in capital.................................. 7,099 (7,099)(24) 2,294,371 76,099(21) Deferred compensation....................................... -- -- -- Notes receivable from shareholders.......................... -- -- -- Accumulated other comprehensive loss........................ (343) 343(24) (22,671) Accumulated deficit......................................... (14,722) 14,722(24) (279,074) 207(24) -------- -------- ---------- Total Stockholders' Equity (Deficit).................. 69,393 7,172 1,994,248 -------- -------- ---------- Total Liabilities and Stockholders.................... $159,693 $ 12,172 $3,686,159 ======== ======== ========== 7 9 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED ---------------- -------- ----------- ------------ Service revenues....................... $ 835,339 $347,188 $(61,839)(7) $1,120,688 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)..................... 735,085 308,532 (61,839)(7) 981,778 Selling, general and administrative.... 125,497 60,977 186,474 Depreciation and amortization.......... 62,788 27,969 9,424(3) 86,508 (10,072)(3) 1,785(3) (5,386)(6) Expense under WorldxChange management agreement............................. 22,688 -- -- 22,688 Restructuring and other special charges............................... 34,326 -- -- 34,326 --------- -------- -------- ---------- Total operating expenses......... 980,384 397,478 (66,088) 1,311,774 --------- -------- -------- ---------- Operating loss................... (145,045) (50,290) 4,249 (191,086) Reimbursement from World Access of net loss under management agreement....... -- -- -- -- Interest and other income.............. 25,642 7,791 -- 33,433 Interest and other expense............. (43,688) (13,153) 1,223(6) (55,618) Loss on investment in TelDaFax......... (4,853) -- -- (4,853) Foreign exchange loss.................. (469) -- -- (469) --------- -------- -------- ---------- Loss from continuing operations before income taxes and minority interests....................... (168,413) (55,652) 5,472 (218,593) Provision (benefit) for income taxes... (18,005) (11,645) 3,899(8) (25,751) --------- -------- -------- ---------- Loss from continuing operations before minority interest........ (150,408) (44,007) 1,573 (192,842) Minority interest...................... -- -- -- -- --------- -------- -------- ---------- Loss from continuing operations...................... (150,408) (44,007) 1,573 (192,842) Preferred stock dividends.............. (1,907) -- -- (1,907) --------- -------- -------- ---------- Loss from continuing operations available to common stockholders.................... $(152,315) $(44,007) $ 1,573 $ (194,749) ========= ======== ======== ========== Loss per common share from continuing operations: Basic............................... $ (2.57) ========= Diluted............................. $ (2.57) ========= Weighted average shares outstanding: Basic............................... 59,199 ========= Diluted............................. 59,199 ========= PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE WORLDXCHANGE WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ------------ ------------- Service revenues....................... $ 381,115 $(79,032)(16) $1,422,771 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)..................... 321,228 (79,032)(16) 1,223,974 Selling, general and administrative.... 129,284 315,758 Depreciation and amortization.......... 38,825 16,251(12) 141,755 (4,958)(12) 6,195(12) (1,066)(15) Expense under WorldxChange management agreement............................. -- (22,688)(11) -- Restructuring and other special charges............................... -- -- 34,326 --------- -------- ---------- Total operating expenses......... 489,337 (85,298) 1,715,813 --------- -------- ---------- Operating loss................... (108,222) 6,266 (293,042) Reimbursement from World Access of net loss under management agreement....... 22,688 (22,688)(11) -- Interest and other income.............. -- -- 33,433 Interest and other expense............. (26,700) 901(15) (81,417) Loss on investment in TelDaFax......... -- -- (4,853) Foreign exchange loss.................. -- -- (469) --------- -------- ---------- Loss from continuing operations before income taxes and minority interests....................... (112,234) (15,521) (346,348) Provision (benefit) for income taxes... -- (138)(18) (25,889) --------- -------- ---------- Loss from continuing operations before minority interest........ (112,234) (15,383) (320,459) Minority interest...................... -- -- -- --------- -------- ---------- Loss from continuing operations...................... (112,234) (15,383) (320,459) Preferred stock dividends.............. (1,898) (3,805) --------- -------- ---------- Loss from continuing operations available to common stockholders.................... $(114,132) $(15,383) $ (324,264) ========= ======== ========== Loss per common share from continuing operations: Basic............................... Diluted............................. Weighted average shares outstanding: Basic............................... Diluted............................. PRO FORMA WORLD ACCESS, STAR, TELDAFAX WORLDXCHANGE AND TELDAFAX(20) ADJUSTMENTS TELDAFAX COMBINED ------------ ----------- ---------------------- Service revenues....................... $224,297 $(3,169)(25) $1,643,899 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)..................... 181,588 (3,169)(25) 1,402,393 Selling, general and administrative.... 50,866 -- 366,624 Depreciation and amortization.......... 18,012 1,202(22) 162,319 (3,600)(22) 4,950(22) Expense under WorldxChange management agreement............................. -- -- -- Restructuring and other special charges............................... -- -- 34,326 -------- ------- ---------- Total operating expenses......... 250,466 (617) 1,965,662 -------- ------- ---------- Operating loss................... (26,169) (2,552) (321,763) Reimbursement from World Access of net loss under management agreement....... -- -- -- Interest and other income.............. 1,086 -- 34,519 Interest and other expense............. (1,141) (26,700) (82,558) Loss on investment in TelDaFax......... -- 4,853(21) -- Foreign exchange loss.................. -- -- (469) -------- ------- ---------- Loss from continuing operations before income taxes and minority interests....................... (26,224) 2,301 (370,271) Provision (benefit) for income taxes... (9,923) (554)(26) (36,366) -------- ------- ---------- Loss from continuing operations before minority interest........ (16,301) 2,855 (333,905) Minority interest...................... 980 -- 980 -------- ------- ---------- Loss from continuing operations...................... (15,321) 2,855 (332,925) Preferred stock dividends.............. -- -- (3,805) -------- ------- ---------- Loss from continuing operations available to common stockholders.................... $(15,321) $ 2,855 $ (336,730) ======== ======= ========== Loss per common share from continuing operations: Basic............................... $ (2.12)(9)(19)(27) ========== Diluted............................. $ (2.12)(9)(19)(27) ========== Weighted average shares outstanding: Basic............................... 159,066(9)(19)(27) ========== Diluted............................. 159,066(9)(19)(27) ========== 8 10 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA PRO FORMA WORLD ACCESS WORLD ACCESS STAR STAR AND STAR (28) (1) ADJUSTMENTS COMBINED ------------ -------- ----------- ------------ Service revenues.................. $1,019,553 $616,469 $(17,949)(7) $1,618,073 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)........ 903,325 537,895 (17,949)(7) 1,423,271 Selling, general and administrative................. 146,231 108,246 -- 254,477 Depreciation and amortization.... 97,517 29,635 4,335(3) 117,892 (13,429)(3) 2,380(3) (2,546)(6) Merger expense................... -- 1,867 -- 1,867 Restructuring and other special charges........................ 44,187 -- -- 44,187 ---------- -------- -------- ---------- Total operating expenses.... 1,191,260 677,643 (27,209) 1,841,694 ---------- -------- -------- ---------- Operating loss.............. (171,707) (61,174) 9,260 (223,621) Interest and other income......... 10,822 6,701 -- 17,523 Interest and other expense........ (58,208) (8,614) -- (66,822) Loss on investment in TelDaFax.... (990) -- -- (990) Foreign exchange loss............. (2,369) (3,471) -- (5,840) ---------- -------- -------- ---------- Loss from continuing operations before income taxes and minority interests.................. (222,452) (66,558) 9,260 (279,750) Provision (benefit) for income taxes............................ (6,999) (11,041) 4,530(8) (13,510) ---------- -------- -------- ---------- Loss from continuing operations before minority interest................... (215,453) (55,517) 4,730 (266,240) Minority interest................. -- -- -- -- ---------- -------- -------- ---------- Loss from continuing operations................. (215,453) (55,517) 4,730 (266,240) Preferred stock dividends......... (2,461) -- -- (2,461) ---------- -------- -------- ---------- Loss from continuing operations available to common stockholders........ $ (217,914) $(55,517) $ 4,730 $ (268,701) ========== ======== ======== ========== Loss per common share from continuing operations: Basic............................ $ (4.30) ========== Diluted.......................... $ (4.30) ========== Weighted average shares outstanding: Basic............................ 50,634 ========== Diluted.......................... 50,634 ========== PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE WORLDXCHANGE WORLDXCHANGE (10) ADJUSTMENTS COMBINED ------------ ------------ ------------- Service revenues.................. $ 607,035 $(25,601)(16) $2,199,507 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)........ 477,317 (25,601)(16) 1,874,987 Selling, general and administrative................. 193,070 -- 447,547 Depreciation and amortization.... 43,304 10,958(12) 173,298 (6,611)(12) 8,260(12) (505)(15) Merger expense................... -- -- 1,867 Restructuring and other special charges........................ -- -- 44,187 --------- -------- ---------- Total operating expenses.... 713,691 (13,499) 2,541,886 --------- -------- ---------- Operating loss.............. (106,656) (12,102) (342,379) Interest and other income......... -- -- 17,523 Interest and other expense........ (25,385) 1,230(15) (90,977) Loss on investment in TelDaFax.... -- -- (990) Foreign exchange loss............. -- -- (5,840) --------- -------- ---------- Loss from continuing operations before income taxes and minority interests.................. (132,041) (10,872) (422,663) Provision (benefit) for income taxes............................ -- (172)(18) (13,682) --------- -------- ---------- Loss from continuing operations before minority interest................... (132,041) (10,700) (408,981) Minority interest................. 1,614 -- 1,614 --------- -------- ---------- Loss from continuing operations................. (130,427) (10,700) (407,367) Preferred stock dividends......... (784) -- (3,245) --------- -------- ---------- Loss from continuing operations available to common stockholders........ $(131,211) $(10,700) $ (410,612) ========= ======== ========== Loss per common share from continuing operations: Basic............................ Diluted.......................... Weighted average shares outstanding: Basic............................ Diluted.......................... PRO FORMA WORLD ACCESS, STAR, TELDAFAX TELDAFAX WORLDXCHANGE AND (20) ADJUSTMENTS TELDAFAX COMBINED -------- ------------- --------------------- Service revenues.................. $364,039 $(8,914)(25) $2,554,632 Operating expenses: Cost of services (exclusive of depreciation and amortization (8,914)(2 shown separately below)........ 304,810 5) 2,170,883 Selling, general and administrative................. 48,758 -- 496,305 Depreciation and amortization.... 18,369 3,311(22) 196,778 (4,800)(22) 6,600(22) Merger expense................... -- -- 1,867 Restructuring and other special charges........................ -- -- 44,187 -------- ------- ---------- Total operating expenses.... 371,937 (3,803) 2,910,020 -------- ------- ---------- Operating loss.............. (7,898) (5,111) (355,388) Interest and other income......... 2,469 -- 19,992 Interest and other expense........ (2,171) -- (93,148) Loss on investment in TelDaFax.... -- 990(28) -- Foreign exchange loss............. -- -- (5,840) -------- ------- ---------- Loss from continuing operations before income taxes and minority interests.................. (7,600) (4,121) (434,384) Provision (benefit) for income taxes............................ (3,830) (738)(26) (18,250) -------- ------- ---------- Loss from continuing operations before minority interest................... (3,770) (3,383) (416,134) Minority interest................. 774 -- 2,388 -------- ------- ---------- Loss from continuing operations................. (2,996) (3,383) (413,746) Preferred stock dividends......... -- -- (3,245) -------- ------- ---------- Loss from continuing operations available to common stockholders........ $(2,996) $(3,383) $ (416,991) ======== ======= ========== Loss per common share from continuing operations: Basic............................ $ (2.77)(9)(19)(27) ========== Diluted.......................... $ (2.77)(9)(19)(27) ========== Weighted average shares outstanding: Basic............................ 150,490(9)(19)(27) ========== Diluted.......................... 150,490(9)(19)(27) ========== 9 11 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 2000 (IN THOUSANDS) PRO FORMA PRO FORMA WORLD ACCESS WORLD STAR AND STAR ACCESS(28) STAR(1) ADJUSTMENTS COMBINED ---------- --------- ------------ ------------ ASSETS Cash and equivalents(2(i))...... $ 164,600 $ 104,567 $ -- $ 269,167 Short-term investments............ 82,249 1,599 -- 83,848 Restricted cash......... 17,229 -- -- 17,229 Accounts and notes receivable............. 226,411 118,499 -- 344,910 Prepaid expenses and other current assets... 23,333 36,777 -- 60,110 Net assets held for sale................... 42,946 -- -- 42,946 ---------- --------- --------- ---------- Total Current Assets......... 556,768 261,442 -- 818,210 ---------- --------- --------- ---------- Property and equipment.............. 130,618 245,142 (94,000)(2) 281,760 Goodwill and other intangibles............ 1,097,251 3,605 (1,764)(4) 1,306,793 257,393(2) 11,900(2) (61,592)(6) Investment in TelDaFax............... 64,242 -- -- 64,242 Net advances to WorldxChange........... 54,650 -- 54,650 Other assets............ 74,426 5,534 -- 79,960 ---------- --------- --------- ---------- Total Assets..... $1,977,955 $ 515,723 $ 111,937 $2,605,615 ========== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt......... $ 60,017 $ 137,673 $ (85,330)(6) $ 112,360 Accounts payable........ 260,994 87,474 --(6) 348,468 Other accrued liabilities............ 167,303 116,581 3,000(2) 282,214 (4,670)(6) ---------- --------- --------- ---------- Total Current Liabilities.... 488,314 341,728 (87,000) 743,042 Long-term debt.......... 247,151 34,462 -- 281,613 Other long-term liabilities............ 3,789 22,076 -- 25,865 ---------- --------- --------- ---------- Total Liabilities.... 739,254 398,266 (87,000) 1,050,520 ---------- --------- --------- ---------- Stockholders' Equity (Deficit): Preferred Stock......... 6 -- -- 6 Common stock............ 732 58 (58)(5) 1,037 227(2) 68(6) Additional paid in capital................ 1,539,915 366,309 (366,309)(5) 1,856,004 279,620(2) 8,139(2) 28,330(6) Deferred compensation... -- (1,224) 1,224(5) -- Notes receivable from shareholders........... -- (3,928) 3,928(5) -- Accumulated other comprehensive loss..... (22,671) (10,077) 10,077(5) (22,671) Accumulated deficit..... (279,281) (233,681) 233,681(5) (279,281) ---------- --------- --------- ---------- Total Stockholders' Equity (Deficit)...... 1,238,701 117,457 198,937 1,555,095 ---------- --------- --------- ---------- Total Liabilities and Stockholders' Equity......... $1,977,955 $ 515,723 $ 111,937 $2,605,615 ========== ========= ========= ========== PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE WORLDXCHANGE WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ------------- ------------- ASSETS Cash and equivalents(2(i))...... $ 12,123 $ -- $ 281,290 Short-term investments............ -- -- 83,848 Restricted cash......... -- -- 17,229 Accounts and notes receivable............. 133,198 (2,201)(17) 517,513 41,606(11) Prepaid expenses and other current assets... 11,331 -- 71,441 Net assets held for sale................... -- -- 42,946 --------- --------- ---------- Total Current Assets......... 156,652 39,405 1,014,267 --------- --------- ---------- Property and equipment.............. 193,257 (6,500)(11) 415,517 (68,000)(11) 15,000(11) Goodwill and other intangibles............ 88,208 (76,327)(13) 1,936,844 593,978(11) 41,300(11) (17,108)(15) Investment in TelDaFax............... -- -- 64,242 Net advances to WorldxChange........... (54,650)(11) -- Other assets............ 3,464 --(11) 83,424 --------- --------- ---------- Total Assets..... $ 441,581 $ 467,098 $3,514,294 ========= ========= ========== LI LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt......... $ 204,219 $ (2,201)(17) $ 264,606 (14,040)(15) (35,732)(20) Accounts payable........ 103,989 (10,960)(15) 464,185 22,688(11) Other accrued liabilities............ 208,884 3,000(11) 494,098 --------- --------- ---------- Total Current Liabilities.... 517,092 (37,245) 1,222,889 Long-term debt.......... 63,082 -- 344,695 Other long-term liabilities............ 3,162 -- 29,027 --------- --------- ---------- Total Liabilities.... 583,336 (37,245) 1,596,611 --------- --------- ---------- Stockholders' Equity (De Preferred Stock......... 30,000 (30,000)(14) 6 Common stock............ 148,056 (148,056)(14) 1,357 298(11) 22(15) Additional paid in capital................ -- 336,686(11) 2,218,272 17,712(11) 7,870(15) Deferred compensation... -- -- -- Notes receivable from shareholders........... (1,988) 1,988(14) -- Accumulated other comprehensive loss..... (14,243) 14,234(14) (22,671) Accumulated deficit..... (303,580) 303,580(14) (279,281) --------- --------- ---------- Total Stockholders' Equity (Deficit)...... (141,755) 504,343 1,917,683 --------- --------- ---------- Total Liabilities and Stockholders' Equity......... $ 441,581 $ 467,098 $3,514,294 ========= ========= ========== 10 12 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD STAR ACCESS(29) STAR(1) ADJUSTMENTS ---------- -------- ----------- Service revenues................... $ 835,339 $347,188 $(61,839)(7) Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below).......... 735,085 308,532 (61,839)(7) Selling, general and administrative................... 125,497 60,977 -- Depreciation and amortization...... 62,788 27,969 9,424(3) (10,072)(3) 1,785(3) (5,386)(6) Expense under WorldxChange management agreement............. 22,688 -- -- Restructuring and other special charges.......................... 34,326 -- -- --------- -------- -------- Total operating expenses... 980,384 397,478 (66,088) --------- -------- -------- Operating loss............. (145,045) (50,290) 4,249 Reimbursement from World Access of net losses under management agreement........................ -- -- -- Interest and other income.......... 25,642 7,791 -- Interest and other expense......... (43,688) (13,153) 1,223(6) Loss on investment in TelDaFax..... (4,853) -- -- Foreign exchange loss.............. (469) -- -- --------- -------- -------- Loss from continuing operations before income taxes and minority interests................ (168,413) (55,652) 5,472 Provision (benefit) for income taxes............................ (18,005) (11,645) 3,899(8) --------- -------- -------- Loss from continuing operations before minority interest........ (150,408) (44,007) 1,573 Minority interest.................. -- -- -- --------- -------- -------- Loss from continuing operations............... (150,408) (44,007) 1,573 Preferred stock dividends.......... (1,907) -- -- --------- -------- -------- Loss from continuing operations available to common stockholders...... $(152,315) $(44,007) $ 1,573 ========= ======== ======== Loss per common share from continuing operations: Basic.......................... $ (2.57) ========= Diluted........................ $ (2.57) ========= Weighted average shares outstanding: Basic.......................... 59,199 ========= Diluted........................ 59,199 ========= PRO FORMA PRO FORMA WORLD WORLD ACCESS, ACCESS STAR AND AND STAR WORLDXCHANGE WORLDXCHANGE COMBINED WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------- ---------------- ------------ ---------------- Service revenues................... $1,120,688 $ 381,115 $(79,032)(16) $1,422,771 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below).......... 981,778 321,228 (79,032)(16) 1,223,974 Selling, general and administrative................... 186,474 129,284 -- 315,758 Depreciation and amortization...... 86,508 38,825 16,251(12) 141,755 (4,958)(12) 6,195(12) (1,066)(15) Expense under WorldxChange management agreement............. 22,688 -- (22,688)(11) -- Restructuring and other special charges.......................... 34,326 -- -- 34,326 ---------- --------- -------- ---------- Total operating expenses... 1,311,774 489,337 (85,298) 1,715,813 ---------- --------- -------- ---------- Operating loss............. (191,086) (108,222) 6,266 (293,042) Reimbursement from World Access of net losses under management agreement........................ -- 22,688 (22,688)(11) -- Interest and other income.......... 33,433 -- -- 33,433 Interest and other expense......... (55,618) (26,700) 901(15) (81,417) Loss on investment in TelDaFax..... (4,853) -- -- (4,853) Foreign exchange loss.............. (469) -- -- (469) ---------- --------- -------- ---------- Loss from continuing operations before income taxes and minority interests................ (218,593) (112,234) (15,521) (346,348) Provision (benefit) for income taxes............................ (25,751) -- (138)(18) (25,889) ---------- --------- -------- ---------- Loss from continuing operations before minority interest........ (192,842) (112,234) (15,383) (320,459) Minority interest.................. -- -- -- -- ---------- --------- -------- ---------- Loss from continuing operations............... (192,842) (112,234) (15,383) (320,459) Preferred stock dividends.......... (1,907) (1,898) -- (3,805) ---------- --------- -------- ---------- Loss from continuing operations available to common stockholders...... $ (194,749) $(114,132) $(15,383) $ (324,264) ========== ========= ======== ========== Loss per common share from continuing operations: Basic.......................... $ (2.66)(9)(19) ========== Diluted........................ $ (2.66)(9)(19) ========== Weighted average shares outstanding: Basic.......................... 121,725(9)(19) ========== Diluted........................ 121,725(9)(19) ========== 11 13 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS PRO FORMA STAR AND STAR WORLDXCHANGE WORLD ACCESS(28) STAR(1) ADJUSTMENTS COMBINED WORLDXCHANGE(10) ADJUSTMENTS ---------------- -------- ----------- ------------ ---------------- ------------ Service revenues................. $1,019,553 $616,469 $(17,949)(7) $1,618,073 $ 607,035 $(25,601)(16) Operating expenses:.............. Cost of services (exclusive of depreciation and amortization shown separately below)...... 903,325 537,895 (17,949)(7) 1,423,271 477,317 (25,601)(16) Selling, general and administrative............... 146,231 108,246 -- 254,477 193,070 -- Depreciation and amortization................. 97,517 29,635 4,335(3) 117,892 43,304 10,958(12) (13,429)(3) (6,611)(12) 2,380(3) 8,260(12) (2,546)(6) (505)(15) Merger expense................. -- 1,867 -- 1,867 -- -- Restructuring and other special charges...................... 44,187 -- -- 44,187 -- -- ---------- -------- -------- ---------- --------- -------- Total operating expenses............... 1,191,260 677,643 (27,209) 1,841,694 713,691 (13,499) ---------- -------- -------- ---------- --------- -------- Operating loss........... (171,707) (61,174) 9,260 (223,621) (106,656) (12,102) Interest and other income........ 10,822 6,701 -- 17,523 -- -- Interest and other expense....... (58,208) (8,614) -- (66,822) (25,385) 1,230(15) Loss on investment in TelDaFax... (990) -- -- (990) -- -- Foreign exchange loss............ (2,369) (3,471) -- (5,840) -- -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations before income taxes and minority interests..... (222,452) (66,558) 9,260 (279,750) (132,041) (10,872) Provision (benefit) for income taxes.......................... (6,999) (11,041) 4,530(8) (13,510) -- (172)(18) ---------- -------- -------- ---------- --------- -------- Loss from continuing operations before minority interest...... (215,453) (55,517) 4,730 (266,240) (132,041) (10,700) Minority interest................ -- -- -- -- 1,614 -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations............. (215,453) (55,517) 4,730 (266,240) (130,427) (10,700) Preferred stock dividends........ (2,461) -- -- (2,461) (784) -- ---------- -------- -------- ---------- --------- -------- Loss from continuing operations available to common stockholders.... $ (217,914) $(55,517) $ 4,730 $ (268,701) $(131,211) $(10,700) ========== ======== ======== ========== ========= ======== Loss per common share from continuing operations: Basic.......................... $ (4.30) ========== Diluted...................... $ (4.30) ========== Weighted average shares outstanding: Basic.......................... 50,634 ========== Diluted........................ 50,634 ========== PRO FORMA WORLD ACCESS, STAR AND WORLDXCHANGE COMBINED ------------- Service revenues................. $2,199,507 Operating expenses:.............. Cost of services (exclusive of depreciation and amortization shown separately below)...... 1,874,987 Selling, general and administrative............... 447,547 Depreciation and amortization................. 173,298 Merger expense................. 1,867 Restructuring and other special charges...................... 44,187 ---------- Total operating expenses............... 2,541,886 ---------- Operating loss........... (342,379) Interest and other income........ 17,523 Interest and other expense....... (90,977) Loss on investment in TelDaFax... (990) Foreign exchange loss............ (5,840) ---------- Loss from continuing operations before income taxes and minority interests..... (422,663) Provision (benefit) for income taxes.......................... (13,682) ---------- Loss from continuing operations before minority interest...... (408,981) Minority interest................ 1,614 ---------- Loss from continuing operations............. (407,367) Preferred stock dividends........ (3,245) ---------- Loss from continuing operations available to common stockholders.... $ (410,612) ========== Loss per common share from continuing operations: Basic.......................... $ (3.63)(9)(19) ========== Diluted...................... $ (3.63)(9)(19) ========== Weighted average shares outstanding: Basic.......................... 113,149(9)(19) ========== Diluted........................ 113,149(9)(19) ========== 12 14 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 2000 (IN THOUSANDS) PRO FORMA WORLD ACCESS PRO FORMA AND WORLD WORLDXCHANGE WORLDXCHANGE ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED TELDAFAX(20) ---------------- ---------------- ------------ ------------ ------------ ASSETS Cash and equivalents(2(i))......... $ 164,600 $ 12,123 $ -- $ 176,723 $ 18,115 Short-term investments............. 82,249 -- -- 82,249 -- Restricted cash.................... 17,229 -- -- 17,229 -- Accounts and notes receivable...... 226,411 133,198 -- 401,215 33,707 41,606(11) Prepaid expenses and other current assets............................ 23,333 11,331 -- 34,664 21,581 Net assets held for sale........... 42,946 -- -- 42,946 ---------- --------- --------- ---------- ---------- Total Current Assets........ 556,768 156,652 41,606 755,226 73,403 ---------- --------- --------- ---------- ---------- Property and equipment............. 130,618 193,257 (6,500)(11) 264,375 57,144 (68,000)(11) 15,000(11) Goodwill and other intangibles..... 1,097,251 88,208 (76,327)(13) 1,727,302 14,080 593,978(11) 41,300(11) (17,108)(15) Investment in TelDaFax............. 64,242 -- -- 64,242 -- Net advances to WorldxChange....... 54,650 -- (54,650)(11) -- Other assets....................... 74,426 3,464 -- 77,890 15,066 ---------- --------- --------- ---------- ---------- Total Assets................ $1,977,955 $ 441,581 $ 469,299 $2,888,835 $ 159,693 ========== ========= ========= ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt.................... $ 60,017 $ 204,219 $ (14,040)(15) $ 214,464 $ 6,983 (35,732)(11) Accounts payable................... 260,994 103,989 (10,960)(15) 376,711 56,738 22,688(11) Other accrued liabilities.......... 167,303 208,884 3,000(11) 379,187 9,374 ---------- --------- --------- ---------- ---------- Total Current Liabilities... 488,314 517,092 (35,044) 970,362 73,095 Long-term debt..................... 247,151 63,082 -- 310,233 16,206 Other long-term liabilities........ 3,789 3,162 -- 6,951 314 ---------- --------- --------- ---------- ---------- Total Liabilities........... 739,254 583,336 (35,044) 1,287,546 89,615 ---------- --------- --------- ---------- ---------- Minority interests................. 685 Stockholders' Equity (Deficit): Preferred stock.................... 6 30,000 (30,000)(14) 6 -- Common stock....................... 732 148,056 (148,056)(14) 1,052 77,359 298(11) 22(15) Additional paid in capital......... 1,539,915 -- 336,686(11) 1,902,183 7,099 17,712(11) 7,870(15) Notes receivable from shareholders...................... -- (1,988) 1,988(14) -- -- Accumulated other comprehensive loss.............................. (22,671) (14,243) 14,243(14) (22,671) (343) Accumulated deficit................ (279,281) (303,580) 303,580(14) (279,281) (14,722) ---------- --------- --------- ---------- ---------- Total Stockholders' Equity (Deficit).................. 1,238,701 (141,755) 504,343 1,601,289 69,393 ---------- --------- --------- ---------- ---------- Total Liabilities and Stockholders' Equity....... $1,977,955 $ 441,581 $ 469,299 $2,888,835 $ 159,693 ========== ========= ========= ========== ========== PRO FORMA WORLD ACCESS, WORLDXCHANGE AND TELDAFAX TELDAFAX ADJUSTMENTS COMBINED ----------- ---------------- ASSETS Cash and equivalents(2(i))......... $ -- $ 194,838 Short-term investments............. -- 82,249 Restricted cash.................... -- 17,229 Accounts and notes receivable...... -- 434,922 Prepaid expenses and other current assets............................ -- 56,245 Net assets held for sale........... -- 42,946 -------- ---------- Total Current Assets........ -- 828,429 -------- ---------- Property and equipment............. (24,000)(21) 297,519 Goodwill and other intangibles..... (10,900)(23) 1,841,796 78,314(21) 33,000(21) Investment in TelDaFax............. (64,242)(21) -- Net advances to WorldxChange....... Other assets....................... -- 92,956 -------- ---------- Total Assets................ $ 12,172 $3,060,700 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt.................... $ -- $ 221,447 Accounts payable................... -- 433,449 Other accrued liabilities.......... 5,000(21) 393,561 -------- ---------- Total Current Liabilities... 5,000 1,048,457 Long-term debt..................... -- 326,439 Other long-term liabilities........ -- 7,265 -------- ---------- Total Liabilities........... 5,000 1,382,161 -------- ---------- Minority interests................. -- 685 Stockholders' Equity (Deficit): Preferred stock.................... -- 6 Common stock....................... (77,359)(24) 1,311 259(21) Additional paid in capital......... (7,099)(24) 1,978,282 76,099(21) Notes receivable from shareholders...................... -- -- Accumulated other comprehensive loss.............................. 343(24) (22,671) Accumulated deficit................ 14,722(24) (279,074) 207(24) -------- ---------- Total Stockholders' Equity (Deficit).................. 7,172 1,677,854 -------- ---------- Total Liabilities and Stockholders' Equity....... $ 12,172 $3,060,700 ======== ========== 13 15 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ---------------- ------------ ---------------- Service revenues.............................. $ 835,339 $ 381,115 $(73,529)(16) $1,142,925 Operating expenses:........................... Cost of services (exclusive of depreciation and amortization shown separately below).... 735,085 321,228 (73,529)(16) 982,784 Selling, general and administrative........... 125,497 129,284 -- 254,781 Depreciation and amortization................. 62,788 38,825 16,251(12) 118,035 (4,958)(12) 6,195(12) (1,066)(15) Expense under WorldxChange management agreement................................... 22,688 -- (22,688)(11) -- Restructuring and other special charges....... 34,326 -- -- 34,326 --------- --------- -------- ---------- Total operating expenses.................... 980,384 489,337 (79,795) 1,389,926 --------- --------- -------- ---------- Operating loss.............................. (145,045) (108,222) 6,266 (247,001) Reimbursement from World Access of net losses under management agreement.................. -- 22,688 (22,688)(11) -- Interest and other income..................... 25,642 -- -- 25,642 Interest and other expense.................... (43,688) (26,700) 901(15) (69,487) Loss on investment in TelDaFax................ (4,853) -- -- (4,853) Foreign exchange loss......................... (469) -- -- (469) --------- --------- -------- ---------- Loss from continuing operations before income taxes and minority interests....... (168,413) (112,234) (15,521) (296,168) Provision (benefit) for income taxes.......... (18,005) -- (138)(18) (18,143) --------- --------- -------- ---------- Loss from continuing operations before minority interest......................... (150,408) (112,234) (15,383) (278,025) Minority interest............................. -- -- -- -- --------- --------- -------- ---------- Loss from continuing operations............. (150,408) (112,234) (15,383) (278,025) Preferred stock dividends..................... (1,907) (1,898) -- (3,805) --------- --------- -------- ---------- Loss from continuing operations available to common stockholders....................... $(152,315) $(114,132) $(15,383) $ (281,830) ========= ========= ======== ========== Loss per common share from continuing operations: Basic....................................... $ (2.57) ========= Diluted..................................... $ (2.57) ========= Weighted average shares outstanding: Basic....................................... 59,199 ========= Diluted..................................... 59,199 ========= PRO FORMA WORLD ACCESS, WORLDXCHANGE TELDAFAX AND TELDAFAX TELDAFAX(20) ADJUSTMENTS COMBINED ------------ ----------- ---------------- Service revenues.............................. $224,297 $(3,169)(25) $1,364,053 Operating expenses:........................... Cost of services (exclusive of depreciation and amortization shown separately below).... 181,588 (3,169)(25) 1,161,203 Selling, general and administrative........... 50,866 -- 305,647 Depreciation and amortization................. 18,012 1,202(22) 138,599 (3,600)(22) 4,950(22) Expense under WorldxChange management agreement................................... -- -- -- Restructuring and other special charges....... -- -- 34,326 -------- ------- ---------- Total operating expenses.................... 250,466 (617) 1,639,775 -------- ------- ---------- Operating loss.............................. (26,169) (2,552) (275,722) Reimbursement from World Access of net losses under management agreement.................. -- -- -- Interest and other income..................... 1,086 -- 26,728 Interest and other expense.................... (1,141) -- (70,628) Loss on investment in TelDaFax................ -- 4,853(21) -- Foreign exchange loss......................... -- -- (469) -------- ------- ---------- Loss from continuing operations before income taxes and minority interests....... (26,224) 2,301 (320,091) Provision (benefit) for income taxes.......... (9,923) (554)(26) (28,620) -------- ------- ---------- Loss from continuing operations before minority interest......................... (16,301) 2,855 (291,471) Minority interest............................. 980 -- 980 -------- ------- ---------- Loss from continuing operations............. (15,321) 2,855 (290,491) Preferred stock dividends..................... -- -- (3,805) -------- ------- ---------- Loss from continuing operations available to common stockholders....................... $(15,321) $ 2,855 $ (294,296) ======== ======= ========== Loss per common share from continuing operations: Basic....................................... $ (2.29)(19)(27) ========== Diluted..................................... $ (2.29)(19)(27) ========== Weighted average shares outstanding: Basic....................................... 128,562(19)(27) ========== Diluted..................................... 128,562(19)(27) ========== 14 16 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED TELDAFAX(20) ---------------- ---------------- ------------ ----------------- ------------ Service revenues....................... $1,019,553 $ 607,035 $(25,601)(16) $1,600,987 $364,039 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below).................. 903,325 477,317 (25,601)(16) 1,355,041 304,810 Selling, general and administrative..................... 146,231 193,070 -- 339,301 48,758 Depreciation and amortization........ 97,517 43,304 10,958(12) 152,923 18,369 (6,611)(12) 8,260(12) (505)(15) Restructuring and other special charges............................ 44,187 -- -- 44,187 -- ---------- --------- -------- ---------- -------- Total operating expenses....... 1,191,260 713,691 (13,499) 1,891,452 371,937 ---------- --------- -------- ---------- -------- Operating loss................. (171,707) (106,656) (12,102) (290,465) (7,898) Interest and other income.............. 10,822 -- -- 10,822 2,469 Interest and other expense............. (58,208) (25,385) 1,230(15) (82,363) (2,171) Loss on investment in TelDaFax......... (990) -- -- (990) -- Foreign exchange loss.................. (2,369) -- -- (2,369) -- ---------- --------- -------- ---------- -------- Loss from continuing operations before income taxes and minority interests........... (222,452) (132,041) (10,872) (365,365) (7,600) Provision (benefit) for income taxes... (6,999) -- (172)(18) (7,171) (3,830) ---------- --------- -------- ---------- -------- Loss from continuing operations before minority interest..... (215,453) (132,041) (10,700) (358,194) (3,770) Minority interest...................... -- 1,614 -- 1,614 774 ---------- --------- -------- ---------- -------- Loss from continuing operations................... (215,453) (130,427) (10,700) (356,580) (2,996) Preferred stock dividends.............. (2,461) (784) -- (3,245) -- ---------- --------- -------- ---------- -------- Loss from continuing operations available to common stockholders................. $ (217,914) $(131,211) $(10,700) $ (359,825) $ (2,996) ========== ========= ======== ========== ======== Loss per common share from continuing operations: Basic................................ $ (4.30) ========== Diluted.............................. $ (4.30) ========== Weighted average shares outstanding: Basic................................ 50,634 ========== Diluted.............................. 50,634 ========== PRO FORMA WORLD ACCESS, TELDAFAX WORLDXCHANGE AND ADJUSTMENTS TELDAFAX COMBINED ----------- -------------------- Service revenues....................... $ (8,914)(25) $1,956,112 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below).................. (8,914)(25) 1,650,937 Selling, general and administrative..................... -- 388,059 Depreciation and amortization........ 3,311(22) 176,403 (4,800)(22) 6,600(22) Restructuring and other special charges............................ -- 44,187 -------- ---------- Total operating expenses....... (3,803) 2,259,586 -------- ---------- Operating loss................. (5,111) (303, 474) Interest and other income.............. -- 13,291 Interest and other expense............. -- (84,534) Loss on investment in TelDaFax......... 990(28) -- Foreign exchange loss.................. -- (2,369) -------- ---------- Loss from continuing operations before income taxes and minority interests........... (4,121) (377,086) Provision (benefit) for income taxes... (738)(26) (11,739) -------- ---------- Loss from continuing operations before minority interest..... (3,383) (365,347) Minority interest...................... -- 2,388 -------- ---------- Loss from continuing operations................... (3,383) (362,959) Preferred stock dividends.............. -- (3,245) -------- ---------- Loss from continuing operations available to common stockholders................. $ (3,383) $ (366,204) ======== ========== Loss per common share from continuing operations: Basic................................ $ (3.05)(19)(27) ========== Diluted.............................. $ (3.05)(19)(27) ========== Weighted average shares outstanding: Basic................................ 119,997(19)(27) ========== Diluted.............................. 119,997(19)(27) ========== 15 17 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 2000 (IN THOUSANDS) PRO FORMA WORLD ACCESS, AND WORLD WORLDXCHANGE WORLDXCHANGE ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------- ---------------- ------------- ------------- ASSETS Cash and equivalents.......................... $ 164,600 $ 12,123 $ -- $ 176,723 Short-term investments 82,249 -- -- 82,249 Restricted cash............................... 17,229 -- -- 17,229 Accounts and notes receivable................. 226,411 133,198 41,606(11) 401,215 Prepaid expenses and other current assets..... 23,333 11,331 -- 34,664 Net assets held for sale...................... 42,946 -- -- 42,946 ---------- --------- -------- ---------- Total Current Assets................. 556,768 156,652 41,606 755,026 ---------- --------- -------- ---------- Property and equipment........................ 130,618 193,257 (6,500)(11) 264,375 (68,000)(11) 15,000(11) Goodwill and other intangibles................ 1,097,251 88,208 (76,327)(13) 1,727,302 593,978(11) 41,300(11) (17,108)(15) Investments................................... 64,242 -- -- 64,242 Net advances to WorldxChange.................. 54,650 -- (54,650)(11) -- Other assets.................................. 74,426 3,464 -- 77,890 ---------- --------- -------- ---------- Total Assets......................... $1,977,955 $ 441,581 $469,299 $2,888,835 ========== ========= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt............................... $ 60,017 $ 204,219 $(14,040)(15) $ 214,464 (35,732)(11) Accounts payable.............................. 260,994 103,989 (10,960)(15) 376,711 22,688(11) Other accrued liabilities..................... 167,303 208,884 3,000(11) 379,187 ---------- --------- -------- ---------- Total Current Liabilities............ 488,314 517,092 (35,044) 970,362 Long-term debt................................ 247,151 63,082 -- 310,233 Other long-term liabilities................... 3,789 3,162 -- 6,951 ---------- --------- -------- ---------- Total Liabilities.................... 739,254 583,336 (35,044) 1,287,546 ---------- --------- -------- ---------- Stockholders' Equity (Deficit): Preferred stock............................... 6 30,000 (30,000)(14) 6 Common stock.................................. 732 148,056 (148,056)(14) 1,052 298(11) 22(15) Additional paid in capital.................... 1,539,915 -- 336,686(11) 1,902,183 17,712(11) 7,870(15) Notes receivable from shareholders............ -- (1,988) 1,988(14) -- Accumulated other comprehensive loss.......... (22,671) (14,243) 14,243(14) (22,671) Accumulated deficit........................... (279,281) (303,580) 303,580(14) (279,281) ---------- --------- -------- ---------- Total Stockholders' Equity (Deficit).......................... 1,238,701 (141,755) 504,343 1,601,289 ---------- --------- -------- ---------- Total Liabilities and Stockholders... $1,977,955 $ 441,581 $469,299 $2,888,835 ========== ========= ======== ========== 16 18 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ---------------- ------------ ---------------- Service revenues................. $ 835,339 $ 381,115 $(73,529)(16) $1,142,925 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)........ 735,085 321,228 (73,529)(16) 982,784 Selling, general and administrative................. 125,497 129,284 -- 254,781 Depreciation and amortization.... 62,788 38,825 16,251(12) 118,035 (4,958)(12) 6,195(12) (1,066)(15) Expense under WorldxChange management agreement........... 22,688 -- (22,688)(11) -- Restructuring and other special charges........................ 34,326 -- -- 34,326 --------- --------- -------- ---------- Total operating expenses.............. 980,384 489,337 (79,795) 1,389,926 --------- --------- -------- ---------- Operating loss.......... (145,045) (108,222) 6,266 (247,001) Reimbursement from World Access of net losses under management agreement...................... -- 22,688 (22,688)(11) -- Interest and other income........ 25,642 -- -- 25,642 Interest and other expense....... (43,688) (26,700) 901(15) (69,487) Loss on investment in TelDaFax... (4,853) -- -- (4,853) Foreign exchange loss............ (469) -- -- (469) --------- --------- -------- ---------- Loss from continuing operations before income taxes and minority interests.................. (168,413) (112,234) (15,521) (296,168) Provision (benefit) for income taxes.......................... (18,005) -- (138)(18) (18,143) --------- --------- -------- ---------- Loss from continuing operations before minority interest................... (150,408) (112,234) (15,383) (278,025) Minority interest................ -- -- -- -- --------- --------- -------- ---------- Loss from continuing operations................. (150,408) (112,234) (15,383) (278,025) Preferred stock dividends........ (1,907) (1,898) -- (3,805) --------- --------- -------- ---------- Loss from continuing operations available to common stockholders.......... $(152,315) $(114,132) $(15,383) $ (281,830) ========= ========= ======== ========== Loss per common share from continuing operations: Basic........................ $ (2.57) $ (3.09)(19) ========= ========== Diluted...................... $ (2.57) $ (3.09)(19) ========= ========== Weighted average shares outstanding: Basic........................ 59,199 91,221(19) ========= ========== Diluted...................... 59,199 91,221(19) ========= ========== 17 19 WORLD ACCESS, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA WORLD ACCESS AND PRO FORMA WORLDXCHANGE WORLDXCHANGE WORLD ACCESS(28) WORLDXCHANGE(10) ADJUSTMENTS COMBINED ---------------- ---------------- ------------ ---------------- Service revenues............. $1,019,553 $ 607,035 $ (25,601)(16) $1,600,987 Operating expenses:.......... Cost of services (exclusive of depreciation and amortization shown separately below)........ 903,325 477,317 (25,601)(16) 1,355,041 Selling, general and administrative........... 146,231 193,070 -- 339,301 Depreciation and amortization............. 97,517 43,304 10,958(12) 152,923 (6,611)(12) 8,260(12) (505)(15) Restructuring and other special charges.......... 44,187 -- -- 44,187 ---------- --------- ------------ ---------- Total operating expenses.......... 1,191,260 713,691 (13,499) 1,891,452 ---------- --------- ------------ ---------- Operating loss...... (171,707) (106,656) (12,102) (290,465) Interest and other income.... 10,822 -- -- 10,822 Interest and other expense... (58,208) (25,385) 1,230(15) (82,363) Loss on investment in TelDaFax................... (990) -- -- (990) Foreign exchange loss........ (2,369) -- -- (2,369) ---------- --------- ------------ ---------- Loss from continuing operations before income taxes and minority interests......... (222,452) (132,041) (10,872) (365,365) Provision (benefit) for income taxes............... (6,999) -- (172)(18) (7,171) ---------- --------- ------------ ---------- Loss from continuing operations before minority interest.......... (215,453) (132,041) (10,700) (358,194) Minority interest............ -- 1,614 -- 1,614 ---------- --------- ------------ ---------- Loss from continuing operations........ (215,453) (130,427) (10,700) (356,580) Preferred stock dividends.... (2,461) (784) -- (3,245) ---------- --------- ------------ ---------- Loss from continuing operations available to common stockholders...... $ (217,914) $(131,211) $ (10,700) $ (359,825) ========== ========= ============ ========== Loss per common share from continuing operations: Basic...................... $ (4.30) $ (4.35)(19) ========== ========== Diluted.................... $ (4.30) $ (4.35)(19) ========== ========== Weighted average shares outstanding: Basic...................... 50,634 82,656(19) ========== ========== Diluted.................... 50,634 82,656(19) ========== ========== 18 20 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 nine months ended September 30, 2000 and for the year ended December 31, 1999 and have been adjusted to reflect the sale of PT-1, a required condition of the STAR merger. For pro forma purposes, we have assumed that PT-1 will be sold to Counsel and the net cash proceeds received from the sale will be approximately $120.0 million, including $22.5 million placed into escrow. STAR STAR EXCLUSION OF EXCLUDING PT-1 SEPTEMBER 30, 2000 PT-1 SEPTEMBER 30, 2000 ------------------ ------------ ------------------ Cash and equivalents.................. $ 12,244 $ (5,177)(i) $104,567 97,500(ii) Short-term investments................ 1,599 --(i) 1,599 Accounts and notes receivable......... 175,979 (79,980)(i) 118,499 22,500(ii) Prepaid expenses and other current assets.............................. 53,495 (16,718)(i) 36,777 -------- --------- -------- Total Current Assets........ 243,317 18,125 261,442 -------- --------- -------- Property and equipment, net........... 283,521 (38,379)(i) 245,142 Goodwill and other intangibles........ 190,405 (186,800)(i) 3,605 Other assets.......................... 6,355 (821)(i) 5,534 -------- --------- -------- Total Assets................ $723,598 $(207,875) $515,723 ======== ========= ======== Short-term debt....................... $139,746 $ (2,073)(i) $137,673 Accounts payable...................... 109,376 (21,902)(i) 87,474 Other accrued liabilities............. 173,103 (56,522)(i) 116,581 -------- --------- -------- Total Current Liabilities... 422,225 (80,497) 341,728 -------- --------- -------- Long-term debt........................ 37,932 (3,470)(i) 34,462 Other long-term liabilities........... 22,966 (890)(i) 22,076 -------- --------- -------- Total Liabilities........... 483,123 (84,857) 398,266 -------- --------- -------- Total Stockholders' Equity.................... 240,475 (123,018)(iii) 117,457 -------- --------- -------- Total Liabilities and Stockholders' Equity...... $723,598 $(207,875) $515,723 ======== ========= ======== (i) Represents the historical asset and liability amounts for PT-1, including PT-1 goodwill recorded by STAR. It does not include certain liabilities that Counsel will not assume in connection with the PT-1 asset sale. These liabilities consist primarily of income taxes, certain network operating costs and litigation matters that have been managed on a consolidated basis and historically accounted for on STAR's balance sheet. There are no significant liabilities on PT-1's balance sheet that are not being assumed by Counsel. 19 21 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (ii) Represents the net cash proceeds expected to be received from the PT-1 asset sale, estimated as follows: Gross purchase price........................ $150,000 Net assets adjustment....................... (8,000) Fees and expenses........................... (2,100) STAR income taxes........................... (19,000) Other costs................................. (900) -------- Net cash proceeds...................... 120,000 Escrowed cash............................... (22,500) -------- Unrestricted cash...................... $ 97,500 ======== The gross purchase price will be adjusted upward or downward if (a) the aging of PT-1's accounts receivable and accounts payable at the closing date differs materially from the related aging as of December 31, 1999, and (b) the net assets of PT-1 as of the closing date differ from $37.2 million, the net assets of PT-1 as of December 31, 1999. Net assets, as defined in the PT-1 asset purchase agreement, excludes goodwill, deferred income taxes, inter-company balances and other liabilities not included on PT-1's December 31, 1999 balance sheet and therefore not assumed by Counsel. Based on an analysis prepared by STAR in December 2000, there has been no material change in the aging of PT-1's accounts receivable and accounts payable during 2000, and accordingly no adjustment in purchase price is expected for this provision. Based on the net assets of PT-1 as of September 30, 2000, we expect the purchase price to be reduced by approximately $8.0 million. The $19.0 million of income taxes represents the net cash liability we expect STAR to incur as a result of the gain it will realize on the PT-1 asset sale for federal and state income tax purposes. This liability, which was calculated net of PT-1 operating loss carryforwards available to offset the tax gain, will be assumed by World Access in connection with the STAR merger. The PT-1 asset purchase agreement requires 15% of the gross purchase price, or $22.5 million, to be placed into escrow on the closing date. This escrowed purchase price will be immediately released to World Access upon (i) the completion of the STAR merger and (ii) World Access' agreement to assume STAR and PT-1's representations, warranties and other obligations under the PT-1 asset purchase agreement. World Access plans to assume these obligations and accordingly expects to receive the $22.5 million of cash shortly after completion of the STAR merger. (iii) Represents the assumed loss on the sale of PT-1. As the sale of PT-1 by STAR is a required condition to the merger and which must be completed before the merger is consummated, the assumed loss on the sale of PT-1 of $123.0 million is not reflected in the World Access unaudited pro forma combined financial statements. STAR STAR EXCLUDING PT-1 NINE MONTHS NINE MONTHS ENDED EXCLUSION OF ENDED SEPTEMBER 30, 2000 PT-1 SEPTEMBER 30, 2000 ------------------ ------------ ------------------ Carrier service revenue.................. $ 733,725 $(386,537) $347,188 Cost of carrier services................. (638,123) 329,591 (308,532) Selling, general and administrative...... (89,329) 28,352 (60,977) 20 22 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) STAR STAR EXCLUDING PT-1 NINE MONTHS NINE MONTHS ENDED EXCLUSION OF ENDED SEPTEMBER 30, 2000 PT-1 SEPTEMBER 30, 2000 ------------------ ------------ ------------------ Depreciation and amortization............ (40,059) 12,090 (27,969) Interest and other income................ 7,923 (132) 7,791 Interest expense......................... (14,021) 868 (13,153) Benefit for income taxes................. 5,174 6,471 11,645 --------- --------- -------- Net loss....................... $ (34,710) $ (9,297) $(44,007) ========= ========= ======== STAR STAR EXCLUDING PT-1 YEAR ENDED EXCLUSION OF YEAR ENDED DECEMBER 31, 1999 PT-1 DECEMBER 31, 1999 ----------------- ------------ ----------------- Carrier service revenues.................. $1,061,774 $(445,305) $ 616,469 Cost of carrier services.................. (925,206) 387,311 (537,895) Selling, general and administrative....... (160,067) 51,821 (108,246) Depreciation and amortization............. (44,236) 14,601 (29,635) Merger expense............................ (1,878) 11 (1,867) Interest and other income................. 7,036 (335) 6,701 Interest expense.......................... (9,895) 1,281 (8,614) Foreign exchange loss..................... (3,471) -- (3,471) Benefit for income taxes.................. 12,096 (1,055) 11,041 ---------- --------- --------- Net loss........................ $ (63,847) $ 8,330 $ (55,517) ========== ========= ========= (2) The STAR merger will be accounted for under the purchase method of accounting. The total cost to acquire STAR is subject to change, to the extent that the number of shares of STAR common stock to be acquired will not be fixed until the effective date of the merger. A change in total cost will result in a corresponding change in goodwill and related amortization expense. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill and other intangible assets. These allocations are subject to change pending the completion of the final analysis of the total purchase price and fair values of the assets acquired and the liabilities assumed. The impact of these changes could be material. Purchase price: Issuance of World Access common stock(i).................. $ 279,847 Fair value of World Access options issued in exchange for STAR options(ii)....................................... 8,139 Estimated fees and expenses............................... 3,000 --------- Total estimated purchase price.................... $ 290,986 Allocation to fair values: Pro forma stockholders' equity as of September 30, 2000(iii).............................................. $(117,457) Intangible assets(v)...................................... (11,900) Adjust assets and liabilities: Eliminate historical goodwill as of September 30, 2000.................................................. 1,764 Write-down of fixed assets to fair value............... 94,000 --------- Preliminary goodwill(iv).......................... $ 257,393 ========= 21 23 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) ----------------------- (i) In accordance with the STAR merger agreement, each share of STAR common stock issued and outstanding shall be converted into the right to receive 0.3866 shares of World Access common stock. At September 30, 2000, approximately 22,678,000 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 September 30, 2000........ 58,660 Multiplied by: Exchange ratio............................... 0.3866 -------- Shares of World Access Common Stock assumed to be exchanged................................................. 22,678 Multiplied by: Average market price(a)...................... $ 12.34 -------- Value of World Access Common Stock exchanged................ $279,847 ======== In accordance with the STAR merger agreement, World Access, at its option, may pay up to 40% of the purchase price in the form of cash. Currently, World Access has no intention of paying any portion of the STAR purchase price with cash other than an immaterial amount to be paid for fractional shares and any cash to be paid for Dissenters' Shares. However, should World Access decide to pay a portion of the STAR purchase price in cash, assuming the maximum of 40% and based upon the average closing price of World Access Common Stock on the Nasdaq National Market for the 10 trading day period ended July 17, 2000 of $10.83, World Access would be required to pay STAR shareholders approximately $98.2 million in cash and issue approximately 13.6 million shares of World Access Common Stock having an approximate value of $171.5 million in connection with the merger. Since the option to pay a portion of the STAR purchase price in cash is solely at the option of the World Access and World Access has no intention of paying any portion of the STAR purchase price with the cash option, the pro forma balance sheets have been prepared excluding the cash option. --------------------------- (a) The average market price represents the average market price of World Access Common Stock for the three trading days prior to and after June 7, 2000, the date economic terms of the merger were amended. (ii) As the consummation of the merger is expected to occur after July 1, 2000, we have valued the World Access options using the guidance in FIN 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25. Under FIN 44, the fair value of vested options issued will be included as part of the purchase price. The fair value of unvested options issued will also be included as part of the purchase price; however, a portion of the intrinsic value (if any) of the unvested options will be allocated to unearned compensation and recognized as compensation cost over the remaining future vesting period. The intrinsic value to be allocated to unearned compensation is not significant and has not been reflected in these pro forma financial statements. In accordance with the merger agreement, each STAR option is to be converted into an option to purchase 0.3866 shares of World Access Common Stock. At September 30, 2000, STAR had approximately 3.5 million options outstanding; 1.7 million of which were vested and 1.8 million were unvested. The vested and unvested options are convertible to approximately 686,000 and 751,000 World Access options, respectively, totaling 1.4 million. The fair value of the 686,000 vested options is $4.4 million computed using the Black-Scholes Option Pricing Model and is included in the purchase price. The fair value of the 22 24 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 751,000 unvested options is $3.7 million computed using the Black-Scholes Option Pricing Model. The assumptions used in the Black-Scholes model are: dividend yield 0%, volatility 70%, risk free interest rate of 6.43%, and an expected life of 3 years. (iii) STAR pro forma stockholders' equity as of September 30, 2000 assumes the sale of PT-1 for net cash proceeds of $120.0 million. (iv) The pro forma goodwill is preliminary and subject to change based on a final review of the fair values of STAR's net assets as of the actual merger date. Upon a final review of the fair value of STAR's assets and liabilities, it is likely that certain tangible and intangible assets such as international licenses, foreign carrier operating agreements and property and equipment may be recognized at amounts which differ from the amounts estimated in these unaudited pro forma financial statements. Although we do not expect these final adjustments to be significant, they could increase or decrease the depreciation and amortization expense reflected in the unaudited pro forma financial statements. In addition, certain liabilities related to exiting STAR activities or terminating STAR employees may be recorded as part of the purchase price allocation in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. This would increase goodwill and related amortization expense. World Access has not finalized a plan to exit any activities of STAR or terminate any STAR employees, and will not have a final plan until a detailed analysis of the combined operations is performed shortly after the STAR merger is consummated. (v) Intangible assets consist of wholesale and retail customer base, licenses and interconnection, management and workforce expertise. Amortization is provided using the straight-line method over a 5-year period. (3) Amortization of additional goodwill over an estimated life of 20 years. The pro forma adjustment to goodwill was computed as follows (in thousands): HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT -------- ------------ ------------ ---------- STAR -- for the nine months ended September 30, 2000..................... $257,393 $ 9,652 $ (228) $9,424 STAR -- for the year ended December 31, 1999................................... $257,393 $12,870 $(8,535) $4,335 Depreciation benefit as a result of write-down of fixed assets to fair value is arrived at using an estimated life of 7 years. The pro forma adjustment to property and equipment was computed as follows (in thousands): PRO FORMA PROPERTY AND DEPRECIATION EQUIPMENT ADJUSTMENT ------------ ------------ STAR -- for the nine months ended September 30, 2000........ $94,000 $(10,072) STAR -- for the year ended December 31, 1999................ $94,000 $(13,429) 23 25 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Amortization of additional intangible assets over an estimated life of 5 years. The pro forma adjustment to intangible assets was computed as follows (in thousands): PRO FORMA INTANGIBLE AMORTIZATION ASSETS ADJUSTMENT ---------- ------------ STAR -- for the nine months ended June 30, 2000............. $11,900 $1,785 STAR -- for the year ended December 31, 1999................ $11,900 $2,380 (4) Elimination of STAR's historical goodwill. (5) Elimination of STAR's historical stockholders' equity accounts. (6) In connection with the consummation of the STAR merger, a vendor of STAR has agreed to convert up to approximately $90.0 million of STAR indebtedness into approximately 7,826,000 shares of World Access common stock based upon a conversion rate of $11.50 per share. As of December 11, 2000, the closing price per share of World Access common stock was $3.63. Since the fair value of the World Access common stock is less than $11.50 per share, World Access is paying consideration less than the carrying amount of the debt. This difference is recorded as a decrease to goodwill of approximately $61.6 million. These shares are assumed to be issued for purposes of the calculation of basic and diluted earnings per share in the pro forma condensed combined statement of operations. The balance sheet adjustment reflects the conversion of approximately $90.0 million from debt and accrued interest to common stock, paid-in capital and goodwill for the amount of indebtedness outstanding as of September 30, 2000. The adjustments to the pro forma statement of operations are to eliminate the interest expense recorded on the debt included in the historical results and to record a reduction in goodwill amortization. (7) Elimination of intercompany revenues and related costs. (8) Adjustment for the additional tax benefit derived from pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from STAR's net operating losses. (9) Represents pro forma weighted average shares for basic and diluted earnings from continuing operations per share. The weighted average shares are computed assuming the issuance of approximately 22,678,000 shares of common stock to complete the STAR merger and 7,826,000 shares upon the conversion of STAR indebtedness into World Access common stock, see Note 6. Due to the pro forma loss from continuing operations, potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. 24 26 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 nine months ended September 30, 2000 and for the year ended December 31, 1999. As WorldxChange's fiscal year end is September 30 the following table represents a reconciliation of WorldxChange's results of operations for its fiscal year ended on September 30, 1999 to the year ended December 31, 1999: HISTORICAL RESULTS FOR FISCAL YEAR EXCLUSION OF INCLUSION OF ENDED OPERATIONS OPERATIONS YEAR ENDED SEPTEMBER 30, FROM 10/1/98- FROM 10/1/99- DECEMBER 31, 1999 12/31/98 12/31/99 1999 -------------- ------------- ------------- ------------ Revenues............................ $ 421,580 $(89,927) $ 143,327 $ 474,980 Cost of services.................... (328,334) 70,922 (112,545) (369,957) Selling, general and administrative.................... (124,112) 27,952 (43,430) (139,590) Depreciation and amortization....... (17,705) 3,564 (9,375) (23,516) Interest and other expense.......... (17,531) 4,234 (6,420) (19,717) Minority interest................... 2,251 (637) -- 1,614 Preferred stock dividends........... (2) 2 (784) (784) --------- -------- --------- --------- Net loss.................. $ (63,853) $ 16,110 $ (29,227) $ (76,970) ========= ======== ========= ========= On November 4, 1999, WorldxChange acquired the outstanding shares of certain European subsidiaries of ACC Corp. ("ACC"), a subsidiary of AT&T. The historical results of operations of WorldxChange includes ACC's results for the two months ended December 31, 1999. The results of ACC for the period from January 1, 1999 to October 31, 1999 have been added to the WorldxChange historical results of operations as follows: WXC WXC YEAR ENDED ACC FOR YEAR ENDED DECEMBER 31, 1999 THE PERIOD DECEMBER 31, 1999 INCLUDING 1/1/99 TO INCLUDING 2 MONTHS OF ACC 10/31/99 12 MONTHS OF ACC ----------------- ---------- ----------------- Revenues................................ $ 474,980 $ 132,055 $ 607,035 Cost of services........................ (369,957) (107,360) (477,317) Selling, general and administrative..... (139,590) (53,480) (193,070) Depreciation and amortization........... (23,516) (19,788) (43,304) Interest and other expense.............. (19,717) (5,668) (25,385) Minority interest....................... 1,614 -- 1,614 Preferred stock dividends............... (784) -- (784) --------- --------- --------- Net loss...................... $ (76,970) $ (54,241) $(131,211) ========= ========= ========= 25 27 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 nine months ended September 30, 2000 (as shown in the WorldxChange financial statements included in this registration statement) to the results of operations for the six months ended September 30, 2000: RESULTS FOR THE EXCLUSION OF YEAR ENDED RESULTS FOR THE RESULTS FOR THE SEPTEMBER 30, THREE MONTHS ENDED NINE MONTHS ENDED 2000 DECEMBER 31, 1999 SEPTEMBER 30, 2000 ----------------- ------------------ ------------------ Revenues................... $ 524,442 $ (143,327) $ 381,115 Cost of services........... (433,773) 112,545 (321,228) Selling, general and administrative........... (172,714) 43,430 (129,284) Depreciation and amortization............. (48,200) 9,375 (38,825) Reimbursement from World Access of net losses under management agreement................ 22,688 -- 22,688 Interest and other expense.................. (33,120) 6,420 (26,700) Preferred stock dividends................ (2,682) 784 (1,898) ---------- ---------- ---------- Net loss applicable to common stockholders...... $ (143,359) $ 29,227 $ (114,132) ========== ========== ========== (11) The WorldxChange merger will be accounted for under the purchase method of accounting. The total cost to acquire WorldxChange is subject to change, to the extent that the number of shares of WorldxChange capital stock to be acquired will not be fixed until the effective date of the merger. A change in total cost will result in a corresponding change in goodwill and related amortization expense. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill and other intangible assets. These allocations are subject to change pending the completion of the final analysis of the total purchase price and fair values of the assets acquired and the liabilities assumed. The impact of these changes could be material. The preliminary purchase price and goodwill is currently estimated as follows (in thousands): Purchase price: Issuance of World Access common stock(i).................. $336,984 Fair value of World Access options issued in exchange for WorldxChange options(ii)............................... 17,712 Net advances from World Access(iii)....................... 54,650 Estimated fees and expenses............................... 3,000 -------- Total estimated purchase price.................... 412,346 Allocation to fair values: Historical shareholders' deficit as of September 30, 2000................................................... 141,755 Intangible assets (vi).................................... (41,300) Eliminate net advances payable to World Access............ (54,650) 26 28 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Adjust assets and liabilities: Eliminate historical goodwill as of September 30, 2000.................................................. 76,327 Write-off of PC based switches(iv)..................... 6,500 Write-down of fixed assets to fair value............... 68,000 Write-up of management information systems to fair value................................................. (15,000) -------- Preliminary goodwill(v)................................... $593,978 ======== ----------------------- (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 September 30, 2000, a total of 29,848,000 shares of World Access common stock are assumed to have been issued in connection with the WorldxChange merger as follows (in thousands, except per share amounts): WorldxChange common shares outstanding upon the conversion of preferred shares outstanding at September 30, 2000..... 2,727 WorldxChange common shares outstanding at September 30, 2000...................................................... 42,614 -------- Total WorldxChange common shares outstanding...... 45,341 Multiplied by: Exchange ratio............................... 0.6583 -------- Shares of World Access Common Stock assumed to be exchanged................................................. 29,848 Multiplied by: Average market price (a)..................... $ 11.29 -------- Value of World Access Common Stock exchanged................ $336,984 ======== - --------------- (a) The average price represents the average market price of World Access common stock for the three trading days prior to and after May 23, 2000, the date economic terms of the merger were amended. (ii) As the consummation of the merger is expected to occur after July 1, 2000, we have valued the World Access options using the guidance in FIN 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB opinion No. 25. Under FIN 44, the fair value of vested options issued will be included as part of the purchase price. The fair value of unvested options issued will also be included as part of the purchase price; however, a portion of the intrinsic value (if any) of the unvested options will be allocated to unearned compensation and recognized as compensation cost over the remaining future vesting period. The intrinsic value to be allocated to unearned compensation is not significant and has not been reflected in these pro forma financial statements. 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 September 30, 2000, WorldxChange had approximately 4.1 million options outstanding; 2.6 million of which were vested and 1.5 million were unvested. The vested and unvested options are convertible to approximately 1.6 million and 1.0 million World Access options respectively, totaling 2.6 million. The fair value of the 1.6 million vested options is $12.7 million computed using the Black-Scholes Option Pricing Model and is included in the purchase price. The fair value of the 1.0 million unvested options is $5.0 million computed using the Black-Scholes Option Pricing Model. The assumptions used in the Black-Scholes model are: dividend yield 0%, volatility 70%, risk free interest rate of 6.43%, and an expected life of three years. 27 29 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (iii) As of September 30, 2000, WorldxChange has net advances due to World Access of $54.7 million, which consisted of the following (in thousands): Net expenses under Management Agreement..................... $(22,688) Secured term loan........................................... 35,732 Working capital advances.................................... 41,606 -------- $ 54,650 ======== On August 1, 2000, WorldxChange entered into an Executive Management Services Agreement ("Management Agreement") with World Access. Under this agreement, World Access serves as the exclusive agent for WorldxChange to provide all management services required for the operation and management of WorldxChange. World Access has the authority, to the fullest extent permitted by law, to take all actions and make all decisions on behalf of WorldxChange in the operation and management of WorldxChange's day to day business affairs. This includes the direction and use of and access to WorldxChange's assets and the power to select, terminate and determine the compensation of the management and employees of WorldxChange. Under this agreement, World Access has also assumed all financial responsibility related to the operations of WorldxChange subsequent to August 1, 2000. As a result of World Access assuming all financial responsibility for WorldxChange, World Access has recorded the net loss incurred by WorldxChange since August 1, 2000 as a single line item, "Expense under WorldxChange Management Agreement", in its Statement of Operations and recorded a liability to WorldxChange. This item has been presented as part of both company's operations due to the significant integration that has occurred between the companies. As an integral component of the merger agreement, World Access agreed to provide WorldxChange up to $45.0 million in bridge funds, $35.7 million of which had been advanced as of September 30, 2000. Stockholders holding a majority of the outstanding shares of voting stock of both the World Access and WorldxChange have entered into agreements in which they agreed to vote in favor of the WorldxChange merger. In early August 2000, when it was determined that completion of the WorldxChange merger was highly likely under the voting agreements, World Access began advancing funds to WorldxChange for working capital purposes. As of September 30, 2000, World Access has advanced approximately $41.6 million to WorldxChange. These funds are being used to finance operating losses expected to be incurred by WorldxChange prior to the merger date and to make permanent investments in working capital that are required to support WorldxChange growth. World Access intends to fully forgive these loans, net of the expenses under the management agreement, in connection with the consummation of the merger. As a result, the bridge financing and other advances already funded are being accounted for as additional purchase price, net of the expenses under the management agreement. (iv) At September 30, 2000, WorldxChange has PC based switches with net book value of approximately $6.5 million. The merger with World Access would result in these assets becoming idle, hence, the adjustment to write-off these assets in the acquisition. Consequently, depreciation expense is decreased by $722,000 and $542,000 for the year 28 30 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) ended December 31, 1999 and the nine months ended September 30, 2000, respectively. See note 12 for adjustment to depreciation expense. (v) The pro forma goodwill is preliminary and subject to change based on a final review of the fair values of WorldxChange's net assets as of the actual merger date. Upon a final review of the fair value of WorldxChange's assets and liabilities, it is likely that certain tangible and intangible assets such as international licenses, foreign carrier operating agreements and property and equipment may be recognized at amounts which differ from the amounts estimated in these unaudited pro forma financial statements. Although we do not expect these final adjustments to be significant, they could increase or decrease the depreciation and amortization expense reflected in the unaudited pro forma financial statements. (vi) Intangible assets consist of wholesale and retail customer base, management information systems, licenses and interconnection, management and workforce expertise. Amortization is provided using the straight-line method over a 5-year period. (12) Amortization of goodwill over an estimated life of 20 years. The pro forma adjustment to goodwill was computed as follows (in thousands): HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT -------- ------------ ------------ ---------- WorldxChange -- For the nine months ended September 30, 2000..................... $593,978 $22,274 $ (6,023) $16,251 WorldxChange -- For the year ended December 31, 1999...................... $593,978 $29,699 $(18,741) $10,958 Depreciation benefit as a result of write-off of impaired assets, write-down of fixed assets to fair value and write-up of management information systems to fair value is arrived at using an estimated life of nine years. The pro forma adjustment to property and equipment was computed as follows (in thousands): PRO FORMA PROPERTY AND DEPRECIATION EQUIPMENT ADJUSTMENT ------------ ------------ WorldxChange -- for the nine months ended September 30, 2000...................................................... $ 59,500 $(4,958) WorldxChange -- for the year ended December 31, 1999........ $ 59,500 $(6,611) Amortization of additional intangible assets over an estimated life of 5 years. The pro forma adjustment to intangible assets was computed as follows (in thousands): PRO FORMA INTANGIBLE AMORTIZATION ASSETS ADJUSTMENT ----------- ------------- WorldxChange -- for the nine months ended September 30, 2000...................................................... $41,300 $6,195 WorldxChange -- for the year ended December 31, 1999........ $41,300 $8,260 (13) Elimination of WorldxChange's historical goodwill. (14) Elimination of WorldxChange's historical shareholders' deficit accounts. (15) In connection with the consummation of the WorldxChange merger, a vendor of WorldxChange has agreed to convert up to approximately $25.0 million of WorldxChange indebtedness into approximately 2,174,000 shares of World Access common stock based upon a conversion rate of $11.50 per share. As of December 11, 2000, the closing price per share of World Access Common Stock was $3.63. Since the fair value of the World Access common stock is less than 29 31 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) $11.50 per share, World Access is paying consideration less than the carrying amount of the accounts payable and debt. This difference is recorded as a decrease to goodwill of approximately $17.1 million. These shares are assumed to be issued for purposes of the calculation of basic and diluted earnings per share in the pro forma condensed combined statement of operations. The balance sheet adjustment reflects the conversion of approximately $25.0 million accounts payable and debt to common stock, paid-in-capital and goodwill for the amount of indebtedness outstanding as of September 30, 2000. The adjustments to the pro forma statement of operations are to eliminate the interest expense recorded on the debt included in the historical results and to record a reduction in goodwill amortization. (16) Elimination of intercompany carrier service revenues and related costs. (17) At September 30, 2000, WorldxChange had a $2.2 million note payable to STAR. Assuming the mergers of WorldxChange and STAR with World Access are consummated, this adjustment is necessary to eliminate the intercompany debt. (18) Adjustment for the additional income tax provision derived from pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from WorldxChange's net operating losses. (19) Represents pro forma weighted average shares for basic and diluted earnings from continuing operations per share. The weighted average shares are computed assuming the issuance of an aggregate of 29,848,000 shares issued to complete the WorldxChange merger and 2,174,000 shares upon the conversion of WorldxChange indebtedness into World Access Common Stock, see Note 15. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. 30 32 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) TELDAFAX ADJUSTMENTS (20) These columns represent the historical financial position and results of operations of TelDaFax as of and for the nine months ended September 30, 2000 and for the year ended December 31, 1999. The following tables represent the conversion of TelDaFax's balance sheet as of September 30, 2000 and statements of operations for the nine months and year ended September 30, 2000 and December 31, 1999, respectively, from local currency (DM) into U.S. dollars. The U.S. dollar equivalent was computed by multiplying the deutsche mark balance by 0.4497, the exchange rate as of September 30, 2000 for the balance sheet and by 0.4822 and 0.5435 which represent the average exchange rates for the nine month period and year ended September 30, 2000 and December 31, 1999, respectively. TELDAFAX TELDAFAX SEPTEMBER 30, EXCHANGE SEPTEMBER 30, 2000 RATE 2000 ------------------- -------- -------------------- (IN THOUSANDS - DM) (IN THOUSANDS - USD) Cash and equivalents...................... 40,282 0.4497 $ 18,115 Accounts receivable....................... 74,955 0.4497 33,707 Prepaid expenses and other current assets.................................. 47,990 0.4497 21,581 ------- -------- Total current assets.................. 163,227 73,403 ------- -------- Property and equipment, net............... 127,072 0.4497 57,144 Goodwill.................................. 31,310 0.4497 14,080 Other assets.............................. 33,503 0.4497 15,066 ------- -------- Total assets.......................... 355,112 $159,693 ======= ======== Short-term debt........................... 15,529 0.4497 $ 6,983 Accounts payable.......................... 126,169 0.4497 56,738 Other accrued liabilities................. 20,845 0.4497 9,374 ------- -------- Total current liabilities............. 162,543 73,095 ------- -------- Long-term debt............................ 36,039 0.4497 16,206 Other long-term liabilities............... 699 0.4497 314 ------- -------- Total liabilities..................... 199,281 89,615 ------- -------- Minority interests........................ 1,524 0.4497 685 Stockholders' Equity (Deficit): Common stock.............................. 172,024 0.4497 77,359 Additional paid in capital................ 15,787 0.4497 7,099 Accumulated other comprehensive loss...... -- (343) Accumulated deficit....................... (33,504) 0.4394 (14,722) ------- -------- Total stockholders' equity............ 154,307 69,393 ------- -------- Total liabilities and stockholders' equity.............................. 355,112 $159,693 ======= ======== 31 33 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) TELDAFAX TELDAFAX NINE MONTHS ENDED EXCHANGE NINE MONTHS ENDED SEPTEMBER 30, 2000 RATE SEPTEMBER 30, 2000 ------------------- -------- -------------------- (IN THOUSANDS - DM) (IN THOUSANDS - USD) Service revenues 465,153 0.4822 $224,297 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below) 376,582 0.4822 181,588 Selling, general and administrative 105,487 0.4822 50,866 Depreciation and amortization 37,353 0.4822 18,012 ------- -------- Total operating expenses 519,422 250,466 ------- -------- Operating loss (54,269) (26,169) Interest and other income 2,253 0.4822 1,086 Interest expense (2,367) 0.4822 (1,141) ------- -------- Loss from continuing operations before income taxes and minority interests (54,383) (26,224) Provision (benefit) for income taxes (20,578) 0.4822 (9,923) ------- -------- Loss from continuing operations before minority interests (33,805) (16,301) Minority interests 2,033 0.4822 980 ------- -------- Loss from continuing operations (31,772) $(15,321) ======= ======== Effective October 1, 1999, TelDaFax acquired a majority interest in the telecommunications equipment distributor Demuth & Dietl Co. Kommunikationselektronik GmbH (D & D). The historical results of operations of TelDaFax for the year ended December 31, 1999 includes D & D results for the three months ended December 31, 1999. The results of D & D for the period from January 1, 1999 to September 30, 1999 have been added to the TelDaFax historical results of operations as follows: TELDAFAX TELDAFAX TELDAFAX YEAR ENDED D&D FOR YEAR ENDED YEAR ENDED DECEMBER 31, 1999 THE PERIOD DECEMBER 31, 1999 DECEMBER 31, 1999 INCLUDING 3 MONTHS JANUARY 1, 1999 TO INCLUDING 12 MONTHS EXCHANGE INCLUDING 12 MONTHS OF D&D SEPTEMBER 30, 1999 OF D&D RATE OF D&D ------------------ ------------------- ------------------- -------- -------------------- (IN THOUSANDS - DM) (IN THOUSANDS - USD) Service revenues...... 611,018 58,787 669,805 0.5435 $364,039 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)............. 507,745 53,083 560,828 0.5435 304,810 Selling, general and administrative..... 84,008 5,703 89,711 0.5435 48,758 32 34 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) TELDAFAX TELDAFAX TELDAFAX YEAR ENDED D&D FOR YEAR ENDED YEAR ENDED DECEMBER 31, 1999 THE PERIOD DECEMBER 31, 1999 DECEMBER 31, 1999 INCLUDING 3 MONTHS JANUARY 1, 1999 TO INCLUDING 12 MONTHS EXCHANGE INCLUDING 12 MONTHS OF D&D SEPTEMBER 30, 1999 OF D&D RATE OF D&D ------------------ ------------------- ------------------- -------- -------------------- (IN THOUSANDS - DM) (IN THOUSANDS - USD) Depreciation and amortization....... 33,630 168 33,798 0.5435 18,369 -------- ------- -------- -------- Total operating expenses........... 625,383 58,954 684,337 371,937 -------- ------- -------- -------- Operating loss.... (14,365) (167) (14,532) (7,898) Interest and other income............. 4,456 86 4,542 0.5435 2,469 Interest expense..... (3,692) (302) (3,994) 0.5435 (2,171) -------- ------- -------- -------- Loss from continuing operations before income taxes and minority interests....... (13,601) (383) (13,984) (7,600) Provision (benefit) for income taxes... (7,009) (37) (7,046) 0.5435 (3,830) -------- ------- -------- -------- Loss from continuing operations before minority interest........ (6,592) (346) (6,938) (3,770) Minority interest.... 1,336 89 1,425 0.5435 774 -------- ------- -------- -------- Loss from continuing operations...... (5,256) (257) (5,513) $ (2,996) ======== ======= ======== ======== (21) The board of directors of World Access has approved a Purchase and Transfer Agreement, dated as of June 14, 2000, under which World Access will acquire shares of TelDaFax stock. Pursuant to the TelDaFax Purchase Agreement, World Access will attempt to acquire 100% of the outstanding shares of TelDaFax in five transactions (collectively referred to as the TelDaFax Purchase): Purchase of the TelDaFax Shares Owned by the Apax Funds. On September 21, 2000, World Access acquired 11,178,176 shares of TelDaFax held by the funds advised by Apax, except the A+M fund, in exchange for 11,457,631 shares of World Access common stock. The shares held by the Apax funds, excluding the A+M fund represented 33.03% of the outstanding capital stock of TelDaFax. As of December 1, 2000, there were 33,828,600 shares of TelDaFax stock outstanding. A+M is a fund advised by Apax; however, because World Access intends to purchase the TelDaFax shares of A+M separately pursuant to a put/call arrangement, all references to "Apax funds" exclude A+M unless otherwise noted. Put/Call Option for Shares of Dr. Klose and A+M. From June 14, 2000 until December 31, 2001, Dr. Klose has the right to sell to World Access all of the outstanding shares of TelDaFax he owns in up to three installments. From July 1, 2002 until December 31, 2002, World Access has the right to buy from Dr. Klose all of the outstanding shares of TelDaFax owned by Dr. Klose at the time World Access exercises its right to purchase. As of December 1, 2000, Dr. Klose owned 2,756,200 shares of TelDaFax stock, equal to 8.15% of the outstanding capital stock of TelDaFax. From January 1, 2001 until April 30, 2001, A+M has the right to sell to World Access all of the outstanding shares of TelDaFax owned by A+M in one installment. From July 1, 2001 until December 31, 2001, World Access has the right to buy from A+M all of the outstanding shares owned by A+M. As of December 1, 2000, A+M owned 143,492 shares of TelDaFax stock, equal to 0.42% of the outstanding capital stock of TelDaFax. 33 35 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Consideration for the Purchase of TelDaFax Shares of the Apax Funds and Dr. Klose. In exchange for each share of TelDaFax common stock purchased by World Access from A+M and Dr. Klose, World Access will issue a number of shares of World Access common stock determined using an exchange ratio of 1.025. Dr. Klose and A+M waived their rights under the purchase agreement to receive additional shares under the new exchange ratio. Tender Offer. World Access will launch a tender offer for all of the shares of TelDaFax pursuant to which each share of TelDaFax would receive 1.16 shares of World Access common stock. Combination of German Businesses of World Access and Business of TelDaFax. Under the TelDaFax contribution agreement, World Access agreed to contribute the German operations of two of its subsidiaries, NETnet Telekommunications, or NETnet Germany and NewTel Communications, to TelDaFax. In exchange, TelDaFax agreed to issue 1,620,334 of its shares to NETnet Germany and 925,905 shares to Newtel. The total TelDaFax shares received for these World Access subsidiaries would represent 7.0% of the outstanding capital stock of TelDaFax. The TelDaFax Purchase will be accounted for under the purchase method of accounting. The contribution of NETnet Germany and NewTel and the tender offer are all contractually required to close on the same day and the consummation of these transactions is conditioned on World Access obtaining at least 50.1% ownership of the outstanding capital stock of TelDaFax. Although the shares to be acquired from Dr. Klose and A+M may not happen on the same date as the contribution of NETnet Germany and NewTel and the tender offer, it is World Access' intent to acquire 100% of the outstanding stock of TelDaFax and as such, for purposes of the pro forma financial information, we have assumed World Access acquired 100% of the TelDaFax outstanding stock. In accordance with EITF 90-13, Accounting for Simultaneous Common Control Mergers, the transfer of NETnet Germany and NewTel to TelDaFax should be accounted for by World Access as a purchase of TelDaFax under APB Opinion 16, Business Combinations. World Access will fair value TelDaFax assets and liabilities to the extent acquired by World Access. World Access will fair value NETnet Germany and NewTel assets and liabilities to the extent NETnet Germany and NewTel are sold to minority shareholders. As the pro forma financial information assumes World Access will acquire 100% of the outstanding capital stock of TelDaFax, all of TelDaFax assets and liabilities will be recorded at fair value and the NETnet Germany and NewTel assets and liabilities will remain at historical cost. Consequently, under this scenario, World Assess would not recognize any gain or loss on the contribution of NETnet Germany and NewTel to TelDaFax. 34 36 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The total cost to acquire TelDaFax is subject to change, to the extent that the number of shares of TelDaFax capital stock to be acquired will not be fixed until the effective date of the merger. A change in total cost will result in a corresponding change in goodwill and related amortization expense. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill and other intangible assets. These allocations are subject to change pending the completion of the final analysis of the total purchase price and fair values of the assets acquired and the liabilities assumed. The impact of these changes could be material. The preliminary purchase price and goodwill is currently estimated as follows (in thousands): Purchase price: Acquisition of 33.03% of TelDaFax common stock(i)......... $ 64,449 Issuance of World Access Common Stock (ii)................ 76,358 Estimated fees and expenses............................... 5,000 -------- Total estimated purchase price.................... 145,807 Allocation to fair values: Historical shareholders' equity as of September 30, 2000................................................... (69,393) Intangible assets (iv).................................... (33,000) Adjust assets and liabilities: Eliminate historical goodwill.......................... 10,900 Write down of fixed assets to fair value............... 24,000 -------- Preliminary goodwill (iii).................................. $ 78,314 ======== - --------------- (i) On September 21, 2000, World Access purchased all of the outstanding shares of TelDaFax held by the Apax funds, except the A+M fund, in exchange for shares of World Access common stock. The Apax funds, excluding the A+M fund, owned 11,178,176 shares of TelDaFax stock, equal to 33.03% of the outstanding capital stock of TelDaFax. In accordance with the purchase agreement, each share of TelDaFax common stock shall be converted into the right to receive 1.025 shares of World Access Common Stock. The fair value of the World Access common stock is determined as follows (in thousands, except per share amounts): TelDaFax common shares acquired by World Access............. 11,178 Multiplied by: Exchange ratio............................... 1.025 -------- Shares of World Access common stock exchanged............... 11,458 Multiplied by: Average market price(a)...................... $ 5.63 -------- Value of World Access common stock exchanged................ $ 64,449 ======== (a) The average price represents the market price of World Access common stock on September 21, 2000, the date that World Access acquired 33.03% of the outstanding capital stock of TelDaFax. (ii) In accordance with the purchase agreement, each share of TelDaFax common stock held by Dr. Klose and A+M shall be converted into the right to receive 1.025 shares of World Access common stock and all TelDaFax common stock subject to the tender offer shall be converted into the right to receive 1.16 shares of World Access common stock and this World Access 35 37 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) common stock is assumed to have been issued in connection with the TelDaFax purchase as follows (in thousands, except per share amounts): TelDaFax common shares held by: Dr. Klose and A+M........................................... 2,900 Multiplied by: Exchange ratio............................... 1.025 ------ Shares of World Access common stock to be exchanged to Dr. Klose and A+M............................................. 2,973 Remaining shares subject to the tender offer................ 19,751 Multiplied by: Exchange ratio............................... 1.16 ------ Shares of World Access common stock to be exchanged in the tender offer.............................................. 22,911 ------- Total shares of World Access common stock to be exchanged....................................... 25,884 Multiplied by: Average market price(a)...................... $ 2.95 ------- Value of World Access common stock exchanged................ $76,358 ======= - --------------- (a) The average price represents the average market price of World Access common stock for the three trading days prior to and after December 5, 2000, the date the economic terms of the tender offer were amended. (iii) The pro forma goodwill is preliminary and subject to change based on a final review of the fair values of TelDaFax's net assets as of the actual purchase date. Upon a final review of the fair value of TelDaFax's assets and liabilities, it is likely that certain tangible and intangible assets such as customer lists, trademarks and property and equipment may be recognized at amounts which differ from the amounts estimated in these unaudited pro forma financial statements. Although we do not expect these final adjustments to be significant, they could increase or decrease the amortization and depreciation expense reflected in the unaudited pro forma financial statements. (iv) Intangible assets consist of wholesale and retail customer base, licenses and interconnection, management and workforce expertise. Amortization is provided using the straight-line method over a 5-year period. (22) Amortization of goodwill over an estimated life of 20 years. The pro forma adjustment to goodwill was computed as follows (in thousands): HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENT -------- ------------ ------------ ---------- TelDaFax -- For the nine months ended September 30, 2000.................... $78,314 $2,937 $(1,735) $1,202 TelDaFax -- For the year ended December 31, 1999.............................. $78,314 $3,916 $ (605) $3,311 Depreciation benefit as a result of write-down of fixed assets to fair value is arrived at using an estimated life of 5 years. The pro forma adjustment to property and equipment was computed as follows (in thousands): PRO FORMA PROPERTY AND DEPRECIATION EQUIPMENT ADJUSTMENT ------------ ------------ TelDaFax -- For the nine months ended September 30, 2000................................................ $24,000 $(3,600) TelDaFax -- For the year ended December 31, 1999...... $24,000 $(4,800) 36 38 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Amortization of additional intangible assets over an estimated life of 5 years. The pro forma adjustment to intangible assets was computed as follows (in thousands): PRO FORMA INTANGIBLE AMORTIZATION ASSETS ADJUSTMENT ------------ ------------ TelDaFax -- For the nine months ended September 30, 2000................................................ $33,000 $4,950 TelDaFax -- For the year ended December 31, 1999...... $33,000 $6,600 (23) Elimination of historical goodwill. (24) Elimination of historical shareholders' equity accounts and the $207,000 historical loss related to the investment in TelDaFax reported in the historical results of World Access. (25) Elimination of intercompany service revenues and related costs. (26) Adjustment to record additional tax provision (benefit) derived from certain pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from TelDaFax's net operating losses. (27) Represents pro forma weighted average shares for basic and diluted earnings from continuing operations per share. The weighted average shares are computed assuming the issuance of an aggregate of 37,342,000 shares issued to complete the TelDaFax purchase. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. The following represents the pro forma net loss and net loss per share assuming World Access acquires a 50.1% majority interest in TelDaFax for the various scenarios listed below: OPERATING NET LOSS SCENARIO LOSS NET LOSS PER SHARE -------- --------- --------- --------- World Access acquires STAR, WorldxChange and TelDaFax: Year ended December 31, 1999........................... $(352,833) $(407,315) $(3.11) Nine months ended September 30, 2000................... $(320,487) $(328,086) $(2.35) World Access acquires WorldxChange and TelDaFax: Year ended December 31, 1999........................... $(300,919) $(362,520) $(3.61) Nine months ended September 30, 2000................... $(274,446) $(285,652) $(2.62) 37 39 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following represents the pro forma summarized balance sheets as at September 30, 2000 assuming World Access acquires a 50.1% majority interest in TelDaFax for the various scenarios listed below: WORLD ACCESS ACQUIRES: --------------------------- STAR, WORLDXCHANGE WORLDXCHANGE & TELDAFAX & TELDAFAX ------------ ------------ Current assets.............................................. $1,087,670 $ 828,429 Noncurrent assets........................................... 2,570,052 2,203,834 ---------- ---------- Total assets................................................ $3,657,722 $3,032,263 ========== ========== Current liabilities......................................... $1,300,984 $1,048,457 Noncurrent liabilities...................................... 390,242 333,704 Minority interests.......................................... 34,364 34,364 Stockholders' equity........................................ 1,932,132 1,615,738 ---------- ---------- Total liabilities and stockholders' equity.................. $3,657,722 $3,032,263 ========== ========== PRO FORMA WORLD ACCESS (28) On December 17, 1999, World Access entered into an Asset Purchase Agreement with Long Distance International, Inc. ("LDI") whereby it agreed to purchase substantially all of its assets in exchange for World Access Convertible Preferred Stock, Series D, with an Aggregate Liquidation Preference of $185,000,000 ("World Access Preferred") and the assumption of certain of LDI's liabilities. At the closing of the transaction, 81% of the World Access Preferred was issued to holders of LDI's 12 1/4% Senior Notes due 2008 ("Note Holders"), in satisfaction of LDI's obligations thereunder; 6% of World Access Preferred was issued to NETnet International S.A. ("S.A.") in satisfaction of LDI's obligation under an Acquisition Agreement dated October 9, 1998; 3% of the World Access Preferred was issued to LDI to satisfy any remaining obligations; and 10% of the World Access Preferred was deposited into escrow to secure LDI's indemnification obligations under the Asset Purchase Agreement. Any escrow proceeds not so applied will be allocated 70% to the Note Holders; 20% to S.A. and 10% to LDI. The Unaudited Pro Forma World Access Condensed Combined Statement of Operations for the year ended December 31, 1999 give effect to our February 2000 acquisition of LDI, our December 1999 merger with FaciliCom and related transactions, and our May 1999 acquisition of Comm/Net as if the acquisitions had been completed on January 1, 1999. The Unaudited Pro Forma World Access Condensed Combined Statement of Operations for the nine months ended September 30, 2000 gives effect to our February 2000 acquisition of LDI as if the acquisition had been completed on January 1, 1999. The unaudited pro forma condensed combined statements of operations, while helpful in illustrating characteristics of the combined company under one set of assumptions, does not attempt to predict or suggest future results. As a result of the FaciliCom merger and the restructuring program initiated by World Access in the fourth quarter of 1999, World Access expects to realize significant operational and financial synergies. These synergies are expected to include cost reductions resulting from traffic routing changes made to take advantage of each company's least cost routes, elimination of redundant leased line costs, elimination of redundant switching centers and consolidation of administrative functions. World Access currently estimates that these annualized cost savings, which have been excluded from the unaudited pro forma condensed combined statement of operations, will range from $20.0 million to $35.0 million. 38 40 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. 39 41 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA WORLD ACCESS UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 2000 WORLD PRO FORMA PRO FORMA ACCESS(A) ADJUSTMENTS WORLD ACCESS ---------- ----------- ------------ ASSETS Cash and equivalents................................... $ 324,600 $(160,000)(B) $ 164,600 Short-term investments................................. 82,249 -- 82,249 Restricted cash........................................ 17,229 -- 17,229 Accounts and notes receivable.......................... 226,411 -- 226,411 Prepaid expenses and other current assets.............. 23,333 -- 23,333 Net assets held for sale............................... 42,946 -- 42,946 ---------- --------- ----------- Total Current Assets......................... 716,768 (160,000) 556,768 ---------- --------- ----------- Property and equipment................................. 130,618 -- 130,618 Goodwill and other intangibles......................... 1,097,251 -- 1,097,251 Investment in TelDaFax................................. 64,242 -- 64,242 Net advances to WorldxChange........................... 54,650 -- 54,650 Other assets........................................... 74,426 -- 74,426 ---------- --------- ----------- Total Assets................................. $2,137,955 $(160,000) $ 1,977,955 ========== ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt........................................ $ 60,017 $ -- $ 60,017 Accounts payable....................................... 260,994 -- 260,994 Other accrued liabilities.............................. 167,303 -- 167,303 ---------- --------- ----------- Total Current Liabilities.................... 488,314 -- 488,314 Long-term debt......................................... 407,151 (160,000)(B) 247,151 Other long-term liabilities............................ 3,789 -- 3,789 ---------- --------- ----------- Total Liabilities............................ 899,254 (160,000) 739,254 ---------- --------- ----------- Stockholders' Equity (Deficit): Preferred Stock........................................ 6 -- 6 Common stock........................................... 732 -- 732 Additional paid in capital............................. 1,539,915 -- 1,539,915 Accumulated other comprehensive loss................... (22,671) -- (22,671) Accumulated deficit.................................... (279,281) -- (279,281) ---------- --------- ----------- Total Stockholders' Equity (Deficit)......... 1,238,701 -- 1,238,701 ---------- --------- ----------- Total Liabilities and Stockholders' Equity... $2,137,955 $(160,000) $ 1,977,955 ========== ========= =========== 40 42 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 WORLD PRO FORMA PRO FORMA ACCESS(A) LDI(E) ADJUSTMENTS WORLD ACCESS --------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Service revenues............................... $ 826,660 $ 8,679 $ -- $ 835,339 Operating expenses: Cost of carrier services (exclusive of depreciation and amortization shown separately below)............................ 725,060 10,025 -- 735,085 Selling, general and administrative............ 117,405 8,092 -- 125,497 Depreciation and amortization.................. 56,331 2,595 1,916(H) 62,788 1,946(H) Expense under WorldxChange management agreement.................................... 22,688 -- -- 22,688 Restructuring charge........................... 34,326 -- -- 34,326 --------- -------- ------- --------- Total operating expenses............. 955,810 20,712 3,862 980,384 --------- -------- ------- --------- Operating income (loss).............. (129,150) (12,033) (3,862) (145,045) Interest and other income...................... 21,900 3,742 -- 25,642 Interest expense............................... (42,471) (6,235) 5,018(K) (43,688) Loss on investment in TelDaFax................. -- -- (4,853)(P) (4,853) Foreign exchange gain (loss)................... (375) (94) -- (469) --------- -------- ------- --------- Income (loss) from continuing operations before income taxes..... (150,096) (14,620) (3,697) (168,413) Provision (benefit) for income taxes........... (19,265) -- 1,260(L) (18,005) --------- -------- ------- --------- Income (loss) from continuing operations......................... (130,831) (14,620) (4,957) (150,408) Preferred stock dividends...................... (1,907) -- -- (1,907) --------- -------- ------- --------- Income (loss) from continuing operations available to common stockholders....................... $(132,738) $(14,620) $(4,957) $(152,315) ========= ======== ======= ========= Loss per common share from continuing operations: Basic........................................ $ (2.24) $ (2.57)(O) ========= ========= Diluted...................................... $ (2.24) $ (2.57)(O) ========= ========= Weighted average shares outstanding: Basic........................................ 59,199 59,199(O) ========= ========= Diluted...................................... 59,199 59,199(O) ========= ========= 41 43 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(C) COMM/NET(D) LDI(E) ADJUSTMENTS WORLD ACCESS --------- ------------ ----------- -------- ----------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Carrier service revenues...... $501,081 $404,485 $13,868 $117,662 $(17,543)(G) $1,019,553 Operating expenses: Cost of carrier services (exclusive of depreciation and amortization shown separately below)........... 448,305 364,773 9,923 97,867 (17,543)(G) 903,325 Selling, general and administrative.............. 28,433 56,652 2,324 58,822 -- 146,231 Depreciation and amortization................ 13,541 27,823 390 20,716 36,229(H) 97,517 5,786(H) (6,968)(I) Restructuring and other special charges............. 37,800 -- -- 6,387 -- 44,187 -------- -------- ------- -------- -------- ---------- Total operating expenses........... 528,079 449,248 12,637 183,792 17,504 1,191,260 -------- -------- ------- -------- -------- ---------- Operating income (loss)............. (26,998) (44,763) 1,231 (66,130) (35,047) (171,707) Interest and other income..... 3,308 3,026 -- 4,488 -- 10,822 Interest expense.............. (12,914) (33,413) (65) (33,607) (8,325)(J) (58,208) 30,116(K) Loss on investment in TelDaFax.................... -- -- -- -- (990)(P) (990) Foreign exchange loss......... (620) (1,749) -- -- -- (2,369) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations before income taxes....... (37,224) (76,899) 1,166 (95,249) (14,246) (222,452) Provision (benefit) for income taxes....................... (10,126) (7,335) 264 -- 10,198(L) (6,999) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations......... (27,098) (69,564) 902 (95,249) (24,444) (215,453) Preferred stock dividends..... (1,968) -- -- (2,049) (493)(M) (2,461) 2,049(N) -------- -------- ------- -------- -------- ---------- Income (loss) from continuing operations available to common stockholders....... $(29,066) $(69,564) $ 902 $(97,298) $(22,888) $ (217,914) ======== ======== ======= ======== ======== ========== Loss per common share from continuing operations: Basic....................... $ (0.78) $ (4.30)(O) ======== ========== Diluted..................... $ (0.78) $ (4.30)(O) ======== ========== Weighted average shares outstanding: Basic....................... 37,423 50,634(O) ======== ========== Diluted..................... 37,423 50,634(O) ======== ========== 42 44 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A. This column represents the historical financial position and results of operations of World Access. The World Access results of operations for the year ended December 31, 1999 includes the results of Comm/Net from May 1, 1999 and the results of FaciliCom from December 7, 1999. The World Access results of operations for the nine months ended September 30, 2000 include the results of operations of LDI from February 11, 2000. B. Under the terms of the Indenture governing World Access' $300.0 million of 13.25% Senior Notes due 2008, World Access has an obligation to utilize the net cash proceeds from the sale of certain of its equipment businesses to retire debt. Based on the net cash received to date from the sale of Telco Systems in April 2000, World Access is currently obligated to utilize approximately $160.0 million to retire unsubordinated indebtedness or make a tender offer for its 13.25% Senior Notes by January 2, 2001. The net cash relates to the $268.6 million cash element of the Telco Systems sales price, less approximately $11.0 million in transaction expenses and $97.0 million of income taxes. The income taxes represents the net cash liability World Access is expected to incur as a result of the gain it will realize on the sale of Telco Systems for federal and state income tax purposes. Income taxes assume a tax basis for Telco Systems of approximately $92.0 million and a combined federal and state tax rate of 40%. To the extent the Company uses its net cash proceeds to tender for the 13.25% Senior Notes, the actual tender price is defined in the Indenture as face value of the Notes, plus accrued and unpaid interest, less the current market value of $15.0 million, or five points, of World Access common stock paid to the note holders as exchange consideration in December 1999. Assuming $5.00 per share as the value of World Access common stock, the current tender price would be approximately 98% of face value, plus accrued and unpaid interest. We have included a pro forma adjustment to reflect the potential $160.0 million reduction in cash and $160.0 million reduction in long-term debt that will occur as a result of retiring unsubordinated indebtedness and/or the future tender offer. Under the Indenture, World Access will also be required to retire indebtedness when it receives additional net cash proceeds from the sale of 9.6 million shares of BATM Advanced Communications stock or from the sale of its NACT business. The BATM shares, which had a value of approximately $82.2 million at September 30, 2000, were received by World Access in connection with the sale of Telco Systems. World Access is contractually restricted from selling or otherwise monetizing these shares until April 5, 2001 without the consent of BATM. Any tender offer related to these two events must be commenced within nine months from the date World Access receives the related cash proceeds. World Access will be required to retire unsubordinated indebtedness or make a tender offer for its 13.25% Senior Notes within nine months from the date World Access receives the related cash proceeds from these two events. Since the amount and timing of this retirement of indebtedness or future tender offer is contingent upon future events, no pro forma adjustment to reflect this potential reduction in cash and long-term debt has been included in these pro forma financial statements. C. This column represents the historical results of operations of FaciliCom for the period January 1, 1999 to December 6, 1999. On August 17, 1999 the Company entered into a definitive merger agreement with FaciliCom International, Inc. ("FaciliCom"), a privately owned company that is a facilities-based provider of European and U.S. originated international long-distance voice, data and Internet services. On December 7, 1999, the transaction was completed in its final form whereby FaciliCom merged into the Company (the "FaciliCom Merger"). 43 45 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the FaciliCom Merger, the stockholders of FaciliCom received approximately $56.0 million in cash, 369,901 shares of Convertible Preferred Stock, Series C (the "Series C Preferred Stock"), and 495,557 vested options that each may be exercised to acquire one share of the Company's common stock at an average exercise price of $2.63 per share. In addition, the Company issued 1,912,500 non-qualified options to purchase Company common stock at an exercise price of $15.00 per share in exchange for substantially all the options held by FaciliCom's employees. The Series C Preferred Stock, which has a $369.9 million liquidation preference, was valued at $265.5 million based on its estimated market value during the period including the three trading days prior and the three trading days subsequent to August 17, 1999, the date economic terms of the FaciliCom Merger was announced. The stock options were valued at $24.8 million based on the Black-Scholes option valuation model. Included in other liabilities in the table below, is $300.0 million 10 1/2% FaciliCom Series B Senior Notes due 2008 which were exchanged for the Company's 13.25% Senior Notes due 2008 having an aggregate principal amount of $300.0 million. As consideration for this exchange the Company issued 942,627 shares of its common stock valued at $15.0 million to FaciliCom noteholders. The Series C Preferred Stock bears no dividend and is convertible into shares of the Company's common stock at a conversion rate of $20.38 per common share, subject to adjustment in the event of below market issuances of common stock, stock dividends, subdivisions, combinations, reclassifications and other distributions with respect to common stock. If the closing trading price of the Company's common stock exceeds $20.38 per share for 60 consecutive trading days, the Series C Preferred Stock will automatically convert into common stock. Initially, the holders of the Series C Preferred Stock were entitled to elect four new directors to the Company's board of directors. Except for the election of directors, the holders of the Series C Preferred Stock vote on an as-converted basis with the holders of the Company's common stock. The acquisition of FaciliCom has been accounted for using the purchase method of accounting. Accordingly, the results of FaciliCom's operations have been included in the accompanying consolidated financial statements from December 7, 1999. The excess of purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized over a 20 year period. The following summarizes the allocation of the purchase price (in thousands): Purchase price: Cash...................................................... $ 56,000 Preferred stock issued.................................... 265,515 Common stock issued....................................... 15,000 Stock options issued...................................... 24,785 Fees and expenses......................................... 15,650 --------- Total purchase price.............................. 376,950 Allocation to fair value of net assets: Current assets............................................ (183,934) Property and equipment.................................... (116,479) Intangible assets......................................... (9,206) Other assets.............................................. (1,362) Current liabilities....................................... 207,362 Other liabilities......................................... 313,148 --------- Goodwill.......................................... $ 586,479 ========= 44 46 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) D. This column represents the historical results of operations of Comm/Net for the period January 1, 1999 to April 30, 1999. In May 1999, the Company acquired substantially all the assets and assumed certain liabilities of Comm/Net Holding Corporation and its wholly owned subsidiaries, Enhanced Communications Corporation, Comm/Net Services Corporation and Long Distance Exchange Corporation (Comm/Net Holdings and its wholly owned subsidiaries are collectively referred to herein as "Comm/Net"). Comm/Net, headquartered in Plano, Texas, is a facilities-based provider of wholesale international long distance and wholesale prepaid calling card services, primarily to the Mexican telecommunications markets. In connection with the acquisition, the Company issued 23,174 shares of 4.25% Cumulative Junior Convertible Preferred Stock, Series B (the "Series B Preferred Stock"), valued at approximately $18.5 million with a $23.2 million liquidation preference, and paid approximately $3.5 million to retire certain Comm/Net notes payable outstanding at the time of acquisition. The Series B Preferred Stock is convertible into shares of the Company's common stock at a conversion rate of $16.00 per common share, subject to standard anti-dilution adjustments. If the closing trading price of the Company's common stock exceeds $16.00 per share for 45 consecutive trading days, the Series B Preferred Stock will automatically convert into common stock. Preferred dividends began accruing July 1, 1999 and are payable quarterly. In March 2000, the Series B Preferred Stock was converted into 1,448,373 shares of the Company's common stock. The acquisition of Comm/Net has been accounted for under the purchase method of accounting. Accordingly, the results of Comm/Net's operations have been included in the accompanying consolidated financial statements from May 1, 1999. The excess of purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized over a 20 year period. the following summarizes the allocation of the purchase price (in thousands): Purchase price: Preferred stock issued.................................... $18,539 Debt paid................................................. 3,502 Fees and expenses......................................... 800 ------- Total purchase price.............................. 22,841 Allocation to fair values of net assets: Current assets............................................ (7,754) Property and equipment.................................... (3,351) Current liabilities....................................... 9,609 Other assets and liabilities, net......................... 1,368 ------- Goodwill.......................................... $22,713 ======= E. These columns represents the historical results of operations of LDI. For the Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 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. 45 47 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) F. The LDI merger has been accounted for under the purchase method of accounting. Under the terms of the Agreement and Plan of Merger dated as of December 17, 1999, the purchase price was determined as follows (in thousands): Purchase price: Issuance of preferred stock (i)........................... $217,560 Debt forgiven............................................. 4,674 Fair value of World Access options issued in exchange for LDI options (ii)....................................... 21,731 Fees and expenses......................................... 2,000 -------- 245,965 Allocation to fair value of net assets: Cash...................................................... (42,476) Other current assets...................................... (15,447) Intangible assets......................................... (27,614) Property and equipment.................................... (17,113) Other assets.............................................. (871) Current liabilities....................................... 80,433 Other liabilities......................................... 723 -------- Goodwill.................................................... $223,600 ======== (i) World Access management has determined the fair value of the 185,000 shares of Series D Preferred Stock issued as part of the LDI merger consideration to be $217,560 based on its estimated market value during the period including the three trading days prior and the three trading days subsequent to December 17, 1999, the date economic terms of the LDI merger was announced. 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. (ii) Represents the fair value of approximately 1,500,000 options to acquire World Access Common Stock issued in exchange for options outstanding to acquire shares of LDI stock. The fair value has been determined using the Black-Scholes Option Pricing Model with the following assumptions: dividend yield 0%, volatility 70%, risk free interest rate of 6.3% and an expected life of 4 years. The World Access options have an exercise price of $18.50 per share. The holders of the LDI redeemable warrants have agreed to terminate their warrants as part of the closing of the acquisition by World Access. G. Elimination of inter-company revenues and related costs. 46 48 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) H. Amortization of additional goodwill as a result of the FaciliCom, Comm/Net and LDI Acquisitions over an estimated life of 20 years. The additional Resurgens goodwill of $127.4 million is a result of the 7,500,000 shares released from escrow related to the acceleration of the Resurgens earn-out in connection with the FaciliCom Merger. The pro forma adjustment to goodwill was computed as follows (in thousands): HISTORICAL PRO FORMA GOODWILL PRO FORMA GOODWILL AMORTIZATION AMORTIZATION ADJUSTMENTS -------- ------------ ------------ ----------- For the nine months ended September 30, 2000: LDI....................................... $223,600 $ 8,385 $ (6,469) $ 1,916 ======= ======== ======= For the year ended December 31, 1999: FaciliCom................................. 586,479 29,324 (2,475) 26,849 Resurgens................................. 127,425 6,371 (409) 5,962 LDI....................................... 223,600 11,180 (8,210) 2,970 Comm/Net.................................. 22,713 1,136 (688) 448 ------- -------- ------- $48,011 $(11,782) $36,229 ======= ======== ======= Amortization of additional intangible assets over their estimated useful lives. The pro forma adjustment for intangible asset amortization was computed as follows (in thousands): INTANGIBLE PRO FORMA HISTORICAL PRO FORMA ASSETS AMORTIZATION AMORTIZATION ADJUSTMENT ---------- ------------ ------------ ---------- For the nine months ended September 30, 2000: LDI........................................ $27,614 $2,958 $(1,854) $1,104 FaciliCom.................................. 9,206 1,380 (538) 842 ------- ------ ------- ------ $36,820 $4,338 $(2,392) $1,946 ======= ====== ======= ====== For the year ended December 31, 1999: LDI........................................ $27,614 $3,944 $ -- $3,944 FaciliCom.................................. 9,206 1,842 -- 1,842 ------- ------ ------- ------ $36,820 $5,786 $ -- $5,786 ======= ====== ======= ====== I. Adjustment to depreciation expense for the adjustment to fair values of switching equipment and IRUs at FaciliCom. J. Represents the adjustment to interest expense related to the exchange of $300.0 million of FaciliCom notes with a 10.5% coupon for World Access notes with a 13.25% coupon and the amortization of the $15.0 million debt discount related to World Access notes over a period of eight years. The pro forma adjustment to interest expense was computed as follows (in thousands): Interest expense on World Access notes for eleven months.... $(36,438) Debt issue cost amortization on World Access notes for eleven months............................................. (1,719) Historical FaciliCom note interest expense.................. 28,875 Historical FaciliCom debt issue cost amortization........... 957 -------- Net increase in interest expense.................. $ (8,325) ======== 47 49 WORLD ACCESS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) K. Adjustment to reduce interest expense related to the elimination of LDI indebtedness resulting from the acquisition as follows: FOR THE 42 DAY FOR THE YEAR PERIOD ENDED ENDED FEBRUARY 11, DECEMBER 31, 2000 1999 --------------- ----------------- Interest expense on LDI's 12 1/4% Senior Notes... $4,609 $27,656 Amortization of original issue discount on LDI's 12 1/4% Senior Notes........................... 200 1,202 Amortization of LDI's 12 1/4% Senior Notes offering costs................................. 157 944 Interest expense on notes payable to the holders of LDI's 12 1/4% Senior Notes.................. 52 314 ------ ------- Net decrease in interest expense....... $5,018 $30,116 ====== ======= L. Adjustment for the additional tax benefit derived from pro forma adjustments. World Access has not recorded any tax benefit on a pro forma basis that may be derived from LDI's and FaciliCom's net operating losses. M. 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. N. To eliminate historical LDI preferred stock dividends and preferred stock and warrant redemption accretion. O. Represents pro forma weighted average shares and basic diluted earnings from continuing operations per share for the year ended December 31, 1999. The weighted average shares are computed assuming the issuance of (1) an aggregate of 4,713,128 shares issued for $75.0 million in connection with the private placement of World Access common stock in conjunction with the FaciliCom merger; (2) an aggregate of 942,627 shares issued to the holders of the FaciliCom notes; (3) an aggregate 963,722 shares issued to certain FaciliCom shareholders; and (4) 7,500,000 shares released from escrow related to the acceleration of the Resurgens earn-out in connection with the FaciliCom merger as of January 1, 1999. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common stock shares would be anti-dilutive. For the six months ended June 30, 2000, no additional shares of common stock are deemed to be outstanding. Due to the pro forma loss from continuing operations potential common stock shares related to stock options, stock warrants, convertible notes and convertible preferred stock have been excluded from the diluted loss per share as the inclusion of these potential common shares would be anti-dilutive. P. On September 21, 2000, World Access acquired 33.03% of the outstanding shares of TelDaFax. The Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended December 31, 1999 and the nine months ended September 30, 2000, give effect to this acquisition as if it had occurred on January 1, 1999. As a result, the following loss from investments have been recognized: 33.03% HISTORICAL TELDAFAX ACQUISITION BY LOSS ON PRO FORMA NET LOSS WORLD ACCESS INVESTMENT ADJUSTMENT -------- -------------- ---------- ---------- Nine months ended September 30, 2000....... $(15,320) $(5,060) $207 $(4,853) Year ended December 31, 1999............... (2,996) (990) -- (990) 48 50 SELLING SECURITY HOLDERS World Access issued the shares of common stock offered by this prospectus in private placement transactions with the holders named below in transactions exempt from the registration requirements of the Securities Act. The selling security holders may from time to time offer and sell any or all of these shares pursuant to this prospectus. For purposes of this prospectus, the term selling security holder includes the holders named below, the beneficial owners of these shares and their transferees, pledgees, donees or other such successors. The percent of beneficial ownership for each stockholder is based on 73,392,231 shares of common stock outstanding as of December 14, 2000. The following table sets forth information with respect to the selling security holders as of December 14, 2000 and the shares beneficially owned by them that they may offer pursuant to this prospectus. We have obtained this information from the selling security holders. SHARES OF SHARES OF COMMON STOCK PERCENTAGE OF COMMON SHARES SHARES OF BENEFICIALLY COMMON STOCK BENEFICIALLY COMMON OWNED BENEFICIALLY OWNED STOCK UPON OWNED PRIOR TO OFFERED COMPLETION UPON COMPLETION SELLING SECURITY HOLDERS OFFERING(1) HEREBY OF OFFERING OF OFFERING - ------------------------ ------------- ----------- ------------ --------------- HOLDER OF 4.25% CUMULATIVE SENIOR PERPETUAL CONVERTIBLE PREFERRED STOCK, SERIES A The 1818 Fund III, L.P. (2)........... 6,086,956 1,739,130(3) 4,347,826 5.59% HOLDERS OF CONVERTIBLE PREFERRED STOCK, SERIES E David Marcus(4)....................... 76,276 76,276(5) -- -- Luc Baechler(6)....................... 20,276 20,276(5) -- -- 3i Group plc.......................... 310,805 310,805(5) -- -- Symphony Finance Ltd.................. 6,437 6,437(5) -- -- HOLDERS OF CONVERTIBLE PREFERRED STOCK, SERIES F Daho Bettoumi......................... 17,659 17,659(7) -- -- Yves Blondeel......................... 7,788 7,788(7) -- -- Hein de Bont.......................... 17,482 17,482(7) -- -- Alfred Heilbron(8).................... 88,243 88,243(7) -- -- Max Heilbron(9)....................... 88,242 88,242(7) -- -- Marco Koningsberger................... 17,482 17,482(7) -- -- Philippe Monheim(10).................. 88,242 88,242(7) -- -- Leo Povel(11)......................... 28,034 28,034(7) -- -- OTHER SELLING STOCKHOLDERS: PrimeTEC International, Inc........... 664,773 664,773 -- -- AP Vermogensverwaltung GbR............ 1,359,970 1,359,970 -- -- Apax Funds Nominees Limited B Account(12)......................... 2,570,778 2,570,778 -- -- Apax Funds Nominees Limited D Account(13)......................... 3,849,888 3,849,888 -- -- APAX Germany II L.P................... 3,676,995 3,676,995 -- -- Christian Vogl........................ 8,729 8,729 -- -- LAN Equities Partnership, L.P......... 106,953(14) 38,411 68,542 * Soditic............................... 29,655 29,655 -- -- John M. Boles......................... 4,303 4,303 -- -- Jonathan Frederick Catherwood......... 703 703 -- -- J. Richard Knop....................... 4,303 4,303 -- -- 49 51 SHARES OF SHARES OF COMMON STOCK PERCENTAGE OF COMMON SHARES SHARES OF BENEFICIALLY COMMON STOCK BENEFICIALLY COMMON OWNED BENEFICIALLY OWNED STOCK UPON OWNED PRIOR TO OFFERED COMPLETION UPON COMPLETION SELLING SECURITY HOLDERS OFFERING(1) HEREBY OF OFFERING OF OFFERING - ------------------------ ------------- ----------- ------------ --------------- Richard Miller........................ 1,519 1,519 -- -- Jeffrey S. Rubin...................... 2,531 2,531 -- -- Susan C. Wright....................... 1,843 1,843 -- -- Robert W. Wright...................... 1,843 1,843 -- -- * Less than one percent. (1) Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to the shares beneficially owned by them. (2) Lawrence C. Tucker, a partner at Brown Brothers Harriman & Company, the general partner of The 1818 Fund III, L.P., is a member of the World Access Board of Directors. (3) Represents shares of common stock issuable upon conversion of shares of 4.25% Cumulative Senior Perpetual Convertible Preferred Stock, Series A. (4) David Marcus is Chairman and Chief Executive Officer of GTN Telecom Switzerland, which is a subsidiary of World Access. (5) Represents shares of common stock issuable upon conversion of shares of Convertible Preferred Stock, Series E. (6) Luc Baechler is a member of the Counsel of Administration of GTN Telecom Switzerland, which is a subsidiary of World Access. (7) Represents shares of common stock issuable upon conversion of shares of Convertible Preferred Stock, Series F. (8) Alfred Heilbron was a director of UniNet International N.V. until November 29, 2000. UniNet is a subsidiary of World Access. (9) Max Heilbron was a director of UniNet International N.V. until November 29, 2000. UniNet is a subsidiary of World Access. (10) Philippe Monheim was a director of UniNet International N.V. until November 29, 2000. UniNet is a subsidiary of World Access. (11) Leo Povel was a director of UniNet International N.V. until November 29, 2000. UniNet is a subsidiary of World Access. (12) APAX Funds Nominees Limited B Account holds the shares as custodian for Apax Ventures IV and Apax Ventures IV International Partners LP, which beneficially own 942,931 and 1,627,847 shares, respectively. Apax Ventures IV and Apax Ventures IV International Partners LP are managed by Apax Partners & Co. Ventures Ltd. (13) APAX Funds Nominees Limited D Account holds the shares as custodian for Apax UK V-A LP and UK V-B LP, which beneficially own 1,960,156 and 1,889,732 shares, respectively. Apax UK V-A LP and Apax UK V-B LP are managed by Apax Partners & Co. Ventures Ltd. (14) Represents shares of common stock issued to Long Aldridge & Norman LLP in partial payment of legal fees. Except as noted above, none of the selling security holders has, or within the past three years has had, any position, office or other material relationship with World Access or any of our predecessors or affiliates. The selling security holders identified above may have sold, transferred or otherwise disposed of all or a portion of their shares, in transactions exempt from the registration requirements of the Securities Act, since the date on which they provided the information regarding their shares. If required, we may identify and provide additional selling security holders and information with respect to them in one or more prospectus supplements. 50 52 PLAN OF DISTRIBUTION As used herein, "selling security holders" includes donees, pledgees, transferees or other successors-in-interest selling shares received after the date of this prospectus from a named selling security holder as a gift, pledge, partnership distribution or other non-sale related transfer. The selling security holders may offer all or part of the shares included in this prospectus from time to time in one or more types of transactions (which may include block transactions) on applicable exchanges or automated interdealer quotation systems, in negotiated transactions, through put or call options transactions relating to the securities offered by this prospectus, through short sales or a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Each selling security holder will act independently of us in making decisions with respect to the timing, manner and size of each sale. The methods by which the selling security holders may resell their shares include, but are not limited to, the following: - a cross or block trade in which the broker or dealer engaged by a selling security holder will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; - purchases by a broker or dealer as principal and resale by such broker or dealer for its account; - an exchange distribution in accordance with the rules of such exchange; - ordinary brokerage transactions and transactions in which the broker solicits purchasers; - negotiated transactions; - short sales or borrowing, returns and reborrowings of the shares pursuant to stock loan agreements to settle short sales; - pledge and hedging transactions with broker-dealers or other financial institutions; - delivery in connection with the issuance of securities by issuers, other than us, that are exchangeable for (whether on an optional or mandatory basis), or payable in, such shares (whether such securities are listed on a national securities exchange or otherwise) or pursuant to which such shares may be distributed; and - a combination of any such methods of sale or distribution. In effecting sales, brokers or dealers engaged by a selling security holder may arrange for other brokers or dealers to participate in such sales. Brokers or dealers may receive commissions or discounts from a selling security holder or from the purchasers in amounts to be negotiated immediately prior to the sale. A selling security holder may also sell the shares in accordance with Rule 144 or Rule 144A under the Securities Act or pursuant to other exemptions from registration under the Securities Act. If the securities offered by this prospectus are sold in an underwritten offering, the underwriters may acquire them for their own account and may further resell these securities from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The names of the underwriters with respect to any such offering and the terms of the transactions, including any underwriting discounts, concessions or commissions and other items constituting compensation of the underwriters and broker-dealers, if any, will be set forth in a prospectus supplement relating to such offering. Any public offering price and any discounts, concessions or commissions allowed or reallowed or paid to broker-dealers may be changed from time to time. Unless otherwise set forth in a prospectus supplement, the obligations of the underwriters to purchase the securities will be subject to certain conditions precedent and the underwriters will be obligated to purchase all the securities specified in such prospectus supplement if any such shares are purchased. Brokers who borrow the securities to settle short sales of securities and who wish to offer and sell the securities under circumstances requiring use of the prospectus or making use of the prospectus desirable may use this prospectus. This prospectus may be amended and supplemented from time to time to describe a specific plan of distribution. 51 53 From time to time the security holders may engage in short sales, short sales against the box, puts, calls and other transactions in our securities, or derivatives thereof, and may sell and deliver the shares offered by this prospectus in connection therewith. We will not receive any of the proceeds from the sales of the securities by the security holders pursuant to this prospectus. We will, however, bear certain expenses in connection with the registration of the securities being offered by the selling security holders, including all costs, expenses and fees incident to the offering and sale of the securities to the public other than any commissions and discounts of underwriters, dealers or agents and any transfer taxes. Our common stock is listed for trading on the Nasdaq National Market, and the shares offered by this prospectus have been approved for quotation on Nasdaq. In order to comply with the securities laws of certain states, the selling security holders may only sell the securities through registered or licensed brokers or dealers. In addition, in certain states, the selling security holders may only sell the securities if they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirements of such state is available and is complied with. A selling security holder, and any broker dealer who acts in connection with the sale of shares hereunder, may be deemed an underwriter within the meaning of Section 2(11) of the Securities Act, and any commissions received by them and profit on any resale of the securities as principal might be deemed underwriting discounts and commissions under the Securities Act. We have agreed to indemnify certain of the selling security holders, underwriters and other participants in an underwriting or distribution of the securities and their directors, officers, employees and agents against certain liabilities including liabilities arising under the Securities Act. Because the selling security holders may be deemed underwriters within the meaning of Section 2(11) of the Securities Act, the selling security holders will be subject to the prospectus delivery requirements of the Securities Act. We are permitted to suspend the use of this prospectus in connection with the sales of securities by selling security holders upon the happening of certain events. These include the existence of any fact that makes any statement of material fact made in this prospectus untrue or that requires the making of additions to or changes in this prospectus in order to make the statements herein not misleading. The suspension will continue until such time as we advise the selling security holders that use of the prospectus may be resumed, in which case the period of time during which we are required to maintain the effectiveness of the registration statement shall be extended. World Access will bear the expense of preparing and filing the registration statement and all post-effective amendments. LEGAL MATTERS Long Aldridge & Norman LLP, Atlanta, Georgia, has passed upon certain legal matters regarding the securities offered by this prospectus. LAN Equities Partnership, L.P., an affiliate of Long Aldridge & Norman LLP, is the owner of 106,953 of the shares of common stock 38,411 of which are being registered pursuant to this registration statement. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedules included in our Annual Report on Form 10-K/A, Amendment No. 4, for the years ended December 31, 1999 and 1998, as set forth in their report, which is incorporated by reference in this prospectus. 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 prospectus by reference to the Annual Report on Form 10-K/A, Amendment No. 4, of World Access for the year ended December 31, 1999 have been so incorporated in reliance on the report of 52 54 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 prospectus by reference to the World Access Current Report on Form 8-K dated December 7, 1999, as amended, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is also incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Ernst & Young LLP, independent certified public accountants, have audited the consolidated financial statements of Long Distance International, Inc. at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, as set forth in their report, which is incorporated by reference in this prospectus. The Long Distance International, Inc. financial statements are incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The consolidated financial statements of STAR are incorporated in this prospectus by reference to STAR's Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A filed on September 11, 2000, 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 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 for each of the two years in the period ended September 30, 1999, as set forth in their report. The WorldxChange financial statements are included in this prospectus in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. BDO Deutsche Warentreuhand, independent auditors, have audited the consolidated financial statements of TelDaFax AG at December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, as set forth in their report. The TelDaFax financial statements are included in this prospectus in reliance on BDO Deutsche Warentreuhand's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION Federal securities laws require us to file information with the Securities and Exchange Commission concerning our business and operations. Accordingly, we file annual, quarterly and special reports, proxy statements and other information with the Commission. You can read and copy this information at the following SEC locations: Public Reference Room New York Regional Office Chicago Regional Office 450 Fifth Street, N.W. Seven World Trade Center Northwest Atrium Center Room 1024 Suite 1300 500 West Madison Street Washington, D.C. 20549 New York, New York 10048 Suite 1400 Chicago, Illinois 60661 You can get additional information about the operation of the Commission's public reference facilities by calling the Commission at 1-800-SEC-0330. The Commission also maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding companies that, like us, file information electronically with the Commission. You can also inspect information about us at the offices of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. 53 55 This prospectus is part of a registration statement that we filed with the Commission and omits certain information contained in the registration statement as permitted by the Commission. Additional information about the Company and our common stock is contained in the registration statement on Form S-3 of which this prospectus forms a part, including certain exhibits and schedules. You can obtain a copy of the registration statement from the Commission at the street address or Internet site listed above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Commission allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered part of this prospectus, and later information that we file with the Commission will automatically update and supersede this information. We incorporate by reference documents listed below and any future filings made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until the selling security holders sell all their shares offered by this prospectus. World Access has filed the following documents with the Commission: - Our Annual Report on Form 10-K for the year ended December 31, 1999, as amended by Form 10-K/A filed on August 4, 2000, September 11, 2000, October 6, 2000 and November 13, 2000 (File Number 0-29782); - Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as amended by Form 10-Q/A filed on August 4, 2000, September 11, 2000 and October 6, 2000 (File Number 0-29782); - Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as amended by Form 10-Q/A filed on September 11, 2000 and October 6, 2000 (File Number 0-29782); - Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File Number 0-29782); - Our Current Report on Form 8-K filed on December 15, 2000 (event date: December 14, 2000) (File Number 0-29782); - Our Current Report on Form 8-K filed on December 7, 2000 (event date: December 6, 2000) (File Number 0-29782); - Our Current Report on Form 8-K filed on June 26, 2000 (event date: June 14, 2000) (File Number 0-29782); - Our Current Report on Form 8-K filed on June 26, 2000 (event date: June 7, 2000) (File Number 0-29782); - Our Current Report on Form 8-K filed April 18, 2000 (event date: April 10, 2000) (File Number 0-29782); - Our Current Report on Form 8-K filed March 1, 2000 relating to the acquisition of WorldxChange (event date: February 11, 2000) (File Number 0-29782); - Our Current Report on Form 8-K filed March 1, 2000 relating to the acquisition of STAR Telecommunications (event date: February 11, 2000)(File Number 0-29782); - Our Current Report on Form 8-K filed February 28, 2000 (event date: February 11, 2000), as amended by Forms 8-K/A filed on April 26, 2000 and August 4, 2000 (File Number 0-29782); - Our Current Report on Form 8-K filed February 9, 2000 (event date: February 2, 2000) (File Number 0-29782); 54 56 - Our Current Report on Form 8-K filed December 22, 1999 (event date: December 7, 1999), as amended by Forms 8-K/A filed on February 22, 2000, August 4, 2000 and September 11, 2000 (File Number 0-29782); - The risk factors included in our Registration Statement on Form S-4 (Registration No. 333-37750), filed with the Commission on May 24, 2000, as amended by Amendment No. 1 to Form S-4 filed on August 7, 2000, Amendment No. 2 to Form S-4 filed on September 12, 2000, Amendment No. 3 to Form S-4 filed on October 10, 2000, and Amendment No. 4 to Form S-4 filed on November 14, 2000; - The risk factors included in our Registration Statement on Form S-4 (Registration No. 333-44864), filed with the Commission on August 31, 2000, as amended by Amendment No. 1 to Form S-4 filed on November 14, 2000; and - Our description of common stock included in the Registration Statement on Form S-4 (No. 333-67025), filed on November 10, 1998. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: 945 E. Paces Ferry Road Suite 2200 Atlanta, Georgia 30326 Attention: Ms. Michele Wolf Vice President, Investor Relations Telephone: (404) 231-2025 STAR Telecommunications, Inc. has filed the following documents with the Commission: - Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 filed on November 20, 2000; - Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, as amended by Form 10-Q/A filed on October 10, 2000; - Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, as amended by Form 10-Q/A filed on October 10, 2000; and - Annual Report on Form 10-K for fiscal year ended December 31, 1999, as amended by Form 10-K/A filed on September 11, 2000. You should rely only on the information incorporated by reference or provided in this prospectus or any supplement. We have not authorized anyone else to provide you with different information. The selling security holders cannot offer any of these shares in any state where the offer is not permitted. You should not assume that the information in this prospectus or any supplement is accurate as of any date other than the date on the front of the respective document. We have not authorized anyone, including brokers and dealers, to give any information or make any representation not contained in this prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by us or any other person. This prospectus does not constitute an offer to sell or solicitation of any offer to buy any of the securities offered hereby in any jurisdiction in which it is unlawful to make such offer or solicitation. 55 57 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and 1999...................................... F-3 Consolidated Statements of Operations for the year ended September 30, 2000 (Unaudited) and each of the two years in the period ended September 30, 1999.................... F-4 Consolidated Statements of Shareholders' Deficit and Comprehensive Income/Loss for the year ended September 30, 2000 (Unaudited) and each of the two years in the period ended September 30, 1999.................................. F-5 Consolidated Statements of Cash Flows for the year ended September 30, 2000 (Unaudited) and each of the two years in the period ended September 30, 1999.................... F-6 Notes to Consolidated Financial Statements.................. F-7 TELDAFAX AG Independent Auditors' Report................................ F-27 Consolidated Balance Sheets as of September 30, 2000 (Unaudited), December 31, 1999 and 1998................... F-28 Consolidated Statements of Operations for the nine months ended September 30, 2000 (Unaudited) and 1999 (Unaudited) and each of the three years in the period ended December 31, 1999.................................................. F-29 Consolidated Statements of Shareholders' Deficit and Comprehensive of Changes in Combined Equity Shareholder's Funds for the nine months ended September 30, 2000 (Unaudited) and each of the three years in the period ended December 31, 1999................................... F-30 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 (Unaudited) and 1999 (Unaudited) and each of the three years in the period ended December 31, 1999.................................................. F-31 Notes to the Consolidated Financial Statements.............. F-32 F-1 58 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 sheet of Communications Telesystems International d.b.a. WorldxChange Communications as of September 30, 1999 and the related consolidated statements of operations, shareholders' deficit, and cash flows for each of the two 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 the consolidated results of its operations and its cash flows for each of the two 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 second and eleventh paragraphs of Note 5 as to which the date is May 22, 2000 F-2 59 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) SEPTEMBER 30, ----------------------- 2000 1999 ----------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 12,123 $ 38,030 Accounts receivable, net of allowance of $26,563 at September 30, 2000 (unaudited) and $9,590 at September 30, 1999................................................ 133,198 54,991 Prepaid expenses and other current assets................. 11,331 8,224 --------- --------- Total current assets............................... 156,652 101,245 Equipment and leasehold improvements, net................... 193,257 114,765 Intangible assets........................................... 88,208 12,194 Other assets................................................ 3,464 6,798 --------- --------- Total assets....................................... $ 441,581 $ 235,002 ========= ========= LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accrued network costs..................................... $ 162,736 $ 83,993 Accounts payable.......................................... 103,989 13,770 Accrued taxes............................................. 12,871 3,734 Accrued interest.......................................... 8,511 634 Other accrued liabilities................................. 17,761 11,965 Payable to related parties................................ 2,696 -- Deferred revenue.......................................... 4,309 3,941 Current portion of long-term debt......................... 190,394 9,799 Current portion of capital lease obligations.............. 13,825 10,582 --------- --------- Total current liabilities.......................... 517,092 138,418 Long-term debt.............................................. 34,427 100,324 Capital lease obligations................................... 28,655 29,395 Other long-term liabilities................................. 3,162 1,918 --------- --------- Total liabilities.................................. 583,336 270,055 Shareholders' deficit: Preferred Stock, no par value; Authorized shares -- 10,000,000: Series A Cumulative Preferred Stock; Issued and outstanding 30,000 at September 30, 2000 (unaudited) and September 30, 1999; liquidation preference of $30,000................................................ 30,000 30,000 Common Stock, no par value; Authorized shares -- 100,000,000, Issued and outstanding 42,613,954 at September 30, 2000 (unaudited), and 36,965,911 at September 30, 1999...................................... 148,056 99,047 Notes receivable from shareholders........................ (1,988) (1,474) Accumulated deficit....................................... (303,580) (160,221) Accumulated other comprehensive loss...................... (14,243) (2,405) --------- --------- Total shareholders' deficit........................ (141,755) (35,053) --------- --------- Total liabilities and shareholders' deficit........ $ 441,581 $ 235,002 ========= ========= See accompanying notes. F-3 60 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) YEARS ENDED SEPTEMBER 30, --------------------------------- 2000 1999 1998 ----------- -------- -------- (UNAUDITED) Revenues.................................................... $ 524,442 $421,580 $398,867 Operating expenses: Cost of services (exclusive of depreciation and amortization shown separately below)................... 433,773 328,334 287,312 Selling, general and administrative....................... 172,714 124,112 114,897 Depreciation and amortization............................. 48,200 17,705 12,332 --------- -------- -------- Total operating expenses.......................... 654,687 470,151 414,541 Operating loss.............................................. (130,245) (48,571) (15,674) Reimbursement from World Access of net losses under Management Agreement...................................... 22,688 -- -- Interest expense............................................ 31,418 16,883 11,947 Other expense, net.......................................... 1,702 648 1,378 --------- -------- -------- Loss before minority interest............................... (140,677) (66,102) (28,999) Minority interest........................................... -- 2,251 1,546 --------- -------- -------- Net loss.................................................... (140,677) (63,851) (27,453) Preferred stock dividends................................. 2,682 2 7 --------- -------- -------- Net loss applicable to common shareholders.................. $(143,359) $(63,853) $(27,460) ========= ======== ======== See accompanying notes. F-4 61 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE INCOME/LOSS (DOLLARS IN THOUSANDS) SERIES A SERIES B CUMULATIVE CUMULATIVE PREFERRED STOCK PREFERRED STOCK COMMON STOCK NOTES RECEIVABLE ------------------ ------------------ --------------------- FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS ------- -------- ------- -------- ---------- -------- ---------------- BALANCE AT OCTOBER 1, 1997......... 23 $ 7 -- $ -- 27,734,000 $ 258 $ -- Dividends on Series A Preferred Stock.................... -- -- -- -- -- -- -- Issuance of Common Stock........... -- -- -- -- 788,127 10,000 -- Exercise of options/warrants....... -- -- -- -- 54,425 39 -- Comprehensive loss: Net loss........................... -- -- -- -- -- -- -- Foreign currency translation adjustment........................ -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- -------- ------- BALANCE AT SEPTEMBER 30, 1998...... 23 7 -- -- 28,576,552 10,297 -- Repurchase of Series A Cumulative Preferred Stock......... (23) (7) -- -- -- -- -- Dividends on Series A Preferred Stock.................... -- -- -- -- -- -- -- Issuance of Series A Cumulative Preferred Stock......... 30,000 30,000 -- -- -- -- -- Issuance of Common Stock........... -- -- -- -- 8,153,120 87,102 -- Exercise of options/warrants....... -- -- -- -- 236,239 1,648 -- Notes receivable for sales of common stock...................... -- -- -- -- -- -- (1,474) Comprehensive loss: Net loss........................... -- -- -- -- -- -- -- Foreign currency translation adjustment........................ -- -- -- -- -- -- -- Total comprehensive loss..... ------ ------- ------- ------- ---------- -------- ------- BALANCE AT SEPTEMBER 30, 1999...... 30,000 30,000 -- -- 36,965,911 99,047 (1,474) Dividends on Series A Cumulative Preferred Stock (unaudited)....... -- -- -- -- -- -- -- Issuance of Series B Cumulative Preferred Stock net of issuance cost of $1,342 (unaudited)..................... -- -- 50,000 48,658 -- -- -- Conversion of Series B Cumulative Preferred Stock into Common Stock (unaudited)....................... -- -- (50,000) (48,658) 5,555,550 48,658 -- Exercise of options/warrants (unaudited)....................... -- -- -- -- 92,493 351 -- Notes receivable for sales of common stock (unaudited).......... -- -- -- -- -- -- (514) Comprehensive loss: Net loss (unaudited)............... -- -- -- -- -- -- -- Foreign currency translation adjustment (unaudited)............ -- -- -- -- -- -- -- Total comprehensive loss (unaudited)................. ------ ------- ------- ------- ---------- -------- ------- BALANCE AT SEPTEMBER 30, 2000 (UNAUDITED)....................... 30,000 $30,000 -- $ -- 42,613,954 $148,056 $(1,988) ====== ======= ======= ======= ========== ======== ======= ACCUMULATED OTHER TOTAL ACCUMULATED COMPREHENSIVE SHAREHOLDERS' DEFICIT LOSS DEFICIT ----------- ------------- ------------- BALANCE AT OCTOBER 1, 1997......... $ (68,908) $ (237) $ (68,880) Dividends on Series A Preferred Stock.................... (7) -- (7) Issuance of Common Stock........... -- -- 10,000 Exercise of options/warrants....... -- -- 39 Comprehensive loss: Net loss........................... (27,453) -- (27,453) Foreign currency translation adjustment........................ -- (3,292) (3,292) --------- Total comprehensive loss..... (30,745) --------- -------- --------- BALANCE AT SEPTEMBER 30, 1998...... (96,368) (3,529) (89,593) Repurchase of Series A Cumulative Preferred Stock......... -- -- (7) Dividends on Series A Preferred Stock.................... (2) -- (2) Issuance of Series A Cumulative Preferred Stock......... -- -- 30,000 Issuance of Common Stock........... -- -- 87,102 Exercise of options/warrants....... -- -- 1,648 Notes receivable for sales of common stock...................... -- -- (1,474) Comprehensive loss: Net loss........................... (63,851) -- (63,851) Foreign currency translation adjustment........................ -- 1,124 1,124 --------- Total comprehensive loss..... (62,727) --------- -------- --------- BALANCE AT SEPTEMBER 30, 1999...... (160,221) (2,405) (35,053) Dividends on Series A Cumulative Preferred Stock (unaudited)....... (2,682) -- (2,682) Issuance of Series B Cumulative Preferred Stock net of issuance cost of $1,342 (unaudited)..................... -- -- 48,658 Conversion of Series B Cumulative Preferred Stock into Common Stock (unaudited)....................... -- -- -- Exercise of options/warrants (unaudited)....................... -- -- 351 Notes receivable for sales of common stock (unaudited).......... -- -- (514) Comprehensive loss: Net loss (unaudited)............... (140,677) -- (140,677) Foreign currency translation adjustment (unaudited)............ -- (11,838) (11,838) --------- Total comprehensive loss (unaudited)................. (152,514) --------- -------- --------- BALANCE AT SEPTEMBER 30, 2000 (UNAUDITED)....................... $(303,580) $(14,243) $(141,755) ========= ======== ========= See accompanying notes. F-5 62 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED SEPTEMBER 30, ------------------------------------ 2000 1999 1998 ----------- ---------- --------- (UNAUDITED) OPERATING ACTIVITIES Net loss.................................................... $(140,677) $ (63,851) $ (27,453) Adjustments to reconcile net loss to net cash used in operating activities: Provision for bad debt.................................... 26,980 15,202 15,170 Depreciation and amortization............................. 48,200 17,705 12,332 Deferred revenue.......................................... (1,838) 3,255 (2,275) Minority interest......................................... - (2,251) (1,546) Changes in operating assets and liabilities: Accounts receivable..................................... (66,344) (31,227) (391) Receivables from related parties........................ - (1,448) (1,864) Prepaid expenses and other assets....................... 14,467 (4,740) (5,551) Accrued network costs................................... 55,872 34,629 (12,255) Accounts payable........................................ (1,620) (1,031) (1,584) Other accrued liabilities............................... 50,095 2,208 (6,318) --------- ---------- --------- Net cash used in operating activities.............. (14,865) (31,549) (31,735) INVESTING ACTIVITIES Acquisition of equipment and leasehold improvements......... (12,746) (27,633) (11,990) Acquisition of ACC Europe, net of cash acquired............. (55,745) - - --------- ---------- --------- Net cash used in investing activities.............. (68,491) (27,633) (11,990) FINANCING ACTIVITIES Proceeds from revolving credit agreement.................... 303,695 283,485 256,535 Repayments on revolving credit agreement.................... (296,727) (278,407) (255,885) Proceeds from issuance of long-term debt.................... 35,725 - 55,152 Repayment of long-term debt, subordinated debentures, loans payable and capital leases................................ (33,221) (30,433) (5,299) Payment of dividends on preferred stock..................... - (2) (7) Proceeds from the issuance of preferred stock............... 48,658 30,000 - Proceeds from issuance of common stock...................... 20 71,648 10,039 Repurchase of preferred stock............................... - (7) - --------- ---------- --------- Net cash provided by financing activities.......... 58,150 76,284 60,535 Effect of exchange rate changes on cash..................... (701) 11 (219) --------- ---------- --------- Net increase (decrease) in cash and cash equivalents...................................... (25,907) 17,113 16,591 Cash and cash equivalents at beginning of year.............. 38,030 20,917 4,326 --------- ---------- --------- Cash and cash equivalents at end of year.................... $ 12,123 $ 38,030 $ 20,917 ========= ========== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest.................................................. $ 21,341 $ 9,248 $ 6,686 Income taxes.............................................. - 2 8 NON-CASH INVESTING AND FINANCING ACTIVITIES Assets acquired by incurring capital lease obligations or long-term debt............................................ 31,549 53,391 10,421 Common stock issued in exchange for the acquisition of certain minority interest................................. - 17,102 - Debt issued in conjunction with acquisition of ACC.......... 53,000 - - See accompanying notes. F-6 63 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 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, 1998, 1999 and 2000 international revenue, including Canada, represented approximately 20%, 22% and 47% 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. In February 2000, WorldxChange executed a definitive merger agreement with World Access, Inc. ("World Access") (See Note 13). As of December 14, 2000, the shareholders of WorldxChange and World Access have approved the merger and Management believes that the merger will be consummated before December 31, 2000. On August 1, 2000, the Company entered into an Executive Management Services Agreement ("Management Agreement")(See Note 13) with World Access. Under this agreement, World Access has assumed all financial responsibility related to the operations of WorldxChange subsequent to August 1, 2000. The duration of the Management Agreement is indefinite but can be terminated in certain limited circumstances. Although WorldxChange believes it unlikely that the Management Agreement would be terminated, in such event WorldxChange would be required to raise substantial additional debt or equity financing or seek out another merger partner. There can be no assurance that WorldxChange would be able to obtain such financing or find another merger partner, which may impact its ability to continue as a going concern. The accompanying September 30, 2000 financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of WorldxChange to continue as a going concern. Unaudited Financial Information The accompanying financial statements at September 30, 2000 and for the year then ended are unaudited but include all adjustments (consisting of normal recurring accruals), which in the opinion of F-7 64 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) management, are necessary for a fair presentation of the statement of financial position and operating results and cash flows. 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. 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 Europe, and to a much lesser extent in the Pacific Rim, Latin America, and Canada. WorldxChange's U.S. revenues from residential and smaller commercial users are billed and collected by local exchange carriers (LECs). These LECs pass through to WorldxChange their collection experience with customers billed under these billing agreements. WorldxChange direct bills carrier and certain commercial customers in the U.S. and direct bills all customers in its international markets. WorldxChange performs credit evaluations of the financial condition of these direct bill customers, and may require a deposit in certain circumstances. Revenue is reported net of estimated customer credits which are provided for in the financial statements at the same time the corresponding revenue is recognized. The Company periodically estimates its reserve requirements for uncollectable accounts, and the bad debt expense is included in selling, general and administrative expense. No one customer accounted for more than 10% of revenues for any period during fiscal 2000, 1999, and 1998. Equipment and Leasehold Improvements Equipment and leasehold improvements are recorded at cost and are depreciated or amortized using the straight-line method over the estimated useful lives of the assets (generally two to seven years). Equipment under capital leases are recorded at the net present value of the minimum lease payments and are amortized over the shorter of the useful life of the asset or the lease term (ranging from three to seven years). Interests in international undersea and on-land fiber-optic cable systems are amortized over their F-8 65 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) estimated useful lives, typically 20 years. Total depreciation expense for the fiscal years ended September 30, 2000, 1999 and 1998 was $38,873,000, $17,705,000 and $12,332,000. Installation Costs Installation costs consists of costs incurred by WorldxChange for the expansion of its switching capacity and related network. These costs also include dialer installation costs incurred upon establishing network services with certain operator services customers. These costs are amortized using the straight-line method over three years. Impairment of Long-Lived Assets The Company evaluates impairment of long-lived assets pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management periodically evaluates property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate the assets may be impaired. This evaluation consists of comparing estimated future cash flows (undiscounted and without interest charges) over the remaining life of the asset to its carrying value. When such evaluation results in a deficiency, the asset is written down to its estimated fair value. Accrued Network Costs Accrued network costs represent an estimate for cost of network services received from third party telecommunications companies for which WorldxChange has not been invoiced. The estimates are based upon vendor contract rates and actual minutes utilized per WorldxChange's records. Minority Interest Certain of WorldxChange's subsidiaries have sold stock to outside investors. Income or losses from these operations are allocated to minority shareholders based on ownership percentages. Losses in excess of the amounts invested by the minority shareholders are absorbed by WorldxChange. In September 1999, WorldxChange issued 1,554,763 shares of its common stock in exchange for the shares held by certain minority shareholders of its Australian subsidiary and a related holding company (Note 8). At September 30, 1999 and 2000 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. F-9 66 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) Revenue Recognition Revenue is recognized as long distance telecommunications services are provided. Prepaid calling card revenue is reported net of selling discounts and recorded when minutes are used. Deferred revenue relates to amounts received from or billed to customers prior to WorldxChange providing telecommunications services. Cost of Services Cost of services is exclusive of depreciation and amortization related to the services network which is included in "Depreciation and amortization" presented separately on the consolidated statements of operations. Advertising WorldxChange charges advertising costs to expense as the costs are incurred. Total advertising expense was $14,117,000, $19,118,000 and $17,129,000 for the years ended September 30, 1998, 1999 and 2000, 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. 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, long-term debt and capital lease obligations approximate their fair market values due to their short-term nature or variable interest rates. F-10 67 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In May 1999, the FASB voted to delay the effective date of SFAS No. 133 by one year. The Company will be required to adopt FAS 133 for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under SFAS No. 133, all derivatives must be recognized as assets and liabilities and measured at fair value. WorldxChange does not expect the adoption of SFAS No. 133 to have a material impact on its consolidated financial position or results of operations. Reclassifications Certain prior period amounts have been reclassified to conform with the current period presentation. 3. ACQUISITIONS In December 1998, WorldxChange completed a business combination with CTS Telcom, Inc. and WorldxChange Limited, affiliates under common ownership and management control, both of which have been accounted for in a manner similar to a pooling-of-interests. WorldxChange issued 278,000 shares in connection with the acquisition of WorldxChange Limited, and no consideration was paid for the acquisition of CTS Telcom. The accompanying pooled consolidated financial statements are derived from the combined historical financial statements of CTS Telcom, WorldxChange Limited and WorldxChange. All significant intercompany accounts and transactions have been eliminated. Net revenues and net loss for fiscal 1998 preceding the merger by entity are as follows (in thousands): NET NET REVENUES LOSS -------- -------- 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) ======== ======== 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 allocated to goodwill and customer base based on management's estimates. Goodwill is being amortized on a straight-line basis over twenty years and the customer base is being 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 F-11 68 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) Series B Convertible Preferred Stock has a liquidation preference of $1,000 per share. In May 2000, the Series B Convertible Preferred Stock was converted into 5,555,550 shares of common stock. 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) 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 September 30, 1999 the outstanding balance of such accounts for which WorldxChange is contingently liable was approximately $1,962,000. No amounts were outstanding under this arrangement at September 30, 2000. Equipment and Leasehold Improvements Equipment and leasehold improvements consist of the following (in thousands): SEPTEMBER 30, ---------------------- 2000 1999 ----------- -------- (UNAUDITED) Telecommunications equipment and cables..................... $220,743 $125,190 Computer equipment and software............................. 33,856 15,365 Office furniture, equipment and vehicles.................... 12,912 9,745 Leasehold improvements...................................... 11,404 3,147 Equipment in progress....................................... -- 10,266 -------- -------- 278,915 163,713 Accumulated depreciation and amortization................... (85,658) (48,948) -------- -------- $193,257 $114,765 ======== ======== Telecommunications equipment and cables include eight indefeasible rights of use in cable systems amounting to $41,892,000 and eleven ownership interests in international cables amounting to $15,605,000 at September 30, 1999. As of September 2000, WorldxChange had indefeasible rights of use in cable systems amounting to $60,891,000 and ownership interests in international cables amounting to $17,140,000. These assets are amortized over the life of the agreements of 15 to 20 years. F-12 69 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) Intangible Assets Intangible assets, including goodwill from acquisitions, representing the excess of purchase price paid over the value of net assets acquired, consisted of the following: SEPTEMBER 30, --------------------- 2000 1999 ----------- ------- (UNAUDITED) Goodwill.................................................... $80,467 $12,194 Customer base............................................... 17,068 -- ------- ------- 97,535 12,194 Accumulated amortization.................................... (9,327) -- ------- ------- $88,208 $12,194 ======= ======= The Company amortizes goodwill and customer base to expense on a straight-line basis over 20 years and 5 years, respectively. The Company reviews the net carrying value of intangibles, including goodwill, on a regular basis, and if deemed necessary, charges are recorded against current operations for any impairment in the value of these assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. Intangibles are removed from the books when fully amortized. Amortization expense for fiscal 2000, 1999 and 1998 was $9,327, $0 and $0, respectively. 5. LONG-TERM DEBT Long-term debt consists of the following (in thousands): SEPTEMBER 30, ------------------------ 2000 1999 ----------- ---------- (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 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.................................................. 15,101 -- Term loan due October 2000, with principal reductions of $300,000 due monthly and interest payable monthly at prime plus 5.00% (14.5% at September 30, 2000) and prime plus 6.75% (15.00% at September 30, 1999)...................... 2,900 4,600 Loan and security agreement payable upon collections of accounts receivable with interest payable monthly at prime rate plus 1.75% (11.25% at September 30, 2000) and prime plus 2.75% (11.00% at September 30, 1999)................. 30,000 24,362 Term loan due February 2001 with interest payable at a per annum rate equal to 11.0%................................. 35,725 -- F-13 70 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) SEPTEMBER 30, ------------------------ 2000 1999 ----------- ---------- (UNAUDITED) Note payable due March 2004, with principal and interest payments payable in monthly installments of $184,000 at 12.00%.................................................... 6,148 7,521 Notes payable due June 2004 to March 2005, with aggregate monthly principal and interest payments at 12% due in monthly installments of $355,000 at September 30, 2000 and $197,000 at September 30, 1999............................ 16,932 8,693 Note payable due May 2004, with principal and interest payments payable in monthly installments of $323,000 at 11.5%..................................................... 11,326 13,742 Note payable due August 2004, with principal and interest payments payable in monthly installments of $73,000 at 11.5%..................................................... 2,714 3,247 Note payable due June 2004, with principal and interest payments payable in monthly installments of $57,000 at 10%....................................................... 2,084 2,568 Note Payable due June 2002 with quarterly payments of $67,000................................................... 499 -- Note payable due May 2004 with principal and interest payments made payable in monthly installments of $93,000 at 11%.................................................... 3,104 -- Secured and unsecured notes, with principal and interest payments payable in quarterly installments, maturing at various dates through June 2002. Interest rates ranging from 10% to 14.25%........................................ 88 190 ---------- ---------- 224,821 110,123 Less current portion........................................ (190,394) (9,799) ---------- ---------- $ 34,427 $ 100,324 ========== ========== In March 1997, WorldxChange entered into a credit facility, which consists of an accounts receivable-based revolving credit facility and a term loan. In February and May 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 amended credit facility allows WorldxChange to borrow up to a maximum of $80.0 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 $30.0 million at September 30, 2000. 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 September 30, 2000 had an outstanding balance of approximately $2.9 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 $45.0 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 $45.0 million under the agreement. As of September 30, 2000, the outstanding balance on the bridge loan was $35.7 F-14 71 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) million and $9.3 million was available for borrowing. In total, as of September 30, 2000, WorldxChange had $68.6 million borrowed under the credit facility and $9.3 million available for borrowing. In November 2000, all outstanding amounts owed under this arrangement were paid off by World Access and the borrowing agreement was terminated. This transaction increased the amount WorldxChange owes to World Access. 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 of September 30, 1999 and 2000 the outstanding balance was $45,200,000. In addition, WorldxChange also issued a promissory note in August 1998 in the amount of $1.2 million representing accrued interest on the subordinated promissory notes. This note bears interest at the rate of 10.0% per annum, provides for quarterly payments of interest only and matures on November 30, 2000. In accordance with the terms of the note, this balance was repaid out of the proceeds of the private placement equity offerings. In July 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a transatlantic telecommunications cable system for $4,000,000. At September 30, 2000 the outstanding balance related to this agreement was $3,104,000. In October 1998, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a transatlantic telecommunications cable system for $8,250,000. The purchase was vendor financed with a note that bears interest at 12.0% per annum and provides for monthly payments of principal and interest. WorldxChange's obligations under this agreement are secured by a first-priority security interest in the leased capacity. At September 30, 2000 and September 30, 1999, the outstanding balance related to this agreement was $6,148,000 and $7,521,000, respectively. In February 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a nationwide fiber optic communications system. The initial fee for each capacity segment is calculated based on mileage between cities, as defined per the agreement. This purchase was vendor financed with notes that bear interest at 12.0% per annum and provide for payments in equal monthly installments of principal and interest. At September 30, 2000 and September 30, 1999, the outstanding balances related to this agreement were $16,932,000 and $8,693,000 respectively. In March 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a nationwide telecommunications network. Pursuant to this agreement, WorldxChange signed notes payable to the vendor for the purchase price. These notes bear interest at 11.5% per annum and provide for monthly payments of principal and interest. WorldxChange's obligations under this agreement are secured by a security interest in the leased capacity. At September 30, 2000 and September 30, 1999, the aggregate outstanding balance were approximately $14,040,000 and $16,989,000, respectively, which was comprised of two separate notes with balances outstanding of $11,326,000 and $2,714,000 at September 30, 2000. In June 1999, WorldxChange entered into an indefeasible right of use agreement to lease capacity in a fiber optic communications system for $2,969,000. The purchase was vendor financed with a note that bears interest at 10.0% per annum and provides for payments in equal monthly installments of principal F-15 72 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) and interest, which are inclusive of all operation and maintenance fees. At September 30, 2000 and September 30, 1999, the outstanding balances related to this agreement were $2,084,000 and $2,568,000 respectively. In January 2000, WorldxChange secured a loan, which allows for borrowing of up to $15 million from a shareholder. The loan bears interest at 15% and becomes payable on December 31, 2000. In January 2000, WorldxChange negotiated payment terms with a network provider to finance outstanding invoices payable to the carrier. Under the terms of the agreement, the Company agreed to pay to the carrier a total of $24.1 million for services through August 31, 1999. Payments in the aggregate of $4.3 million were 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. At September 30, 2000 $15.1 million remains outstanding and bears interest at 13%. Maturities of long-term debt as of September 30, 2000 (unaudited) are as follows (in thousands): YEAR ENDING SEPTEMBER 30, - ------------------------- 2001........................................................ $190,394 2002........................................................ 12,315 2003........................................................ 12,010 2004........................................................ 9,135 2005........................................................ 967 -------- Total............................................. $224,821 ======== 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 $8,618,000, $4,783,000, and $3,129,000, respectively, for the years ended September 30, 2000, 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 September 30, 2000 and September 30, 1999 assets acquired under these leases have an original cost of $52,142,000 and $42,958,000, respectively, and accumulated amortization of $33,010,000 and $24,375,000, respectively. The amortization of these assets is included with depreciation and amortization expense presented in the Consolidated Statements of Operations. F-16 73 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 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, 2000 (unaudited) are as follows (in thousands): CAPITAL OPERATING YEAR ENDING SEPTEMBER 30, LEASES LEASES - ------------------------- -------- --------- 2001........................................................ $ 17,386 $ 4,047 2002........................................................ 15,906 3,333 2003........................................................ 10,070 2,343 2004........................................................ 5,020 1,873 2005........................................................ 7 1,803 Thereafter.................................................. -- 1,383 -------- ------- Total minimum lease payments................................ 48,389 $14,782 ======= Less amount representing interest........................... 5,909 -------- Present value of minimum lease payments..................... 42,480 Less current portion........................................ (13,825) -------- Amounts due after one year.................................. $ 28,655 ======== 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 September 30, 2000 these obligations remain outstanding. WorldxChange entered into an agreement during the year ended September 30, 1999 to acquire $25.0 million of capacity in land-based fiber optic cable systems. The vendor has agreed to finance 90% of the commitment at 12% interest, with monthly principal and interest payments over a five year amortization period. At September 30, 1999, WorldxChange has purchased for cash of approximately $10.0 million, leaving $15.0 million to be ordered. As of September 30, 2000, $3.2 million remained to be ordered. 7. INCOME TAXES Income taxes are provided for in accordance with the provisions of FASB Statement No. 109, Accounting for Income Taxes. Under this method, WorldxChange recognizes deferred tax assets and liabilities for the expected future tax effects of temporary differences between the carrying amounts and the tax bases of assets and liabilities, as well as operating loss carryforwards. F-17 74 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) The significant components of WorldxChange's deferred tax assets and liabilities as of September 30, 2000 and 1999 are shown below (in thousands). At September 30, 2000, a valuation allowance of $93,041,000 has been recorded as realization of such net deferred assets is uncertain: SEPTEMBER 30, ---------------------- 2000 1999 ----------- -------- (UNAUDITED) Deferred tax assets: U.S. net operating loss carryforward...................... $ 57,968 $ 28,541 Foreign net operating loss carryforwards.................. 31,265 19,263 Accrued liabilities and reserves.......................... 4,725 4,263 Other..................................................... -- -- -------- -------- 93,958 52,067 Deferred tax liabilities: Depreciation and amortization............................. (913) (1,153) Other..................................................... (4) 199 -------- -------- Net deferred tax assets..................................... 93,041 51,113 Deferred tax assets valuation allowance..................... (93,041) (51,113) -------- -------- $ -- $ -- ======== ======== At September 30, 2000, WorldxChange had net operating loss carryforwards available for federal, state and foreign tax purposes of approximately $153,000,000, $78,000,000 and $89,000,000 respectively. The federal tax loss carryforwards will begin expiring in 2007, unless previously utilized. The state tax loss carryforwards continue expiring in 2000 and will continue to expire through 2003, unless previously utilized. The Netherlands net operating loss carryforward in the amount of $9,480,000 will begin expiring in 2003. Other foreign loss carryforwards may be carried forward indefinitely. The realization of future domestic benefits from net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code if certain cumulative changes occur in WorldxChange's ownership. 8. SHAREHOLDERS' DEFICIT Common Stock In September 1998, WorldxChange completed a private placement for the issuance of 1,659,214 shares of common stock. WorldxChange issued 788,127 shares of common stock in September 1998 for $10,000,000. The remaining 871,087 shares of common stock were issued in December 1998 for another $10,000,000. During fiscal 1999, WorldxChange issued 5,727,000 shares of common stock for proceeds of $60,000,000. In September 1999, WorldxChange issued 1,554,763 shares of its common stock in exchange for minority interests held in certain of its subsidiaries. The acquisition was accounted for under the purchase method of accounting at a value of $17,102,000, or $11.00 per share. The excess value of the stock issued over the minority interest balance at September 30, 1999 was recorded as goodwill of $12,194,000. This intangible asset is being amortized on a straight-line basis over 20 years. F-18 75 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 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 $1,300,000 and $100,000 at September 30, 2000 and 1999, respectively). 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. In connection with the ACC acquisition, 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. In May 2000 the Series B stock converted into 5,555,550 shares of common stock. 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 1998, 1999 and 2000, respectively: risk free interest rate of 5.25%, 5.75% and 6.43%; 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: 2000 1999 1998 ----------- -------- -------- (UNAUDITED)N THOUSANDS) Pro forma net loss.................................. $(142,231) $(65,016) $(28,176) ========= ======== ======== F-19 76 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 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 October 1, 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).............. (1,574,081) 1,574,081 $ 3.52-$13.00 7.48 Exercises (unaudited)........... -- (92,493) $ 0.42-$10.00 3.80 Cancellations (unaudited)....... 1,140,532 (1,140,532) $ 5.00-$13.00 9.76 ----------- ----------- ------------- ------- Balance as of September 30, 2000 (unaudited)..................... 3,451,531 4,083,478 $ 0.42-$13.00 $ 6.32 =========== =========== ============= ======= The following table summarizes significant ranges of outstanding and exercisable options at September 30, 2000 (unaudited): OUTSTANDING OPTIONS ------------------------------------------- OPTIONS EXERCISABLE WEIGHTED -------------------------- AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING LIFE AVERAGE AVERAGE EXERCISE PRICES SHARES IN YEARS EXERCISE PRICE SHARES EXERCISE PRICE - --------------- --------- -------------- -------------- --------- -------------- $0.42-$3.52 1,131,575 3.96 $ 1.16 950,975 $ 0.71 $3.62-$6.80 1,162,833 8.04 5.45 502,317 5.14 $7.00-$10.00 1,221,572 8.10 9.66 604,905 9.47 $11.00-$13.00 567,506 8.98 11.21 118,367 11.20 --------- ---- ------ --------- ------ 4,083,485 7.06 $ 6.32 2,176,564 $ 4.74 ========= ==== ====== ========= ====== The weighted average fair value at date of grant for options granted during fiscal 1998, 1999 and 2000 were $1.88, $2.52 and $3.46 per share, respectively. 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 $5,409,000 and $1,705,000 for the years F-20 77 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) ended September 30, 1998 and 1999, respectively. Effective January 1999, WorldxChange terminated the agreements with these affiliates. 10. SAVINGS PLAN In January 1996, WorldxChange adopted a 401(k) Savings Plan covering substantially all employees that have been employed for at least one year and meet other age and eligibility requirements. Participants may elect to contribute up to six percent of their compensation. WorldxChange matches 25% of participant contributions. WorldxChange's matching contribution totaled $82,000, $100,000 and $116,000 during the years ended September 30, 1998, 1999 and 2000, respectively. 11. LITIGATION AND REGULATION WorldxChange is required under federal law and regulations to file tariffs showing rates, terms and conditions affecting its services. WorldxChange has filed interstate long distance tariffs with the FCC. The FCC has adopted an order that, with certain exceptions, rescinds the requirement that carriers such as WorldxChange maintain FCC tariffs and mandates that tariffs be withdrawn. The FCC stayed its order pending judicial review. If tariffs are eliminated, it will probably be necessary for WorldxChange to secure contractual agreements with its customers providing for many of the terms of its existing tariffs. Absent tariffs and contracts, WorldxChange believes that disputes could arise concerning the respective rights of WorldxChange and its customers, which could hinder WorldxChange's ability to collect its accounts receivable, increase WorldxChange's overall bad debt losses and collection expenses, and increase WorldxChange's exposure to unlimited damage claims. The FCC has not proposed to change its requirements that tariffs for international services be filed, and WorldxChange continues to file such tariffs. The intrastate long distance operations of WorldxChange are also subject to various state laws. The majority of states require certification or registrations. WorldxChange has secured the ability to offer intra-state service in forty-one states. Many states require tariff filing as well. WorldxChange has been successful in obtaining all necessary regulatory approvals to date, although revision of tariffs, authorities and approvals are being made on a continuing basis and many such requests are pending at any one time. Some states may assess penalties on long distance service providers for traffic sold prior to tariff approval. Such states may require refunds to be made to customers. It is the opinion of management that such penalties and refunds, if any, would not have a material adverse effect on the consolidated results of operations, financial position or liquidity of WorldxChange. In May 1997, the California Public Utilities Commission issued an order, which became effective in October 1997, revoking WorldxChange's Certificate of Public Convenience and Necessity in California and imposing certain other fines and penalties against WorldxChange based on the California Public Utilities Commission's findings that WorldxChange violated California laws and regulations requiring WorldxChange to obtain prior consumer authorization before switching consumers' long distance carriers. As a result of the revocation for WorldxChange's Certificate of Public Convenience and Necessity, WorldxChange cannot provide intrastate telecommunication services in California. In addition, WorldxChange must, among other things, (i) pay a $19.6 million fine to the state of California, $2 million of which has been paid with the balance suspended so long as WorldxChange is not found to have committed any future violations of California law or California Public Utilities Commission directives; F-21 78 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) (ii) reimburse the California Public Utilities Commission for $100,000 in prosecution costs which has also been paid; and (iii) pay approximately $1.9 million in reparations to consumers, of which $1,211,000 was payable at September 30, 1999 with no remaining amounts outstanding at September 30, 2000. Under the California Public Utilities Commission's order, the suspension of WorldxChange's Certificate of Public Convenience and Necessity and the other sanctions and fines imposed on WorldxChange are binding on any successor of WorldxChange. WorldxChange may apply to the California Public Utilities Commission for reinstatement of the Certificate of Public Convenience and Necessity after October 22, 2000, although there can be no assurance that such reinstatement would be granted. In addition, WorldxChange is subject to certain legal, regulatory and administrative proceedings, claims and inquiries arising in the ordinary course of business, some of which involve claims for substantial amounts of damages. The ultimate outcome of such proceedings, claims or inquiries cannot be predicted at this time. It is management's opinion, after consultation with its legal counsel, that any such liability or possible restrictions placed on WorldxChange's operations resulting from the ultimate resolution of such proceedings, claims, and inquiries, beyond that provided, would not have a material effect on WorldxChange's consolidated financial position or WorldxChange's future consolidated results of operations or cash flows. 12. SEGMENT INFORMATION In 1999, WorldxChange adopted SFAS 131. The prior year's segment information has been restated to present three reportable operating segments. WorldxChange's segments are organized on the basis of geographic location and include North America, Pacific Rim and Europe. None of WorldxChange's operating segments have been aggregated. WorldxChange evaluates performance and allocates resources based on profit or loss from operations before interest expense, other income (loss) and minority interest. The accounting policies of the reportable segments are the same as those described in the basis of presentation and summary of significant accounting policies. Intersegment sales and transfers between geographic regions are accounted for at prices that approximate arm's length transactions. No single customer accounted for 10% or more of revenues in fiscal 2000, 1999, and 1998. WorldxChange's regional segments earn revenue from direct-dial long distance services as well as operator, debit/calling card, toll free, private line and other enhanced services to residential customers, other telecommunications carriers, and small to medium-sized businesses. Each of WorldxChange's reportable regions represents a strategic business segment that functions in an environment with common economic characteristics determined based on historical and expected future performance. F-22 79 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 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 -------- ------- -------- ---------- September 30, 2000, and for the year then ended (unaudited) (in thousands) Sales to unaffiliated customers.................... $285,347 $52,186 $186,909 $ 524,442 Intersegment revenues.............................. 36,184 5,451 16,882 58,517 -------- ------- -------- ---------- Segment revenues................................... 321,531 57,637 203,791 582,959 Depreciation and amortization...................... 21,379 2,862 23,959 48,200 Segment operating loss............................. (73,151) (10,918) (46,176) (130,245) Segment assets..................................... 698,255 30,738 305,210 1,034,203 Expenditures for long-lived assets................. 4,523 1,237 6,936 12,746 Reconciliations: NET LOSS Total operating loss for reportable segments....... $ (130,245) Interest expense................................... (31,418) Other expense, net................................. 20,986 ---------- Total consolidated net loss................ $ (140,677) ========== ASSETS Total assets for reportable segments............... $1,034,203 Elimination of intercompany receivables............ (592,622) ---------- Total consolidated assets.................. $ 441,581 ========== 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 1,886 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) ========== F-23 80 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) ASSETS Total assets for reportable segments............... $ 574,510 Elimination of intercompany receivables............ (339,508) ---------- Total consolidated assets.................. $ 235,002 ========== September 30, 1998, and for the year then ended (in thousands) Sales to unaffiliated customers.................... $321,763 $58,382 $ 18,722 $ 398,867 Intersegment revenues.............................. 44,650 22,605 7,576 74,831 -------- ------- -------- ---------- Segment revenues................................... 366,413 80,987 26,298 473,698 Depreciation and amortization...................... 9,988 1,484 860 12,332 Segment operating loss............................. (5,547) (3,041) (7,086) (15,674) Segment assets..................................... 176,678 19,883 28,705 225,266 Expenditures for long-lived assets................. 11,790 200 -- 11,990 Reconciliations: NET LOSS Total operating loss for reportable segments......... $ (15,674) Interest expense................................... 11,947 Other expense, net................................. 1,378 Minority interest.................................. 1,546 ---------- Total consolidated net loss................ $ (27,453) ========== ASSETS Total assets for reportable segments............... $ 225,266 Elimination of intercompany receivables............ (105,137) ---------- Total consolidated assets.................. $ 120,129 ========== The following table summarizes revenue by region and by type of customer for the years ended September 30, 2000 and 1999: YEARS ENDED SEPTEMBER 30, ----------------------- 2000 1999 ----------- --------- (UNAUDITED) (IN MILLIONS) REVENUE BY REGIONS: United States............................................... $275.5 $330.0 North America (other)....................................... 9.8 7.5 ------ ------ North America total......................................... 285.3 337.5 Pacific Rim................................................. 52.2 55.6 Europe...................................................... 186.9 28.5 ------ ------ Total............................................. $524.4 $421.6 ====== ====== REVENUE BY CUSTOMERS: Carrier..................................................... $203.9 $186.9 Residential................................................. 220.4 185.3 F-24 81 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) YEARS ENDED SEPTEMBER 30, ----------------------- 2000 1999 ----------- --------- (UNAUDITED) (IN MILLIONS) Operator Services........................................... 7.8 22.9 Commercial.................................................. 92.3 26.5 ------ ------ Total............................................. $524.4 $421.6 ====== ====== 13. MERGER AND MANAGEMENT SERVICES AGREEMENTS WITH WORLD ACCESS In February 2000, WorldxChange executed a definitive merger agreement with World Access, Inc. ("World Access"). On August 1, 2000, WorldxChange entered into an Executive Management Services Agreement ("Management Agreement") with World Access. Under this agreement, World Access serves as the exclusive agent for WorldxChange to provide all management services required for the operation and management of WorldxChange. World Access has the authority, to the fullest extent permitted by law, to take all actions and make all decisions on behalf of WorldxChange in the operation and management of WorldxChange's assets and the power to select, terminate and determine the compensation of the management and employees of WorldxChange. Under this agreement, World Access has also assumed all financial responsibility related to the operations of WorldxChange subsequent to August 1, 2000. As of September 30, 2000, WorldxChange has net advances due to World Access of $91.0 million, which consisted of the following (in thousands): (UNAUDITED) Reimbursement from World Access of Net Losses under Management Agreement...................................... $ (22,688) Secured term loan........................................... 35,732 Working capital advances.................................... 77,957 ------------ $ 91,001 ============ As a result of World Access assuming all financial responsibility for WorldxChange, WorldxChange has recorded the reimbursement of the net loss incurred by WorldxChange since August 1, 2000 as a single line item, "Reimbursement from World Access of Net Losses Under Management Agreement," in its Statement of Operations. As of September 30, 2000, World Access and WorldxChange have consolidated their sales forces, billing systems and network operations centers, as well as decommissioned certain switches as traffic has migrated from one network to the other. F-25 82 COMMUNICATIONS TELESYSTEMS INTERNATIONAL D.B.A. WORLDXCHANGE COMMUNICATIONS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1999 AND PERTAINING TO SEPTEMBER 30, 2000 AND FOR THE YEAR ENDED SEPTEMBER 30, 2000 IS UNAUDITED) The Statement of Operations for WorldxChange for the two months ended September 30, 2000 while operating under the Management Agreement consisted of the following (in thousands): (UNAUDITED) Revenue..................................................... $ 74,031 Cost of services............................................ 55,920 Selling, general and administrative......................... 25,842 Depreciation and network amortization....................... 6,808 Amortization of intangibles................................. 1,889 -------- Total operating expense........................... 90,459 -------- Operating loss.............................................. (16,428) Interest and other income................................... 280 Interest expense............................................ 6,511 ======== Loss before income taxes.................................... (22,659) Income taxes................................................ 29 -------- Net loss.................................................... $(22,688) ======== If WorldxChange had not entered into this Management Agreement its net loss for the year ended September 30, 2000 (unaudited) would have been $163,365,000. In February 2000, World Access entered into a participation agreement with a lender under which WorldxChange can borrow money. In this participation agreement, the lender is the lead lender and acts as agent for World Access in dispersing the funds and in administering and collecting the loan. The participation agreement allows World Access to advance up to $45.0 million to WorldxChange. The terms of the loan are governed by the terms of an existing loan agreement between the lender and WorldxChange. Advances by World Access under the participation agreement are structured as a term loan which bears interest at a rate of 11% per annum and matures on February 11, 2001. Both the term loan and the existing indebtedness under the loan arrangement are secured by a security interest in all personal property of WorldxChange. Subsequent to September 30, 2000, the borrowings under this loan were repaid by World Access. As of September 30, 2000, WorldxChange owed $69.1 million under the loan, including $35.7 million advanced by World Access. These funds are being used to finance operating losses expected to be incurred by WorldxChange prior to the merger date as well as to make permanent investments in working capital that are required to support WorldxChange's growth. As of December 14, 2000, the shareholders of WorldxChange and World Access have approved the Merger and Management believes that the merger will be consummated before December 31, 2000. F-26 83 Herrn Dr. Henning F. Klose Vorsitzender des Vorstands TelDaFax AG Postfach 22 06 35010 Marburg INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of TelDaFax AG as of December 31, 1999, 1998 and 1997, and the related consolidated statements of operations, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TelDaFax AG as of December 1999, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. As discussed in Note 11, the Company's 1999 financial statements have been restated to account for the acquisition of Demuth & Dietl only from the acquisition date, October 4, 1999. Wiesbaden, August 2, 2000 BDO Deutsche Warentreuhand Aktiengesellschaft Wirtschaftsprufungsgesellschaft /s/ BUNGERS /s/ KARLIK - ------------------------------ ------------------------------ H.G. Bungers Karlik F-27 84 TELDAFAX GROUP CONSOLIDATED BALANCE SHEETS (ALL AMOUNTS IN DM '000) DECEMBER 31, SEPTEMBER 30, ----------------- 2000 1999 1998 ------------- ------- ------- (UNAUDITED) Current assets: Cash and equivalents...................................... 40,282 178,287 159,011 Accounts receivable, less allowance for doubtful accounts of DM 408 as of September 30, 2000 (unaudited) and DM 1,128 and DM 3,115 as of December 31, 1999 and 1998, respectively........................................... 74,955 80,260 63,853 Inventories............................................... 9,061 4,129 68 Prepaid expenses and other current assets................. 38,929 29,422 7,843 Total current assets.............................. 163,227 292,098 230,775 Equipment and leasehold improvements, net................... 127,072 137,929 67,355 Intangible assets........................................... 31,310 16,451 13,624 Loan to related parties..................................... 1,375 1,411 -- Financial assets............................................ 4,461 -- -- Deferred tax assets, net.................................... 24,288 3,255 -- Other assets................................................ 3,379 4,027 815 ------- ------- ------- Total assets...................................... 355,112 455,171 312,569 ======= ======= ======= Current liabilities: Accounts payable.......................................... 126,169 196,041 90,699 Accrued expenses.......................................... 10,219 6,575 12,094 Other current liabilities................................. 10,626 4,778 -- Current portion of long-term debt......................... 2,120 1,553 -- Current portion of capital lease obligations.............. 13,409 13,761 4,818 ------- ------- ------- Total current liabilities......................... 162,543 222,708 107,611 Long-term debt.............................................. 1,543 1,572 -- Capital lease obligations................................... 34,496 44,251 10,076 Deferred tax liabilities.................................... -- -- 2,794 Other long-term liabilities................................. 699 721 753 ------- ------- ------- Total long-term liabilities....................... 36,738 46,544 13,623 Minority interests.......................................... 1,524 (160) -- Shareholders' equity: Common stock, Eur 2,60 as of September 30, 2000 (unaudited) and December 31, 1999 and DM 5 par value as of December 31, 1998, 33,828,600 authorized, issued and outstanding as of September 30, 2000 (unaudited) and December 31, 1999 and 1998, respectively............... 172,024 172,024 169,143 Additional paid in capital................................ 15,787 15,787 15,787 Retained earnings......................................... (33,504) (1,732) 6,405 ------- ------- ------- Total shareholders' equity........................ 154,307 186,079 191,335 ------- ------- ------- Total liabilities and shareholders' equity........ 355,112 455,171 312,569 ======= ======= ======= F-28 85 TELDAFAX GROUP CONSOLIDATED STATEMENTS OF OPERATIONS (ALL AMOUNTS IN DM '000, EXCEPT PER SHARE AMOUNTS) NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ----------------------- ----------------------------------- 2000 1999 1999 1998 1997 ---------- ---------- ---------- ---------- --------- (UNAUDITED) Sales................................. 465,153 447,681 611,018 263,050 32,271 Cost of services...................... (407,311) (353,126) (548,110) (202,359) (31,085) Sales expenses........................ (84,799) (67,273) (50,716) (31,417) (3,434) General administration expenses....... (19,901) (4,842) (17,723) (8,570) (2,797) Other operating income................ 4,740 9,625 791 327 76 Other operating expenses.............. (12,151) (7,470) (9,625) (2,969) (1,448) Operating income (loss)............... (54,269) 24,595 (14,365) 18,062 (6,417) Financial result...................... (114) 1,266 764 425 (1,104) Taxes................................. 20,578 (13,365) 7,009 (9,713) 1,667 Minority interests.................... 2,033 207 1,336 -- -- Net income (loss)..................... (31,772) 12,703 (5,256) 8,774 (5,854) Income (loss) per Common Share from Continuing Operations: Basic and Diluted................... (0.94) 0.38 (0.16) 0.45 (5.16) Weighted Average Shares Outstanding: Basic and Diluted................... 33,828,600 33,828,600 33,828,600 19,296,826 1,133,525 F-29 86 TELDAFAX GROUP CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE OF CHANGES IN COMBINED EQUITY SHAREHOLDER'S FUNDS ADDITIONAL COMMON STOCK PAID SHARE RETAINED SHARES AMOUNT IN CAPITAL CAPITAL EARNINGS TOTAL ------------ ------- ------------- ------- -------- ------- PIECES DM'000 DM'000 DM'000 DM'000 BALANCE AT DECEMBER 31, 1996...... -- -- -- 4,000 (7,732) (3,732) Issuance of common stock.......... 20,000 100 100 Issuance of common stock.......... 1,648,000 8,240 8,240 Issuance of common stock.......... 714,860 3,574 14,450 18,024 Retirement of share capital....... (4,000) (4,000) Loss of predecessor company....... (3,663) 3,663 -- Contribution in kind.............. 7,554 7,554 Loss for the period............... (5,854) (5,854) ---------- ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1997...... 2,382,860 11,914 10,787 -- (2,369) 20,332 Issuance of common stock.......... 1,000,000 5,000 5,000 10,000 Issuance of IPO -- public......... 9,725,722 48,629 48,629 Issuance of IPO -- old shareholders.................... 20,720,018 103,600 103,600 Cash dividends.................... -- Transfer to legal reserve......... 334 (334) -- Profit for the period............. 8,774 8,774 ---------- ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1998...... 33,828,600 169,143 16,121 -- 6,071 191,335 Issue of share capital (Euro), Dec 17, 1999........................ -- 2,881 (2,881) -- Loss for the period............... (5,256) (5,256) ---------- ------- ------ ------ ------- ------- BALANCE AT DECEMBER 31, 1999...... 33,828,600 172,024 16,121 -- (2,066) 186,079 Loss for the period (unaudited)... (31,772) (31,772) ---------- ------- ------ ------ ------- ------- BALANCE AT SEPTEMBER 30, 2000..... 33,828,600 172,024 16,121 -- (33,838) 154,307 ========== ======= ====== ====== ======= ======= F-30 87 CONSOLIDATED STATEMENTS OF CASH FLOWS TELDAFAX GROUP (ALL AMOUNTS IN DM '000) NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30 DECEMBER 31 ----------------------- ----------------------------- 2000 1999 1999 1998 1997 ---------- ---------- -------- -------- ------- (Unaudited) Net income (loss)...................................... (33,805) 12,496 (5,256) 8,774 (5,854) Minority interests..................................... 2,033 207 (1,336) -- -- Amortization and depreciation.......................... 33,392 22,595 33,630 18,086 5,040 Depreciation of current assets......................... 3,961 -- -- -- -- Loss on the sale of property, plant and equipment...... 32 -- 3,800 6 -- Decrease (increase) in deferred tax assets............. (21,033) -- (3,255) -- -- Increase (decrease) in deferred tax liabilities........ -- -- (2,794) -- -- -------- -------- -------- -------- ------- (15,420) 35,298 24,789 26,866 (814) -------- -------- -------- -------- ------- Decrease (increase) in accounts receivable trade, net of bad debts......................................... 5,305 (11,759) (16,407) (59,817) (2,759) Increase (decrease) in inventories..................... (4,932) (804) (4,061) -- -- Decrease (increase) in prepaid expenses and other current assets....................................... (9,507) (24,616) (21,579) (8,376) -- Decrease (increase) in other assets.................... 648 (1,818) (3,112) 130 -- Increase (decrease) in accounts payable................ (69,872) 30,936 105,342 48,856 7,205 Increase (decrease) in other accrued liabilities....... 9,492 (1,576) 5,469 34,164 3,091 Increase (decrease) in tax provisions.................. -- 1,750 (6,210) 6,179 31 Increase (decrease) in provision for deferred taxes.... -- 10 -- (60) 2,854 Decrease (increase) in deferred taxes from loss carryforwards........................................ -- -- -- 4,525 (4,525) Increase (decrease) in other long-term liabilities..... 215 (26) 927 2,121 (1,674) Adjustment for effects of acquisition of subsidiaries......................................... (2,277) (326) 4,472 -- -- -------- -------- -------- -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES................... (86,348) 27,069 89,630 54,588 3,409 -------- -------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................................... (14,486) (93,343) (110,397) (65,796) (30,718) Acquisitions........................................... (27,365) (30) (4,757) (350) -- -------- -------- -------- -------- ------- (41,851) (93,373) (115,154) (66,146) (30,718) -------- -------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from capital increases........................ -- -- -- 157,229 2,199 Loans to related parties............................... -- -- (1,411) -- -- Proceeds in respect of share premium amounts........... -- -- -- 5,000 7,512 Proceeds from outstanding amounts due in respect of capital subscribed................................... -- -- -- 9,615 -- Proceeds from outstanding amounts due in respect of share premium amounts................................ -- -- -- 3,275 -- Payments on debt....................................... (29) (22) -- (6) (86) Proceeds from issuance of debt......................... -- 22 3,125 (9,519) 9,519 Payments on capital lease obligations.................. (9,755) -- -- (12,066) -- Proceeds from long-term accounts payable............... -- 36,748 43,118 10,076 -- Payments on other long-term liabilities................ (22) (26) (32) (64) -- Other proceeds from paid-in capital.................... -- -- -- -- 3,663 Proceeds from issuance of other long-term debt......... -- -- -- -- 10,546 -------- -------- -------- -------- ------- (9,806) 36,723 44,800 163,540 33,353 -------- -------- -------- -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (138,005) (29,581) 19,276 151,982 6,044 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....... 178,287 159,011 159,011 7,029 985 CASH AND CASH EQUIVALENTS AT END OF PERIOD............. 40,282 129,430 178,287 159,011 7,029 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: 13,580 13,944 26,812 5,468 1,106 Interest............................................. 2,382 1,777 3,415 5,425 1,106 Income taxes......................................... 11,198 12,167 23,397 43 -- NON-CASH INVESTING AND FINANCING ACTIVITIES............ 475 53,682 57,695 10,821 9,519 Assets acquired by incurring capital lease obligations or................................................... 525 53,682 56,086 20,340 -- long term debt......................................... (50) -- 1,609 (9,519) 9,519 F-31 88 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DM IN THOUSANDS) 1. DESCRIPTION OF BUSINESS TelDaFax Telefon-, Daten- und Fax Transfer GmbH & Co. KG was founded in March 1995. On July 1, 1997, TelDaFax Telefon-, Daten und Fax Transfer GmbH & Co. KG transferred all of its business assets to TelDaFax GmbH. TelDaFax AG was then established through a change in the legal form of TelDaFax GmbH. The transfer of the business assets was a contribution-in-kind to TelDaFax GmbH in exchange for new shares. The assets were contributed at their fair market value. The step-up amounts were treated as contributed capital. Following a resolution, of the General Meeting of Shareholders on May 27, 1998, the legal form was changed again to that of a stock corporation in accordance with Sections 190ff and 238ff of the law governing changes in legal form. The incorporation into TelDaFax AG was entered in the Commercial Register on June 10, 1998. TelDaFax AG ("TelDaFax"), a German company, provides voice telephony, fax and data transmission services along with mobile hardware and mobile phone cards throughout Germany. TelDaFax provides fixed-to-mobile, -international and - -domestic connections to commercial and residential customers through a communication network of dedicated lines leased from Deutsche Telekom AG. Prior to January 1, 1998, these services were provided solely to commercial customers. The receipt of a Category 4 License from the Federal Ministry for Post and Telecommunications for fixed-line telecommunication services on September 30, 1997 and the full liberalization of the German telecommunications market on January 1, 1998 allowed TelDaFax to expand these services to residential customers under the carrier number "01030". TelDaFax also provides internet access through its majority-owned subsidiary GeoNet Systems GmbH and mobile phone hardware and calling cards through its majority-owned subsidiaries Demuth & Dietl + Co. Kommunikationselektronic GmbH and Netztel Plus Drillish AG. TelDaFax also wholly owns BNC Kommunikationssysteme GmbH & Co. KG, an operating division responsible for monitoring TelDaFax router system, and TelDaFax Vertriebs GmbH, an operating division consisting of TelDaFax's sales organization. The accompanying financial statements have been prepared in accordance with United States generally accepted accounting principles, referred to as US GAAP. TelDaFax maintains its financial records in accordance with German statutory regulations which represents generally accepted accounting principles in Germany. Generally, accepted accounting principles in Germany vary in certain respects from US GAAP. Accordingly, TelDaFax has recorded certain adjustments in order that these financial statements be in accordance with US GAAP. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information (Unaudited) The unaudited consolidated balance sheet as of September 30, 2000 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the nine month periods ended September 30, 2000 and 1999, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All adjustments, in the opinion of management, that are necessary for the fair statement of the financial position and the operating results and cash flows for the interim periods have been presented. Results of operations for the nine month periods ended September 30, 2000 and 1999 are not necessarily indicative of the results that may be achieved for the entire years or future periods. Principles of Consolidation The accompanying consolidated financial statements include the accounts of TelDaFax and its wholly-and majority-owned financial subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. F-32 89 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Cash and Cash Equivalents TelDaFax considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables. Concentration of credit risk with respect to trade receivables is limited as the outstanding total represents a large number of customers with individually small balances. The Company does not require collateral or other security interests against trade receivable balances; however, it does maintain reserves for potential credit losses and such losses have been within management's expectations. Substantially all of the Company's cash and cash equivalents are deposited in financial institutions in Germany. Inventories Inventories are stated at the lower of cost or market and are valued using the weighted-average method. Property, Plant and Equipment Property, plant and equipment, is valued at acquisition or production cost and depreciated or amortized over their estimated useful lives, using the straight-line method. Equipment under capital leases are recorded at the net present value of the minimum lease payments and are amortized over the shorter of the useful life of the asset or the lease term using the straight-line method. The range of depreciable lives are as follows: YEARS ------ Technical equipment, plant and machinery.................... 4 - 7 Operational, office and other equipment..................... 4 - 20 Intangible Assets Intangible assets mainly relate to goodwill, acquired software, acquired technical know-how and the license for fixed-line telecommunication services. Goodwill is amortized on a straight-line basis over 15 years. Goodwill as of September 30, 2000 and December 31, 1999, 1998 and 1997, net of accumulated amortization, was DM 24,238, DM 8,049, DM 3,852 and DM 2,694, respectively. Software is capitalized when it is purchased from a third party, either in the ordinary course of business or, in the case of the acquisition of subsidiaries, as allocated goodwill. It is amortized over 4 years. Technical know-how is capitalized as allocated goodwill in the case of the acquisition of subsidiaries. It is amortized over 4 years. Technical know-how as of September 30, 2000 and December 31, 1999, 1998 and 1997, net of accumulated amortization, was DM 676, DM 1,245, DM 2,054 and DM 2,614, respectively. TelDaFax evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, there were no material adjustments to the carrying value of long-lived assets during the nine F-33 90 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) month period ended September 30, 2000 and 1999 and the years ended December 31, 1999, 1998 and 1997. Revenue Recognition Telecommunication revenue is recognized as services are provided. Mobile hardware revenue is reported when the customer takes possession of the product and prepaid mobile calling card revenue is recorded when the minutes are used. Advertising TelDaFax expenses advertising costs as incurred. Total advertising costs were DM 12,485 DM 5,041, DM 24,696, DM 12,321 and DM 3,434 for the nine month periods ended September 30, 2000 and 1999 and the years ended December 31, 1999, 1998 and 1997, respectively. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, SFAS No. 133 was amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS 133". As a result of this amendment, SFAS No. 133 shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In accordance with SFAS No. 133, an entity is required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 requires that changes in the derivatives' fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial position or results of operations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassification Certain amounts in prior years financial statements have been reclassified to conform with the presentation in 1999. F-34 91 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INVENTORIES Inventories consist of: SEPTEMBER 30, DECEMBER 31, ----------- ------------ 2000 1999 1998 ----------- ----- ---- (UNAUDITED) Raw materials............................................... -- -- 68 Work-in-progress............................................ -- 1,027 -- Finished goods.............................................. 9,061 3,102 -- ----- ----- -- 9,061 4,129 68 ===== ===== == 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following: SEPTEMBER 30, DECEMBER 31, ------------- -------------- 2000 1999 1998 ------------- ------ ----- (UNAUDITED) Contractual claim of purchase reduction for traffic services................................................ -- -- -- Prepaid income taxes...................................... 10,060 16,858 -- Short-term portion of prepaid commissions................. 8,052 5,090 -- Other..................................................... 20,817 7,474 7,843 ------ ------ ----- Total........................................... 38,929 29,422 7,843 ====== ====== ===== 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, consist of: SEPTEMBER 30, DECEMBER 31, ------------- ----------------- 2000 1999 1998 ------------- ------- ------- (UNAUDITED) Technical equipment, plant and machinery............... 169,648 160,723 75,755 Other equipment, operational and office equipment...... 23,761 18,769 8,657 Construction in progress............................... 2,323 578 570 -------- ------- ------- Total cost................................... 195,732 180,070 84,982 Accumulated depreciation and amortization.............. (68,660) (42,141) (17,627) -------- ------- ------- Net book value............................... 127,072 137,929 67,355 ======== ======= ======= F-35 92 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM DEBT Long-term debt consists of the following: SEPTEMBER 30, DECEMBER 31, ------------- ------------- 2000 1999 1998 ------------- ----- ----- (UNAUDITED) Loan due November 2002 with a yearly principal reduction of DM 34.787 and an interest rate of 5.5 %.................. 43 72 -- Term loan due September, 2003 with interest payable at per annum rate equal to 6.75 %............................... 1,500 1,500 -- ----- ----- ----- Total............................................ 1,543 1,572 -- ===== ===== ===== Aggregate maturities of long-term debt as of December 31, 1999 are as follows: PRINCIPAL INTEREST TOTAL --------- -------- -------- 2001........................................................ 35 101 136 2002........................................................ 37 100 137 2003........................................................ 1,500 74 1,574 2004........................................................ -- -- -- Thereafter.................................................. -- -- -- ----- --- ----- Total............................................. 1,572 275 1,847 ===== === ===== The loans are secured by transfers of ownership by way of security, blank assignments as well as land charges of Demuth & Dietl. 7. CAPITAL LEASE OBLIGATIONS The future minimum lease payments as of December 31, 1999 under capital leases consist of the following: CAPITAL LEASES -------------- 2000........................................................ 16,609 2001........................................................ 15,213 2002........................................................ 14,803 2003........................................................ 13,641 2004........................................................ 4,226 Thereafter.................................................. -- ------- Total minimum lease payments................................ 64,492 Less amount representing interests.......................... 6,480 ------- Present value of minimum lease payments..................... 58,012 Less current portion........................................ (13,761) ------- Amounts due after one year........................ 44,251 ======= 8. INCOME TAXES Income taxes are provided for in accordance with the provisions of FASB Statement No. 109, Accounting for Income Taxes. Under this method, TelDaFax recognizes deferred tax assets and liabilities for the expected future tax effects of temporary differences between the carrying amounts and the tax basis of assets and liabilities, as well as operating loss carryforwards. F-36 93 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes consists of the following: YEAR ENDED DECEMBER 31, --------------------------- 1998 1999 ------------ ------------ Current income taxes: Payment for 1998 in 1999.................................. -- 989 Corporate tax claim from loss carryback 1999 to 1998...... -- (950) Prepaid trade taxes....................................... (25) -- Prepaid corporate taxes................................... (475) -- Provision from trade taxes................................ (732) -- Provision from corporate taxes............................ (5,500) -- ------ ----- (6,732) 39 Deferred taxes: Provision from trade taxes................................ (1,042) 2,278 Provision from corporate taxes............................ (1,934) 4,231 ------ ----- (2,976) 6,509 ------ ----- Total provision for income taxes.................. (9,708) 6,548 ====== ===== Deferred income taxes consist of the following: YEAR ENDED DECEMBER 31, --------------- 1998 1999 ------ ----- Deferred tax liabilities: On Amortization of intangible assets........................ 2,794 1,589 Elimination of intermediate earnings from tangible assets...................................... -- (535) Differences in value assessment............................. -- 211 ------ ----- Total deferred tax liabilities.................... 2,794 1,265 Deferred tax assets: Tax loss carry forward...................................... -- 4,520 ------ ----- Total deferred tax assets......................... -- 4,520 ------ ----- Net deferred tax assets........................... (2,794) 3,255 ====== ===== The provision for income taxes differs from the amount of income tax provision computed by applying the Germany federal income tax rate to income before income taxes and minority interest. A reconciliation of the differences is as follows: Loss before income taxes and minority interest:............. DM (13,486) Income tax rate............................................. 46% Expected income tax:........................................ DM (6,204) Prior year payment.......................................... DM (989) Differences in value assessment............................. DM (211) Elimination of intermediate earnings........................ DM 535 Higher tax rate on loss carryback........................... DM 321 ------------- Total provision for income taxes.................. DM (6,548) ============= F-37 94 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ------- ------- ------- DM '000 DM '000 DM '000 Profit (loss) for the period................................ (5,854) 8,774 (5,256) Loss of predecessor company................................. 3,663 -- -- Increase contributed capital................................ 10,787 5,000 -- Capital increase............................................ 15,468 -- -- Issue of share capital...................................... -- 157,229 -- ------ ------- ------- Net changes in combined equity shareholder's funds.......... 24,064 171,003 (5,256) Opening combined equity shareholder's funds................. (3,732) 20,332 191,335 ------ ------- ------- Closing combined equity shareholder's funds....... 20,332 191,335 186,079 ====== ======= ======= The share capital is divided into 33,828,600 non par value bearer shares with a theoretical nominal value of EUR 2,60. The executive board is authorized, with the approval of the supervisory board, to increase the share capital of TelDaFax in the period up to June 9, 2004 at one time or on several occasions by up to a total amount of EUR 42,900,000.00 through the issue of new no par value bearer shares with a theoretical nominal value of EUR 2,60 each against payment in cash or contribution in kind (authorized capital). Shareholder's are to be granted subscription rights with respect thereto. However, subject to the approval of the supervisory board may decide on the exclusion of subscription rights for existing shareholders. The executive board is authorized, with the approval of the supervisory board, at one time or on several occasions in the period up to June 9, 2004, to grant bearer options and/or convertible bonds with up to a total nominal amount of EUR 858,000,000.00 and a term of no longer than 20 years and to grant option rights to the bearers of convertible debenture stock or to grant the bearers of convertible bonds right of conversion for new shares of TelDaFax with stake in share capital of up to EUR 42,900,000.00 -- or up to 16,500,000 shares -- within the limits of the conditions for options or bonds. 10. COMMITMENTS AND CONTINGENCIES Operating Leases Certain buildings and automobiles are under noncancellable operating lease agreements expiring in various years. Minimum future lease obligations, by year and in aggregate, as of December 31, 1999 are as follows: OPERATING LEASES ---------------- 2000........................................................ 2,033 2001........................................................ 1,888 2002........................................................ 1,470 2003........................................................ 1,218 2004........................................................ 1,167 Thereafter.................................................. 17,505 ------ Total minimum lease payments...................... 25,281 ====== Legal Proceedings TelDaFax and certain of its suppliers have entered into legal proceedings regarding the cost, functionality and period of services provided. TelDaFax has two such disputes outstanding which F-38 95 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) individually amount to DM 21,000 and DM 5,000, respectively. TelDaFax has refused payment of these amounts because of defective delivery or cancellation of the supplier contracts. TelDaFax has accrued amounts, including legal fees, which it believes reflect the amounts for which it will ultimately settle these disputes. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of TelDaFax's management, based on information available at this time, that the expected outcome of these matters, individually, or in the aggregate, will not have an adverse effect on the results of operations and financial condition of TelDaFax. 11. ACQUISITIONS On July 1, 1997, TelDaFax acquired 100% of the stock of BNC Kommunikationssysteme GmbH & Co. KG, a router management service provider, for DM 3,037. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 1,374 and goodwill allocated to technical know-how of DM 2,987. On January 1, 1998, TelDaFax acquired 100% of the stock of TelDaFax Vertriebs GmbH, a sales organization, for DM 250. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 115. On December 8, 1998, TelDaFax acquired 75% of the stock of GeoNet Systems GmbH, an internet access provider, for DM 400. TelDaFax recorded the acquisition in accordance with purchase accounting as of January 1, 1999 (the acquisition was classified as an investment as of December 31, 1998) resulting in goodwill of DM 1,478. On October 4, 1999, TelDaFax acquired 51% of the stock of Demuth & Dietl + Co. Kommunikationselektronik GmbH, a provider of mobile hardware and calling cards, for DM 5,200. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 3,414. Previously, the financial statements reflected the acquisition of Demuth & Dietl from January 1, 1999 in accordance with the terms to the agreement between TelDaFax and the sellers but, under US GAAP, the Company subsequently determined that it did not "control" Demuth & Dietl until the transaction closed in October, 1999. Unaudited pro forma information with respect to TelDaFax as if the 1998, 1999 and 2000 acquisitions had occurred on January 1, 1998, is as follows: NET INCOME YEAR ENTITY NET REVENUE (LOSS) - ---- ------ ----------- ----------- (UNAUDITED) (UNAUDITED) 1999 TelDaFax................................................. 630,232 (10,911) Demuth & Dietl........................................... 58,787 (181) Netztel.................................................. 17,781 (613) Eliminations............................................. (19,214) 5,579 ------- ------- Combined................................................. 687,586 (6,126) ======= ======= 1998 TelDaFax................................................. 292,033 16,890 Demuth & Dietl........................................... 107,204 (50) Netztel.................................................. -- (204) Eliminations............................................. (28,983) (8,116) ------- ------- Combined................................................. 370,254 8,520 ======= ======= F-39 96 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. RELATED PARTY TRANSACTIONS In conjunction with TelDaFax's acquisition of Demuth & Dietl + Co. Kommunikationselektronic GmbH, a DM 1,411 loan was made to a division of the acquired company excluded from the transaction with payments beginning in 2000. 13. BUSINESS SEGMENT INFORMATION TelDaFax provides telecommunication products and services to its customers in Germany in three distinct business segments organized around the different services provided: Fixed Network, Mobile and Internet. The Fixed Network is made up of one operating unit: TelDaFax. TelDaFax provides fixed-to-mobile, - -international and -domestic telephony, fax and data connections to commercial and residential customers through its communication network leased from Deutsche Telekom AG. Mobile services, which consist of hardware sales and calling cards provided through a distribution network consisting of over 1,500 retailer dealers in Germany, are provided by Demuth + Dietl + Co. Kommunikationselektronic GmbH and Netztel Plus Drillish. Internet services, which consists of internet access, is provided by GeoNet Systems GmbH. The tables below present information about the business segments in which TelDaFax operates and represent information utilized by management to evaluate its business segments. TELDAFAX FINANCIAL DATA PER SEGMENT NINE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- ------- (IN THOUSAND DM) Sales to unaffiliated customers............................ 362,895 5,450 96,808 465,153 Intersegment revenues...................................... -- -- -- -- Segment revenues........................................... 362,895 5,450 96,808 465,153 Depreciation and amortization.............................. (33,193) (746) (3,414) (37,353) Segment operating profit (loss)............................ (37,201) (8,201) (13,607) (59,009) Segment assets............................................. 330,498 1,594 57,807 389,899 Expenditures for long-lived assets......................... 39,831 197 1,823 41,851 Reconciliations: NET RESULT Total operating result for the reportable segments....... (59,009) Other income............................................. 4,740 Financial result......................................... (114) Other expense, net....................................... 20,578 Minority interest........................................ 2,033 Total consolidated profit (loss)................. (31,772) ASSETS Total assets for reportable segments..................... 389,899 Elimination of intercompany receivables.................. (34,787) Total consolidated assets........................ 355,112 F-40 97 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NINE MONTHS ENDED SEPTEMBER 30, 1999 --------------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- ------- (IN THOUSAND DM) Sales to unaffiliated customers............................. 445,404 2,277 -- 447,681 Intersegment revenues....................................... -- -- -- -- Segment revenues............................................ 445,404 2,277 -- 447,681 Depreciation and amortization............................... (22,227) (368) -- (22,595) Segment operating profit (loss)............................. 16,716 (1,746) -- 14,970 Segment assets.............................................. 400,011 1,089 -- 401,100 Expenditures for long-lived assets.......................... 92,319 1,054 -- 93,373 Reconciliations: NET RESULT Total operating result for the reportable segments........ 14,970 Other income.............................................. 9,625 Financial result.......................................... 1,266 Other expense, net........................................ (13,365) Minority interest......................................... 207 Total consolidated profit (loss).................. 12,703 ASSETS Total assets for reportable segments...................... 401,100 Elimination of intercompany receivables................... (8,698) Total consolidated assets......................... 392,402 DECEMBER 31, 1999, AND FOR THE YEAR THEN ENDED ----------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- ------- (IN THOUSAND DM) Sales to unaffiliated customers........................... 587,299 4,124 19,595 611,018 Intersegment revenues..................................... -- -- -- -- Segment revenues.......................................... 587,299 4,124 19,595 611,018 Depreciation and amortization............................. (33,391) (183) (56) (33,630) Segment operating profit (loss)........................... (10,279) (4,843) (34) (15,156) Segment assets............................................ 458,507 3,587 14,154 476,248 Expenditures for long-lived assets........................ 108,185 1,367 845 110,397 Reconciliations: NET RESULT Total operating result for the reportable segments........ (15,156) Other income.............................................. 791 Financial result.......................................... 764 Other expense, net........................................ 7,009 Minority interest......................................... 1,336 Total consolidated profit (loss).................. (5,256) ASSETS Total assets for reportable segments...................... 476,248 Elimination of intercompany receivables................... (21,077) Total consolidated assets......................... 455,171 F-41 98 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED ----------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL ------- -------- -------- -------- (IN THOUSAND DM) Sales to unaffiliated customers....................... 263,050 -- -- 263,050 Intersegment revenues................................. -- -- -- -- Segment revenues...................................... 263,050 -- -- 263,050 Depreciation and amortization......................... (18,086) -- -- (18,086) Segment operating profit (loss)....................... 17,735 -- -- 17,735 Segment assets........................................ 314,392 -- -- 314,392 Expenditures for long-lived assets.................... 66,146 -- -- 66,146 Reconciliations: NET RESULT Total operating result for the reportable segments.... 17,735 Other income.......................................... 327 Financial result...................................... 425 Other expense, net.................................... (9,713) Minority interest..................................... -- Total consolidated profit (loss).............. 8,774 ASSETS Total assets for reportable segments.................. 314,392 Elimination of intercompany receivables............... (1,823) Total consolidated assets..................... 312,569 DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED ---------------------------------------------- FIXED CELLULAR NETWORK INTERNET SERVICE TOTAL -------- ----------- ----------- ------- (IN THOUSAND DM) Sales to unaffiliated customers..................... 32,271 -- -- 32,271 Intersegment revenues............................... -- -- -- -- Segment revenues.................................... 32,271 -- -- 32,271 Depreciation and amortization....................... (5,040) -- -- (5,040) Segment operating profit (loss)..................... (6,493) -- -- (6,493) Segment assets...................................... 61,885 -- -- 61,885 Expenditures for long-lived assets.................. 30,718 -- -- 30,718 Reconciliations: NET RESULT Total operating result for the reportable segments......................................... (6,493) Other income........................................ 76 Financial result.................................... (1,104) Other expense, net.................................. 1,667 Minority interest................................... -- Total consolidated profit (loss)............ (5,854) ASSETS Total assets for reportable segments................ 61,885 Elimination of intercompany receivables............. -- Total consolidated assets................... 61,885 Other Information TelDaFax is dependent upon one significant supplier for the leasing of transmission lines and billing operations for call-by-call customers. TelDaFax's reliance on this external source can be shifted, over a period of time, to alternative sources should the changes be necessary. However, there may be a material adverse effect on the business, financial and operations of TelDaFax. F-42 99 TELDAFAX AG NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUBSEQUENT EVENTS Investment in Netztel Plus Drillish AG On February 3, 2000, TelDaFax acquired an 81.9% of the stock of Netztel Plus Drillish AG, a mobile phone calling card provider, for DM 15,000. TelDaFax recorded the acquisition in accordance with purchase accounting resulting in goodwill of DM 13,658. Investment in Internet AG On April 5, 2000, TelDaFax acquired a 32% interest in Internet AG, a provider of e-commerce solutions with integrated payment systems, on-line shops and electronic market places. TelDaFax's investment totaled Euro 2,275. F-43 100 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC registration fee........................................ $12,025.45 Accounting fees and expenses................................ 25,000.00 Legal fees and expenses..................................... 20,000.00 Printing and mailing expenses............................... 20,000.00 Miscellaneous expenses...................................... 2,974.55 ---------- Total............................................. $80,000.00 ========== The foregoing items, except for the SEC registration fee, are estimated. We will pay all of the above expenses. The selling security holders will pay their own expenses, including expenses of their own counsel, broker or dealer fees, discounts and expenses, and all transfer and other taxes on the sale of the shares of common stock offered by this prospectus. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102 of the Delaware General Corporation Law ("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 for: - breach of the director's duty of loyalty, - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, - certain unlawful dividends and stock repurchases, or - 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. Section 145 of the DGCL provides that in the case of an action by or in the right of a corporation to procure a judgment in its favor, a corporation may indemnify any person who was or is a party or is threatened to be made a party to any action or suit 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) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under standards similar to those set forth in the preceding paragraph, except that no indemnification may be made in respect of any action or claim as to which such person shall have been adjudged to be liable to the corporation unless a court determines that such person is fairly and reasonably entitled to indemnification. Articles X and XI of World Access' Amended Certificate of Incorporation provide for indemnification of directors, officers and employees to the fullest extent permissible under the DGCL. II-1 101 Officers and directors of World Access are presently covered by insurance that (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 in enforcing his rights under his indemnification agreement. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. The following exhibits are filed as part of this registration statement. EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 5.1 -- Opinion of Long Aldridge & Norman LLP. 23.1 -- Consent of Long Aldridge & Norman LLP (included in Exhibit 5.1). 23.2 -- Consent of Ernst & Young LLP with respect to the financial statements of World Access, Inc. 23.3 -- Consent of PricewaterhouseCoopers LLP with respect to the financial statements of World Access, Inc. 23.4 -- Consent of Deloitte & Touche LLP with respect to the financial statements of FaciliCom International, Inc. 23.5 -- Consent of Ernst & Young LLP with respect to the financial statements of Long Distance International, Inc. 23.6 -- Consent of Arthur Andersen LLP with respect to the financial statements of STAR Telecommunications, Inc. 23.7 -- Consent of Ernst & Young LLP with respect to the financial statements of Communications Telesystems International d/b/a WorldxChange Communications. 23.8 -- Consent of BDO Deutsche Warentreuhand with respect to the financial statements of TelDaFax AG. 24.1 -- Power of Attorney of World Access (included in the signature pages to this Registration Statement). (b) Financial Statement Schedules. The financial statement schedules that are required by Regulation S-X are incorporated herein by reference to our Annual Report on Form 10-K for the year ended December 31, 1999. II-2 102 ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a) (3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration statement is on Form S-3 or Form S-8, and the information required to be included in the post-effective amendment by those paragraphs is contained in periodic reports filed by the registrants pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrants hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15 (d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement 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. Insofar as 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 Securities Act of 1933 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 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 Securities Act of 1933 and will be governed by the final adjudication of such issue. II-3 103 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and 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 December 18, 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 Bryan D. Yokley, 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, this Registration Statement has been signed by the following persons in the capacities indicated as of December 18, 2000. SIGNATURES TITLE ---------- ----- /s/ John D. Phillips Chairman and Chief Executive Officer - ----------------------------------------------------- (Principal Executive Officer) John D. Phillips /s/ Bryan D. Yokley Executive Vice President and Chief Financial - ----------------------------------------------------- Officer (Principal Financial Officer) Bryan D. Yokley /s/ Henry C. Lyon Vice President and Corporate Controller - ----------------------------------------------------- (Principal Accounting Officer) Henry C. Lyon /s/ Walter J. Burmeister Director - ----------------------------------------------------- Walter J. Burmeister /s/ Kirby Campbell Director - ----------------------------------------------------- Kirby Campbell /s/ Bryan Cipoletti Director - ----------------------------------------------------- Bryan Cipoletti /s/ Stephen J. Clearman Director - ----------------------------------------------------- Stephen J. Clearman II-4 104 SIGNATURES TITLE ---------- ----- /s/ John P. Imlay, Jr. Director - ----------------------------------------------------- John P. Imlay, Jr. /s/ Massimo Prelz Oltramonti Director - ----------------------------------------------------- Massimo Prelz Oltramonti /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-5 105 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT - ------- ---------------------- 5.1 -- Opinion of Long Aldridge & Norman LLP. 23.1 -- Consent of Long Aldridge & Norman LLP (included in Exhibit 5.1). 23.2 -- Consent of Ernst & Young LLP with respect to the financial statements of World Access, Inc. 23.3 -- Consent of PricewaterhouseCoopers LLP with respect to the financial statements of World Access, Inc. 23.4 -- Consent of Deloitte & Touche LLP with respect to the financial statements of FaciliCom International, Inc. 23.5 -- Consent of Ernst & Young LLP with respect to the financial statements of Long Distance International, Inc. 23.6 -- Consent of Arthur Andersen LLP with respect to the financial statements of STAR Telecommunications, Inc. 23.7 -- Consent of Ernst & Young LLP with respect to the financial statements of Communications Telesystems International d/b/a WorldxChange Communications. 23.8 -- Consent of BDO Deutsche Warentreuhand with respect to the financial statements of TelDaFax AG. 24.1 -- Power of Attorney of World Access (included in the signature pages to this Registration Statement).