EXHIBIT 99.11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Enhanced Communications Corporation:
We have audited the accompanying balance sheets of Enhanced Communications
Corporation ("Encom") (a wholly owned subsidiary of World Access
Telecommunications Group, Inc.) ("World Access") and its predecessor as of
December 31, 1999 and 1998, and the related statements of operations,
stockholder's equity (deficit) and cash flows for the three years ended
December 31, 1999. These financial statements are the responsibility of
Encom'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 of America. 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.
As discussed in Note 1 to the financial statements, the balance sheets of
Encom include the net assets acquired by World Access in its purchase of
Encom in June 1999, after giving effect to the allocation of World Access's
purchase price to Encom's net assets and to the changes in the net assets
of Encom subsequent to the acquisition; the related statements of
operations, stockholder's equity (deficit) and reflect the results of
operations and the cash flows of Encom subsequent to such acquisition after
giving effect to the allocation of World Access's purchase price to Encom's
net assets.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of Encom and its predecessor at December
31, 1999 and 1998, and the results of its operations, stockholder's equity
(deficit) and cash flows for the three years ended December 31, 1999, in
conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared from the separate
records maintained by World Access and may not necessarily be indicative of
the conditions that would have existed or the results of operations if
Encom had been operated as an unaffiliated company. Portions of certain
expenses represent allocations made from World Access items applicable to
World Access as a whole.
/s/ Deloitte & Touche, LLP
September 21, 2000
-10-
ENHANCED COMMUNICATIONS CORPORATION
(A Wholly Owned Subsidiary of World Access Telecommunications Group, Inc.)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------
SUCCESSOR PREDECESSOR
------------ ------------
1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 1,246,408 $ 41,632
Accounts receivable, net of allowance for uncollectible
accounts of $0 and $90,342, respectively 2,931,971 2,551,104
Prepaid expenses and other current assets 304,793 2,000
------------ ------------
Total current assets 4,483,172 2,594,736
PROPERTY AND EQUIPMENT, NET 2,868,147 1,210,562
NOTES RECEIVABLES 1,078,660
EXCESS OF COST OF INVESTMENT OVER NET ASSETS ACQUIRED,
NET OF AMORTIZATION OF $216,650 4,116,350
OTHER ASSETS 32,649 86,991
------------ ------------
TOTAL $ 12,578,978 $ 3,892,289
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 9,391,923 $ 2,663,554
Current portion of capital lease obligations 854,553 267,354
Accrued payroll and related expenses 587,537 219,719
Due to RSM/Southern Holdings Corporation 169,272 193,484
Other liabilities 105,967 215,967
Deferred revenue 80,000 25,000
------------ ------------
Total current liabilities 11,189,252 3,585,078
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 1,075,429 323,596
------------ ------------
Total liabilities 12,264,681 3,908,674
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, 100,000 shares authorized at no par value,
1,000 shares issued and outstanding
Paid-in capital 4,316,615 1,000
Accumulated deficit (4,002,318) (17,385)
------------ ------------
Total stockholder's equity (deficit) 314,297 (16,385)
------------ ------------
TOTAL $ 12,578,978 $ 3,892,289
============ ============
See notes to financial statements.
-11-
ENHANCED COMMUNICATIONS CORPORATION
(A Wholly Owned Subsidiary of World Access Telecommunications Group, Inc.)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------
PREDECESSOR
SUCCESSOR -------------------------------------------------
---------------- SIX MONTHS
SIX MONTHS ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
REVENUES $ 15,213,530 $ 7,317,630 $ 17,157,076 $ 9,314,349
COST OF REVENUES 14,724,092 6,028,011 14,896,490 8,242,689
------------ ------------ ------------ ------------
GROSS PROFIT 489,438 1,289,619 2,260,586 1,071,660
OPERATING EXPENSES:
Sales and marketing 2,252 1,529 2,434
General and administrative expenses 4,173,318 935,685 2,039,160 826,403
Depreciation and amortization 373,977 98,553 105,404 44,407
------------ ------------ ------------ ------------
Total operating expenses 4,547,295 1,036,490 2,146,093 873,244
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (4,057,857) 253,129 114,493 198,416
OTHER (EXPENSE) INCOME:
Interest income 2,970 93 44,650 30,120
Interest expense (271,468) (23,990) (58,555) (36,724)
Other (172,957) 43,776
------------ ------------ ------------ ------------
Total other (expense) income (441,455) (23,897) 29,871 (6,604)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (4,499,312) 229,232 144,364 191,812
INCOME TAXES BENEFIT (EXPENSE) 267,762 (230,617) (68,000)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE
EXTRAORDINARY GAIN (4,231,550) 229,232 (86,253) 123,812
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT, NET OF
TAXES OF $44,710 86,571
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (4,231,550) $ 229,232 $ 318 $ 123,812
============ ============ ============ ============
See notes to financial statements.
-12-
ENHANCED COMMUNICATIONS CORPORATION
(A Wholly Owned Subsidiary of World Access Telecommunications Group, Inc.)
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------
(ACCUMULATED
COMMON STOCK DEFICIT)
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
BALANCE, JANUARY 1, 1997 1,000 $ - $ 1,000 $ (141,515) $ (140,515)
Net income 123,812 123,812
----- ----- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1997 1,000 - 1,000 (17,703) (16,703)
Net income 318 318
----- ----- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 1,000 - 1,000 (17,385) (16,385)
Subsequent to World Access Acquisition:
Adjustment related to the acquisition 4,315,615 17,385 4,333,000
of Encom by World Access
(Note 1)
Net loss (4,002,318) (4,002,318)
----- ----- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999 1,000 $ - $4,316,615 $(4,002,318) $ 314,297
===== ===== ========== =========== ===========
See notes to financial statements.
-13-
ENHANCED COMMUNICATIONS CORPORATION
(A Wholly Owned Subsidiary of World Access Telecommunications Group, Inc.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------
PREDECESSOR
SUCCESSOR -------------------------------------------------
---------------- SIX MONTHS
SIX MONTHS ENDED ENDED
DECEMBER 31, 1999 JUNE 30, 1999 1998 1997
OPERATING ACTIVITIES:
Net (loss) income $ (4,231,550) $ 229,232 $ 318 $ 123,812
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Depreciation and amortization 373,977 98,553 105,404 44,407
Gain on disposal of property
and equipment (43,776)
Extraordinary gain on debt
extinguishment (86,571)
Write-off of investment in affiliate (390,000)
Changes in operating assets
and liabilities:
Accounts receivable (292,421) (88,446) (803,747) (1,009,700)
Notes receivable (1,078,660)
Due to RSM/Southern Holdings
Corporation (35,469) 11,257 320,641
Prepaid expenses and other assets 20,358 (268,809) (466,947) (5,863)
Accounts payable and accrued
expenses 6,967,058 129,130 607,994 1,401,455
Other liabilities (110,000) 147,966 68,000
Deferred revenue 80,000 (25,000) (2,000) (20,273)
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 1,693,293 85,917 (610,718) 601,838
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,622,851) (290,614) (681,751) (729,888)
Proceeds from disposal of equipment 95,259
------------ ------------ ------------ ------------
Net cash used in investing
activities (1,622,851) (290,614) (586,492) (729,888)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from capital lease
obligations 1,284,531 642,265 309,003 500,235
Payments on capital lease
obligations (226,007) (361,758) (247,788)
------------ ------------ ------------ ------------
Net cash provided by financing
activities 1,058,524 280,507 61,215 500,235
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,128,966 75,810 (355,994) 372,185
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 117,442 41,632 397,626 25,441
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,246,408 $ 117,442 $ 41,632 $ 397,626
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 67,943 $ 56,620 $ 42,520 $ 32,464
============ ============ ============ ============
Income taxes paid to or on behalf
of the parent $ - $ 67,825 $ - $ -
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES - Allocation of goodwill
from parent $ 4,333,000 $ - $ - $ -
============ ============ ============ ============
See notes to financial statements.
-14-
ENHANCED COMMUNICATIONS CORPORATION
(A Wholly Owned Subsidiary of World Access Telecommunications Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - The financial statements of Enhanced
Communications Corporation ("Encom"), a subsidiary of World Access
Telecommunications Group, Inc. ("World Access"). Encom is a wholesale
telecommunication provider of network services for domestic and
international telephone traffic. Encom utilizes leased telephone switches
and various interexchange carriers to originate and terminate telephone
calls from end users. Encom was incorporated on January 30, 1995. On
January 27, 1999, Encom entered into an agreement to merge with
RSM/Southern Holdings Corporation ("RSM"), a Texas corporation, which is a
wholly owned subsidiary of Comm/Net Holding Corporation ("Comm/Net"). In
June 1999, World Access acquired all of the outstanding equity interest of
Comm/Net and its subsidiaries (see Note 2).
BASIS OF FINANCIAL STATEMENTS - The accompanying financial statements
of Encom include the net assets acquired by World Access in its purchase of
Encom on June 30, 1999, and the results of Encom's operations and its cash
flows for the year ended December 31, 1999, and the period from July 1,
1999 to December 31, 1999, after giving effect to the allocation of World
Access's purchase price to Encom's net assets and to the changes in net
assets of Encom subsequent to the acquisition. Accordingly, these
financial statements do not purport to be those of Encom as a separate
corporate entity prepared on a historical cost basis of accounting.
REVENUE RECOGNITION - Revenues from telecommunications services are
recognized when the calls of the carrier's customers are completed. Cost
of revenues are based primarily on the direct costs associated with owned
and leased transmission capacity and the cost of transmitting and
terminating traffic on other carriers' facilities. Commissions paid to
agents for customer call traffic are expensed in the period when associated
call revenues are recognized.
DEFERRED REVENUE - Deferred revenue consists primarily of prepaid
phone cards sold by Encom that have an expiration date of 24 months after
issuance or six months after last use. Encom records the net sales price
as deferred revenue when cards are sold and recognizes revenue as the
ultimate consumer utilizes calling time. Deferred revenue relating to
unused calling time remaining at each card's expiration is recognized as
revenue upon the expiration of such card.
-15-
USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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 these estimates.
CASH AND CASH EQUIVALENTS - Encom considers all short-term, highly
liquid investments purchased with an initial maturity of three months or
less to be cash equivalents.
PROPERTY AND EQUIPMENT - The cost of property and equipment is
depreciated over the estimated useful lives of the related assets.
Depreciation and amortization are computed on the straight-line method.
Encom's data communication equipment and computer equipment are being
depreciated over estimated useful lives of 3 to 10 years.
EQUIPMENT UNDER CAPITAL LEASE - Encom leases certain of its data
communication equipment and other fixed assets under capital lease
agreements. The assets and liabilities under capital leases are recorded
at the lesser of the present value of aggregate future minimum lease
payments or the fair value of the assets under lease. Assets under these
capital leases are depreciated over the shorter of the lease term or the
estimated useful lives of the assets.
EXCESS COST OF INVESTMENT OVER NET ASSETS ACQUIRED - Excess cost of
investment over net assets acquired ("goodwill") is being amortized on a
straight-line method over 10 years. Encom management routinely evaluates
realizability of goodwill based upon expectations of future nondiscounted
cash flows. Should management determine that impairment has occurred,
goodwill would be reduced by the excess, if any, of the carrying value of
goodwill over management's estimate of the anticipated discounted future
net cash flows.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Encom grants credit to customers
based on an evaluation of each customer's financial condition. Exposure to
losses on receivables is principally dependent on each customer's financial
condition. Encom controls its exposure to credit risks through credit
approvals, credit limits and monitoring procedures, and it establishes
allowances for anticipated losses.
ACCOUNT RECEIVABLE - Under an account advance agreement with a third-
party billing service, advance payments equal to a percentage of the
outstanding billed receivables are remitted to Encom when payments are
submitted to the third-party billing service. The remainder of the billed
receivable is paid to Encom, net of the advance amount, after the third-party
billing service has collected the receivables from the respective companies.
Interest and collection fees are charged on the advance payment at varying
rates.
-16-
INCOME TAXES - Encom files a consolidated tax return with World
Access. Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities. The effect
on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. Encom annually evaluates the
recoverability of the deferred tax asset and adjusts the valuation
allowance for the portion of such asset not considered more likely than not
to be realized.
COMPREHENSIVE INCOME - Encom has no elements of other comprehensive
income, except net income.
SEGMENTS - Encom operates in a single-market segment.
SOURCE OF SUPPLIES - Encom relies on local telephone companies and
other companies to provide data communications capacity. Although
management believes alternative telecommunications facilities could be
found in a timely manner, any disruption of these services could have an
adverse effect on operating results.
MAJOR CUSTOMERS - Encom executed transactions with three, two and
three major customers, which accounted for approximately 88.3%, 41.2% and
59.9% of total revenues in 1999, 1998 and 1997, respectively.
Encom attempts to maintain multiple vendors for its modems, terminal
servers and high-performance routers, which are important components of its
network. If the suppliers are unable to meet Encom's needs as it expands
its network infrastructure, Encom may experience delays and increased
costs, which would adversely affect operating results.
LONG-LIVED ASSETS - Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," requires that long-lived assets
be stated at the lower of the expected net realizable value or cost. The
carrying value of long-lived assets is periodically reviewed to determine
whether impairment exists. The review is based on comparing the carrying
amount of the assets to the undiscounted estimated cash flows over the
remaining useful lives. No impairment is indicated as of December 31, 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998
and establishes standards for accounting and reporting for derivative
instruments. It requires entities to record all derivative instruments on
the balance sheet at fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and on the type of hedge transaction. The portion of all
hedges not effective in achieving offsetting changes in fair value is
recognized in earnings. SFAS No. 133, as amended, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Management does not believe that the impact of this statement will have a
material impact on Encom's financial statements.
-17-
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements,"
which summarizes the application of accounting principles generally
accepted in the United States of America to revenue recognition in
financial statements and is effective for Encom's fiscal year 2001
financial statements. Management does not believe that the adoption of
this bulletin will have a significant impact on Encom.
2. ACQUISITION
In June 1999, World Access acquired substantially all the assets and
assumed certain liabilities of Comm/Net and its wholly owned subsidiaries.
In connection with this acquisition, World Access issued 23,174 shares of
4.25% Cumulative Junior Convertible Preferred Stock, Series B ("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 was convertible into shares of
World Access'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 World Access's common stock exceeds $16.00 per share for
45 consecutive trading days, the Series B Preferred Stock would
automatically convert into common stock. Preferred dividends began
accruing July 1, 1999, and were payable quarterly. In March 2000, the
Series B Preferred Stock was converted into 1,448,373 shares of World
Access's common stock.
-18-
The acquisition of Comm/Net was accounted for by World Access under
the purchase method of accounting, and "push-down accounting" was used.
The application of purchase accounting and push-down accounting resulted in
the fair valuing of Encom's assets and liabilities on the date of
acquisition. The following schedule illustrates the adjustments made to
Encom's accounts as a result of the acquisition:
HISTORICAL FAIR VALUE
BALANCES PURCHASE BALANCES
PRIOR TO ACCOUNTING AS OF
MERGER ADJUSTMENTS MERGER DATE
ASSETS:
Cash $ 117,442 $ - $ 117,442
Accounts receivable 2,650,587 2,650,587
Property and equipment, net 1,402,623 1,402,623
Prepaid expenses and other assets 346,763 346,763
Excess of cost of investments
over net assets acquired 4,333,000 4,333,000
---------- ---------- ----------
Total assets $4,517,415 $4,333,000 $8,850,415
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accounts payable $2,558,169 $ - $2,558,169
Other liabilities 801,896 801,896
Capital lease obligations 871,457 871,457
---------- ---------- ----------
Total liabilities 4,231,522 - 4,231,522
Stockholder's equity 285,893 4,333,000 4,618,893
---------- ---------- ----------
TOTAL $4,517,415 $4,333,000 $8,850,415
========== ========== ==========
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts at December 31 consisted of the following:
BALANCE AT
BEGINNING OF BALANCE AT
YEAR PROVISION WRITE-OFFS END OF YEAR
1997 $ - $ 222,678 $ (194,336) $28,342
======= ========== =========== =======
1998 $28,342 $ 525,127 $ (463,127) $90,342
======= ========== =========== =======
1999 $90,342 $2,014,976 $(2,105,318) $ -
======= ========== =========== =======
-19-
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of the following:
1999 1998
Data communication equipment $3,115,962 $1,288,599
Computer equipment 163,523 68,741
---------- ----------
Total cost 3,279,485 1,357,340
Less accumulated depreciation (411,338) (146,778)
---------- ----------
$2,868,147 $1,210,562
========== ==========
Depreciation expense was $264,568 and $105,404 for fiscal years 1999
and 1998, respectively.
5. OTHER ASSETS
Other assets at December 31 consisted of the following:
1999 1998
Deposits $ 17,263 $ 66,816
Other 15,386 20,175
-------- --------
$ 32,649 $ 86,991
======== ========
6. CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations at December 31 consisted
of the following:
1999 1998
Capital lease obligations, with interest rates of 15%
to 15.3%, maturing August 2003 $1,929,982 $ 590,950
Less current portion of long-term debt (854,553) (267,354)
---------- ----------
$1,075,429 $ 323,596
========== ==========
-20-
Future minimum lease payments for capital lease obligations at
December 31, 1999, are as follows:
Year ended December 31:
2000 $1,048,848
2001 918,465
2002 255,449
----------
Total 2,222,762
Less interest of capital lease obligations (292,780)
----------
Present value of net minimum capital lease payments 1,929,982
Less current portion (854,553)
----------
$1,075,429
==========
7. CAPITAL STOCK
COMMON STOCK - The total authorized and outstanding stock of Encom is
1,000 shares of common stock, with no par value for the years ended
December 31, 1999 and 1998.
8. RELATED PARTY
From June through December 1999, Encom purchased telecommunications
services from World Access. At December 31, 1999, Encom owed World Access
approximately $8,175,524, which was included in accounts payable.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS - Encom leases certain of its facilities and equipment
under noncancelable operating leases expiring in various years through
2003. Total rent expense for all operating leases amounted to $366,154,
$164,533 and $21,925 for the years ended December 31, 1999, 1998 and 1997,
respectively.
-21-
At December 31, 1999, the future minimum occupancy and equipment lease
payments under operating leases were as follows:
2000 $ 286,337
2001 403,812
2002 2,206
2003 1,103
---------
Total $ 693,458
=========
CONTINGENCIES - Encom is subject to certain claims and legal
proceedings that arise in the ordinary course of its business activities.
Each of these matters is subject to various uncertainties, and it is
possible that some of these matters may be decided unfavorably to Encom.
Encom's management believes that any liability that may ultimately result
from the resolution of these matters will not have a material adverse
effect on the financial condition, operating results or cash flows of Encom.
10. EXTRAORDINARY GAIN
In April 1998, Encom entered into an agreement to resell network
services on behalf of ITG Creditors to a third party. Payments would be
remitted to Encom, then submitted to ITG Creditors. In August 1998, no
further payments were remitted to Encom. As a result of the nonpayment in
October 1998, ITG Creditors forgave the debt from Encom and pursued legal
actions against the third party. Therefore, Encom incurred an
extraordinary gain of approximately $131,000 resulting from the forgiveness
of debt.
11. INCOME TAXES
Components of the provision for income taxes are as follows as of
December 31:
1999 1998
Current:
Federal $(267,762) $202,546
State 28,071
--------- --------
$(267,762) $230,617
========= ========
-22-
Net deferred taxes in the accompanying balance sheets include the
following components as of December 31:
1999 1998
Deferred tax asset:
Net operating loss carryforward $ 1,350,164 $ -
Write-off of investment in affiliate 132,600 132,600
----------- -----------
Total deferred tax asset 1,482,764 132,600
Valuation allowance (1,482,764) (132,600)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
Encom annually evaluates the recoverability of the deferred tax asset
and adjusts the valuation allowance for the portion of such asset not
considered more likely than not to be realized. At December 31, 1999,
Encom has certain net operating loss carryforwards for regular tax purposes
expiring December 2014.
A reconciliation of income taxes computed at the U.S. federal
statutory tax rate to the provision for income tax is as follows as of
December 31:
1999 1998
Income tax (benefit) expense at U.S. federal
statutory rates $(1,434,025) $ 68,974
State tax (benefit) expense (181,715) 28,071
Permanent differences 61,067 972
Valuation allowance 1,350,164 132,600
----------- -----------
$ (267,762) $ 230,617
=========== ===========
-23-
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by Encom using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that Encom could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
Assets:
Cash and cash equivalents $ 1,246,408 $ 1,246,408 $ 41,632 $ 41,632
Accounts receivable - trade 2,931,971 2,931,971 2,551,104 2,511,104
Liabilities:
Accounts payable 9,391,923 9,391,923 2,663,554 2,663,554
Capital lease obligations 1,929,982 1,929,982 590,950 590,950
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE -
The carrying amounts of these items are a reasonable estimate of their fair
value.
CAPITAL LEASE OBLIGATIONS - The fair values of capital lease
obligations are estimated based on interest rates that are currently
available to Encom for the issuance of debt with similar terms and
remaining maturities.
The fair value estimates are based on pertinent information available
to management as of December 31, 1999. Although management is not aware of
any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date, and current estimates of
fair value may differ significantly from the amounts presented.
-24-
13. SUBSEQUENT EVENTS
Subsequent to December 31, 1999, Encom assumed several capital lease
agreements from former affiliate companies. Total underlying assets of
capital leases assumed equaled $804,852, and liabilities (including
principal and interest) approximated $749,216.
In June 2000, an Asset Purchase Agreement (the "Agreement") was
entered into between World Access and NetVoice Encom LP, whereby NetVoice
Encom LP acquired certain assets associated with Encom. Pursuant to the
Agreement, the purchase price for the acquisition of Encom was $8.1
million, paid with $6.0 million in cash and a $2.1 million convertible note
payable, payable in quarterly payments, maturing on June 30, 2005, and bearing
interest at the London InterBank Offering Rate plus a margin of 2%. The
outstanding principal amount of the convertible note payable can be converted
into shares of common stock at any time prior to or on the maturity date at
the market price, but in no event less than $10.00 per share. The assets
purchased include all of accounts receivable accruing on or after
June 1, 2000; all accounts payable and accrued liabilities incurred on or
after June 1, 2000, in the ordinary course of business; and all other
assets and liabilities as of June 1, 2000. Excluded assets included cash,
Edge Debit Cards in inventory, prepaid accounts, rights to Voice
Compression Gear, NACT Debit Card Switches and any contracts, accounts
receivable or accounts payable related to CapRock Communications. The
acquired liabilities consist of all obligations associated with the leases
and other agreements purchased as assets.
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